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As filed with the Securities and Exchange Commission on October 15, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
______________
PUBLIC STORAGE, 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)
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701 Western Avenue, Suite 200 HUGH W. HORNE
Glendale, California 91201-2397 Public Storage, Inc.
(818) 244-8080 701 Western Avenue, Suite 200
(Address, including zip code, and Glendale, California 91201-2397
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)
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______________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
______________
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
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<CAPTION>
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Proposed Proposed
Amount Offering Maximum Maximum
to be Price Aggregate Amount of
Title of Each Class of Securities to be Registered Registered Per Share Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.10 par value per share (1) (1) (1) $49,421(1)(2)
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(1) This Registration Statement relates to (a) the proposed merger of Partners
Preferred Yield, Inc. ("PPY") into the Registrant and the conversion of
shares of common stock of PPY into either cash (as to up to 20% of the
outstanding shares of common stock series A of PPY) or common stock of the
Registrant, (b) the proposed merger of Partners Preferred Yield II, Inc.
("PPY2") into the Registrant and the conversion of shares of common stock of
PPY2 into either cash (as to up to 20% of the outstanding shares of common
stock series A of PPY2) or common stock of the Registrant and (c) the
proposed merger of Partners Preferred Yield III, Inc. ("PPY3") into the
Registrant and the conversion of shares of common stock of PPY3 into either
cash (as to up to 20% of the outstanding shares of common stock series A of
PPY3) or common stock of the Registrant. At the mergers, there will be a
maximum of (a) 3,077,028 shares of common stock series A, 420,875 shares of
common stock series B, 247,574 shares of common stock series C, and 163,036
shares of common stock series D, of PPY outstanding, (b) 3,130,103 shares of
common stock series A, 420,875 shares of common stock series B, 247,574
shares of common stock series C, and 163,036 shares of common stock series
D, of PPY2 outstanding and (c) 1,313,384 shares of common stock series A,
168,709 shares of common stock series B, 99,241 shares of common stock
series C and 65,354 shares of common stock series D, of PPY3 outstanding.
The closing price of the common stock series A of PPY on the American Stock
Exchange on October 9, 1996 was $18.375 per share, the book value of the
common stock series B and C of PPY at June 30, 1996 was $11.48 per
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share and the book value of the common stock series D of PPY at June 30,
1996 was $.01 per share. The closing price of the common stock series A of
PPY2 on the American Stock Exchange on October 9, 1996 was $19.625 per
share, the book value of the common stock series B and C of PPY2 at June 30,
1996 was $12.39 per share and the book value of the common stock series D of
PPY2 at June 30, 1996 was $.01 per share. The closing price of the common
stock series A of PPY3 on the American Stock Exchange on October 9, 1996 was
$19.75 per share, the book value of the common stock series B and C of PPY3
at June 30, 1996 was $12.02 per share and the book value of the common stock
series D of PPY3 at June 30, 1996 was $.01 per share. The number of shares
of common stock of the Registrant to be issued in the mergers cannot be
determined at this time.
(2) Calculated in accordance with rule 457(f)(1) and (f)(2) under the Securities
Act of 1933. $14,853 of the registration fee was previously paid in
connection with PPY's preliminary proxy materials.
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.
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PUBLIC STORAGE, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY FORM S-4
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<CAPTION>
Registration Statement Item Location in Prospectus
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A. Information About the Transaction
1. Forepart of Registration Front Cover Page
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back See page 1 and pages (iii)-(iv)
Cover Pages of Prospectus
3. Risk Factors, Ratio of Earnings Risk Factors and Material
to Fixed Charges and Other Considerations
Information
4. Terms of the Transaction Summary and The Mergers
5. Pro Forma Financial Information Incorporation of Certain Documents by
Reference
6. Material Contacts with the Risk Factors and Material
Company Being Acquired Considerations, Conflicts of Interest
in the Mergers and The Mergers
7. Additional Information Required *
for Reoffering by Persons and
Parties Deemed to be Underwriters
8. Interests of Named Experts and Legal Opinions
Counsel
9. Disclosure of Commission Position The Mergers -- Comparison of PPY,
on Indemnification for Securities PPY2 and PPY3 Common Stock with PSI
Act Liabilities Common Stock -- Management and Duties
B. Information About the Registrant
10. Information with Respect to S-3 Incorporation of Certain Documents by
Registrants Reference
11. Incorporation of Certain Incorporation of Certain Documents by
Information By Reference Reference
12. Information with Respect to S-2 Incorporation of Certain Documents by
or S-3 Registrants Reference
13. Incorporation of Certain Incorporation of Certain Documents by
Information By Reference Reference
14. Information with Respect to Incorporation of Certain Documents by
Registrants Other than S-2 or S-3 Reference
Registrants
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_________________
* Omitted as Inapplicable.
(ii)
<PAGE>
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<S> <C>
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Incorporation of Certain Documents by
Companies Reference
16. Information with Respect to S-2 Incorporation of Certain Documents by
or S-3 Companies Reference
17. Information with Respect to Incorporation of Certain Documents by
Companies Other than S-2 or S-3 Reference
Companies
D. Voting and Management Information
18. Information if Proxies, Consents Incorporation of Certain Documents by
or Authorizations are to be Solicited Reference
19. Information if Proxies, Consents Incorporation of Certain Documents by
or Authorizations are not to be Reference
Solicited or in an Exchange Offer
</TABLE>
_________________
* Omitted as Inapplicable.
(iii)
<PAGE>
PARTNERS PREFERRED YIELD, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 17, 1996
A special meeting of shareholders of Partners Preferred Yield, Inc., a
California corporation ("PPY"), will be held at PPY's offices at 701 Western
Avenue, Suite 200, Glendale, California on December 17, 1996, at the hour of
10:00 a.m. for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization among
PPY, Public Storage, Inc. ("PSI"), Partners Preferred Yield II, Inc.
("PPY2") and Partners Preferred Yield III, Inc. ("PPY3") described in
the accompanying Combined Proxy Statement and Prospectus (the "Merger
Agreement") pursuant to which PPY would be merged into PSI (the "PPY
Merger"). Upon the PPY Merger, each outstanding share of PPY Common
Stock Series A ("PPY Common Stock") (other than shares held by PSI or
by holders of PPY Common Stock ("PPY Shareholders") who have properly
exercised dissenters' rights under California law ("Dissenting PPY
Shares")) would be converted into the right to receive cash, PSI Common
Stock or a combination of the two, as follows: (i) with respect to a
certain number of shares of PPY Common Stock (not to exceed 20% of the
outstanding PPY Common Stock, or 615,406 shares, less any Dissenting
PPY Shares), upon a PPY Shareholder's election, $19.00 in cash, subject
to reduction as described below (a "PPY Cash Election") or (ii) that
number (subject to rounding) of shares of PSI Common Stock determined
by dividing $19.00, subject to reduction as described below, by the
average of the per share closing prices on the New York Stock Exchange
of PSI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders
of PPY. If a PPY Shareholder does not make a PPY Cash Election, all of
his or her PPY Common Stock would be converted into PSI Common Stock in
the PPY Merger. The consideration paid by PSI to PPY Shareholders in
the PPY Merger will be reduced by the amount of cash distributions
required to be paid to PPY Shareholders by PPY prior to completion of
the PPY Merger in order to satisfy PPY's REIT distribution requirements
("Required PPY REIT Distributions"). The consideration received by PPY
Shareholders in the PPY Merger, however, along with any Required PPY
REIT Distributions, will not be less than $19.00 per share of PPY
Common Stock, which amount represents the interest of the PPY
Shareholders in the market value of PPY's real estate assets at June
30, 1996 (based on an independent appraisal) and the interest of the
PPY Shareholders in the estimated net asset value of its other assets
at December 31, 1996. Additional distributions would be made to PPY
Shareholders to cause PPY's estimated net asset value allocable to the
PPY Shareholders as of the date of the PPY Merger to be substantially
equivalent to $19.00 per share. The PPY Common Stock, PPY Common Stock
Series B, PPY Common Stock Series C and PPY Common Stock Series D held
by PSI will be cancelled in the PPY Merger. Under the Merger
Agreement, PPY2 and PPY3 will also be merged into PSI (the "PPY2
Merger" and the "PPY3 Merger", respectively), if approved by the
respective shareholders of those entities. THE PPY MERGER, THE PPY2
MERGER AND THE PPY3 MERGER ARE NOT CONDITIONED ON EACH OTHER.
2. To consider and vote upon a related amendment to PPY's bylaws to
authorize the PPY Merger in the form of Appendix E-1 to the
accompanying Combined Proxy Statement and Prospectus.
The Board of Directors has determined that holders of record of PPY Common
Stock Series A, PPY Common Stock Series B, PPY Common Stock Series C and PPY
Common Stock Series D at the close of business on October 21, 1996 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
October ___, 1996
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PARTNERS PREFERRED YIELD II, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 17, 1996
A special meeting of shareholders of Partners Preferred Yield II, Inc., a
California corporation ("PPY2"), will be held at PPY2's offices at 701 Western
Avenue, Suite 200, Glendale, California on December 17, 1996, at the hour of
10:00 a.m. for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization among
PPY2, Public Storage, Inc. ("PSI"), Partners Preferred Yield, Inc.
("PPY") and Partners Preferred Yield III, Inc. ("PPY3") described in
the accompanying Combined Proxy Statement and Prospectus (the "Merger
Agreement") pursuant to which PPY2 would be merged into PSI (the "PPY2
Merger"). Upon the PPY2 Merger, each outstanding share of PPY2 Common
Stock Series A ("PPY2 Common Stock") (other than shares held by PSI or
by holders of PPY2 Common Stock ("PPY2 Shareholders") who have properly
exercised dissenters' rights under California law ("Dissenting PPY2
Shares")) would be converted into the right to receive cash, PSI Common
Stock or a combination of the two, as follows: (i) with respect to a
certain number of shares of PPY2 Common Stock (not to exceed 20% of the
outstanding PPY2 Common Stock, or 626,021 shares, less any Dissenting
PPY2 Shares), upon a PPY2 Shareholder's election, $20.39 in cash,
subject to reduction as described below (a "PPY2 Cash Election") or
(ii) that number (subject to rounding) of shares of PSI Common Stock
determined by dividing $20.39, subject to reduction as described below,
by the average of the per share closing prices on the New York Stock
Exchange of PSI Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the special meeting of the
shareholders of PPY2. If a PPY2 Shareholder does not make a PPY2 Cash
Election, all of his or her PPY2 Common Stock would be converted into
PSI Common Stock in the PPY2 Merger. The consideration paid by PSI to
PPY2 Shareholders in the PPY2 Merger will be reduced by the amount of
cash distributions required to be paid to PPY2 Shareholders by PPY2
prior to completion of the PPY2 Merger in order to satisfy PPY2's REIT
distribution requirements ("Required PPY2 REIT Distributions"). The
consideration received by PPY2 Shareholders in the PPY2 Merger,
however, along with any Required PPY2 REIT Distributions, will not be
less than $20.39 per share of PPY2 Common Stock, which amount
represents the interest of the PPY2 Shareholders in the market value of
PPY2's real estate assets at June 30, 1996 (based on an independent
appraisal) and the interest of the PPY2 Shareholders in the estimated
net asset value of its other assets at December 31, 1996. Additional
distributions would be made to PPY2 Shareholders to cause PPY2's
estimated net asset value allocable to the PPY2 Shareholders as of the
date of the PPY2 Merger to be substantially equivalent to $20.39 per
share. The PPY2 Common Stock, PPY2 Common Stock Series B, PPY2 Common
Stock Series C and PPY2 Common Stock Series D held by PSI will be
cancelled in the PPY2 Merger. Under the Merger Agreement, PPY and PPY3
will also be merged into PSI (the "PPY Merger" and the "PPY3 Merger",
respectively), if approved by the respective shareholders of those
entities. THE PPY2 MERGER, THE PPY MERGER AND THE PPY3 MERGER ARE NOT
CONDITIONED ON EACH OTHER.
2. To consider and vote upon a related amendment to PPY2's bylaws to
authorize the PPY2 Merger in the form of Appendix E-2 to the
accompanying Combined Proxy Statement and Prospectus.
The Board of Directors has determined that holders of record of PPY2 Common
Stock Series A, PPY2 Common Stock Series B, PPY2 Common Stock Series C and PPY2
Common Stock Series D at the close of business on October 21, 1996 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
October ___, 1996
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PARTNERS PREFERRED YIELD III, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 17, 1996
A special meeting of shareholders of Partners Preferred Yield III, Inc., a
California corporation ("PPY3"), will be held at PPY3's offices at 701 Western
Avenue, Suite 200, Glendale, California on December 17, 1996, at the hour of
10:00 a.m. for the following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization among
PPY3, Public Storage, Inc. ("PSI"), Partners Preferred Yield, Inc.
("PPY") and Partners Preferred Yield II, Inc. ("PPY2") described in the
accompanying Combined Proxy Statement and Prospectus (the "Merger
Agreement") pursuant to which PPY3 would be merged into PSI (the "PPY3
Merger"). Upon the PPY3 Merger, each outstanding share of PPY3 Common
Stock Series A ("PPY3 Common Stock") (other than shares held by PSI or
by holders of PPY3 Common Stock ("PPY3 Shareholders") who have properly
exercised dissenters' rights under California law ("Dissenting PPY3
Shares")) would be converted into the right to receive cash, PSI Common
Stock or a combination of the two, as follows: (i) with respect to a
certain number of shares of PPY3 Common Stock (not to exceed 20% of the
outstanding PPY3 Common Stock, or 262,677 shares, less any Dissenting
PPY3 Shares), upon a PPY3 Shareholder's election, $20.47 in cash,
subject to reduction as described below (a "PPY3 Cash Election") or
(ii) that number (subject to rounding) of shares of PSI Common Stock
determined by dividing $20.47, subject to reduction as described below,
by the average of the per share closing prices on the New York Stock
Exchange of PSI Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the special meeting of the
shareholders of PPY3. If a PPY3 Shareholder does not make a PPY3 Cash
Election, all of his or her PPY3 Common Stock would be converted into
PSI Common Stock in the PPY3 Merger. The consideration paid by PSI to
PPY3 Shareholders in the PPY3 Merger will be reduced by the amount of
cash distributions required to be paid to PPY3 Shareholders by PPY3
prior to completion of the PPY3 Merger in order to satisfy PPY3's REIT
distribution requirements ("Required PPY3 REIT Distributions"). The
consideration received by PPY3 Shareholders in the PPY3 Merger,
however, along with any Required PPY3 REIT Distributions, will not be
less than $20.47 per share of PPY3 Common Stock, which amount
represents the interest of the PPY3 Shareholders in the market value of
PPY3's real estate assets at June 30, 1996 (based on an independent
appraisal) and the interest of the PPY3 Shareholders in the estimated
net asset value of its other assets at December 31, 1996. Additional
distributions would be made to PPY3 Shareholders to cause PPY3's
estimated net asset value allocable to the PPY3 Shareholders as of the
date of the PPY3 Merger to be substantially equivalent to $20.47 per
share. The PPY3 Common Stock, PPY3 Common Stock Series B, PPY3 Common
Stock Series C and PPY3 Common Stock Series D held by PSI will be
cancelled in the PPY3 Merger. Under the Merger Agreement, PPY and PPY2
will also be merged into PSI (the "PPY Merger" and the "PPY2 Merger,"
respectively, if approved by the respective shareholders of those
entities. THE PPY3 MERGER, THE PPY MERGER AND THE PPY2 MERGER ARE NOT
CONDITIONED ON EACH OTHER.
2. To consider and vote upon a related amendment to PPY3's bylaws to
authorize the PPY3 Merger in the form of Appendix E-3 to the
accompanying Combined Proxy Statement and Prospectus.
The Board of Directors has determined that holders of record of PPY3 Common
Stock Series A, PPY3 Common Stock Series B, PPY3 Common Stock Series C and PPY3
Common Stock Series D at the close of business on October 21, 1996 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
October ___, 1996
<PAGE>
PUBLIC STORAGE, INC.
PARTNERS PREFERRED YIELD, INC.
PARTNERS PREFERRED YIELD II, INC.
PARTNERS PREFERRED YIELD III, INC.
COMBINED PROXY STATEMENT AND PROSPECTUS
SPECIAL MEETINGS OF SHAREHOLDERS OF
PARTNERS PREFERRED YIELD, INC., PARTNERS PREFERRED YIELD II, INC. AND
PARTNERS PREFERRED YIELD III, INC.
DECEMBER 17, 1996
This Combined Proxy Statement and Prospectus is being furnished to holders
of shares of (a) Partners Preferred Yield, Inc. ("PPY") Common Stock Series A,
par value $.01 per share (the "PPY Common Stock"), Common Stock Series B, par
value $.01 per share, Common Stock Series C, par value $.01 per share and Common
Stock Series D, par value $.01 per share (collectively, the "PPY Common Stock
Series B, C and D"), (b) Partners Preferred Yield II, Inc. ("PPY2") Common Stock
Series A, par value $.01 per share (the "PPY2 Common Stock"), Common Stock
Series B, par value $.01 per share, Common Stock Series C, par value $.01 per
share and Common Stock Series D, par value $.01 per share (collectively, the
"PPY2 Common Stock Series B, C and D") and (c) Partners Preferred Yield III,
Inc. ("PPY3") Common Stock Series A, par value $.01 per share (the "PPY3 Common
Stock"), Common Stock Series B, par value $.01 per share, Common Stock Series C,
par value $.01 per share and Common Stock Series D, par value $.01 per share
(collectively, the "PPY3 Common Stock Series B, C and D") and relates to
meetings of shareholders of PPY, PPY2 and PPY3 called to approve the proposed
mergers of each of PPY, PPY2 and PPY3 with and into Public Storage, Inc. ("PSI")
(the "PPY Merger," the "PPY2 Merger" and the "PPY3 Merger," respectively;
together, the "Mergers") pursuant to the Agreement and Plan of Reorganization
attached as Appendix A to this Combined Proxy Statement and Prospectus (the
"Merger Agreement"). Holders of PPY, PPY2 and PPY3 Common Stock are referred to
hereafter as the "PPY Shareholders," the "PPY2 Shareholders," and the "PPY3
Shareholders," respectively, and holders of PSI Common Stock, par value $.10 per
share (the "PSI Common Stock") are referred to hereafter as the "PSI
Shareholders." THE PPY MERGER, THE PPY2 MERGER AND THE PPY3 MERGER ARE NOT
CONDITIONED ON EACH OTHER.
PSI and its executive officers have significant relationships with PPY,
PPY2 and PPY3, and PSI and B. Wayne Hughes ("Hughes"), the chief executive
officer of each of PSI, PPY, PPY2 and PPY3, own a substantial amount of the
capital stock of each of PPY, PPY2 and PPY3. See "Summary -- Relationships." The
Merger Agreement requires that each of the Mergers be approved by a majority of
the outstanding shares of Common Stock and Common Stock Series B, C and D of the
respective corporation, voting together as a class, with the Common Stock Series
B, C and D voted with the holders of a majority of the unaffiliated shares of
the Common Stock of the respective corporation. Each of the Boards of Directors
of PPY, PPY2 and PPY3, based on recommendations of special committees composed
of independent directors, recommends that PPY, PPY2 and PPY3 Shareholders,
respectively, vote for the PPY, PPY2 and PPY3 Mergers, respectively.
The Mergers involve certain factors that should be considered by the PPY,
PPY2 and PPY3 Shareholders, including the following:
. The Mergers have not been negotiated at arm's length, no unaffiliated
representatives were appointed to negotiate the terms of the Mergers on
behalf of PPY, PPY2 or PPY3 and no third party proposals for PPY, PPY2 or
PPY3 or their properties were solicited.
. The nature of the investment of PPY, PPY2 and PPY3 Shareholders who receive
shares of PSI 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 fully-integrated real estate company, whose
portfolio of properties is changed
(Continued on following page)
------------------
THE SECURITIES TO BE ISSUED IN THE MERGERS 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 COMBINED
PROXY STATEMENT AND PROSPECTUS. ANY PRESENTATION 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.
October __, 1996
<PAGE>
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 the PSI Common Stock ($21 3/4 per share) and
the current regular quarterly distribution rate for PSI, PPY, PPY2 and
PPY3, the level of distributions to PPY, PPY2 and PPY3 Shareholders who
receive PSI Common Stock in the Mergers would be approximately 29%, 26% and
39% lower, respectively, after the Mergers.
. The properties of PPY, PPY2 and PPY3 may continue to appreciate in value
and might be able to be liquidated at a later date for more consideration
than in the Mergers.
. Under California law, PPY, PPY2 and PPY3 Shareholders will be entitled to
dissenters' rights of appraisal in connection with the Mergers only if
demands for payments are filed with respect to 5% or more of the
outstanding shares of PPY, PPY2 and PPY3 Common Stock, respectively.
. PSI and its affiliates have conflicts of interest in connection with the
Mergers.
. The public PSI Shareholders are substantially limited in their ability to
control PSI. Hughes and members of his family (the "Hughes Family") own
approximately 44% of the PSI Common Stock (approximately 49% upon
conversion of the PSI Class B Common Stock), and there are restrictions on
beneficial ownership of PSI securities in PSI's organizational documents.
Such ownership factors should prevent any takeover not approved by Hughes.
. As a result of a prior business combination, PSI is subject to tax risks,
including additional risks as to PSI's continued qualification as a real
estate investment trust ("REIT").
. In making real estate investments, PSI, unlike PPY, PPY2 and PPY3, has
incurred, and may continue to incur, debt.
. The interest of PSI Shareholders can be diluted through the issuance of
additional securities. PSI has outstanding, and intends to issue
additional, securities with priority over PSI Common Stock.
. The market price of PSI Common Stock may fluctuate following establishment
of the number of shares to be issued to PPY, PPY2 and PPY3 Shareholders in
the Mergers and prior to issuance and could decrease as a result of
increased selling activity following issuance of shares in the Mergers and
other factors.
. The consideration to be received by PPY, PPY2 and PPY3 Shareholders in the
Mergers 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 the properties of
PPY, PPY2 or PPY3.
. PPY, PPY2 and PPY3 Shareholders who receive any cash in connection with the
Mergers may have a taxable gain.
SEE "RISK FACTORS AND MATERIAL CONSIDERATIONS" BEGINNING ON PAGE 24 OF THIS
COMBINED PROXY STATEMENT AND PROSPECTUS.
The PSI Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "PSA". On _______________, 1996, the closing price of the PSI
Common Stock on the NYSE was $_____. The PPY, PPY2 and PPY3 Common Stock are
traded on the American Stock Exchange ("AMEX") under the symbols "PYA", "PYB"
and "PYC", respectively. On _______________, 1996, the closing prices of the
PPY, PPY2 and PPY3 Common Stock on the AMEX were $_____, $_____ and $_____,
respectively.
This Combined Proxy Statement and Prospectus is first being mailed on or
about _______________, 1996 to shareholders of record of PPY, PPY2 and PPY3 at
the close of business on October 21, 1996. The special meetings of shareholders
of PPY, PPY2 and PPY3 to consider the Mergers will occur concurrently.
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 PSI, PPY, PPY2
OR PPY3. THIS COMBINED 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 COMBINED 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.
ii
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TABLE OF CONTENTS
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Available Information................................................................ 1
Incorporation of Certain Documents by Reference...................................... 1
Cautionary Statement................................................................. 2
Summary.............................................................................. 3
Overview of Mergers............................................................... 3
Meetings and Vote Requirements of Shareholders.................................... 5
PPY............................................................................... 5
PPY2.............................................................................. 6
PPY3.............................................................................. 6
PSI............................................................................... 6
Risk Factors and Material Considerations.......................................... 6
Background and Reasons for the Mergers............................................ 8
Potential Advantages of the Mergers............................................... 10
Rights of Dissenting Shareholders................................................. 10
Determination of Payments to be Received by PPY Shareholders
in Connection with the PPY Merger................................................ 11
Determination of Payments to be Received by PPY2 Shareholders
in Connection with the PPY2 Merger............................................... 11
Determination of Payments to be Received by PPY3 Shareholders
in Connection with the PPY3 Merger............................................... 12
Federal Income Tax Matters........................................................ 12
Recommendations; Opinions of Financial Advisors................................... 12
Comparison of PPY, PPY2 and PPY3 Common Stock with PSI Common Stock............... 14
Summary Financial Information..................................................... 16
Relationships..................................................................... 21
Risk Factors and Material Considerations............................................. 24
No Arm's Length Negotiation or Unaffiliated Representatives....................... 24
Change in Nature of Investment.................................................... 24
Lower Level of Distributions After the Mergers.................................... 24
Potential Loss of Future Appreciation............................................. 24
Limitation on Dissenters' Rights of Appraisal..................................... 24
Control and Influence by the Hughes Family and Ownership Limitations.............. 24
Tax Risks......................................................................... 25
Financing Risks................................................................... 26
Uncertainty Regarding Market Price of PSI Common Stock............................ 27
Merger Consideration Based on Appraisals Instead of Arm's Length Negotiation...... 27
Tax to PPY, PPY2 and PPY3 Shareholders............................................ 27
Operating Risks................................................................... 27
Shares Eligible for Future Sale................................................... 29
Conflicts of Interest in the Mergers................................................. 30
The Mergers.......................................................................... 31
General........................................................................... 31
Background 33
Reasons for the Mergers and Timing................................................ 36
Alternatives to the Mergers....................................................... 37
No Solicitation of Other Proposals................................................ 39
Determination of Payments to be Received by PPY, PPY2 and PPY3 Shareholders
in Connection with the Mergers................................................... 39
Potential Advantages of the Mergers to PPY, PPY2 and PPY3......................... 44
Recommendation to PPY, PPY2 and PPY3 Shareholders and Fairness Analysis........... 44
Comparison of Consideration to be Received in the Mergers to Other Alternatives... 47
Real Estate Portfolio Appraisals by NDRC.......................................... 51
</TABLE>
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Fairness Opinions from Stanger 54
The Merger Agreement.............................................................. 58
Cash Election Procedure........................................................... 60
Consequences to PPY, PPY2 and PPY3 if the Mergers are Not Completed............... 62
Costs of the Mergers.............................................................. 62
Accounting Treatment.............................................................. 63
Regulatory Requirements........................................................... 63
Comparison of PPY, PPY2 and PPY3 Common Stock with PSI Common Stock............... 64
Amendment to Bylaws of PPY, PPY2 and PPY3............................................ 68
Approval of the Mergers and Bylaw Amendments......................................... 69
General........................................................................... 69
PPY............................................................................... 69
PPY2.............................................................................. 69
PPY3.............................................................................. 70
Security Ownership of Certain Beneficial Owners and Management.................... 70
Solicitation of Proxies........................................................... 80
Description of PPY's Properties...................................................... 81
Description of PPY2's Property....................................................... 83
Description of PPY3's Property....................................................... 85
Description of PSI's Properties...................................................... 89
Distributions and Price Range of PSI Common Stock.................................... 90
Distributions and Price Range of PPY Common Stock.................................... 91
Distributions and Price Range of PPY2 Common Stock................................... 92
Distributions and Price Range of PPY3 Common Stock................................... 93
Description of PSI Capital Stock..................................................... 94
Common Stock...................................................................... 94
Ownership Limitations............................................................. 94
Class B Common Stock.............................................................. 95
Preferred Stock................................................................... 96
Effects of Issuance of Capital Stock.............................................. 97
Dissenting Shareholders' Rights of Appraisal......................................... 98
Certain Federal Income Tax Matters................................................... 100
The Mergers 100
Opinion of Counsel................................................................ 102
General Tax Treatment of PSI...................................................... 103
Consequences of the PSMI Merger on PSI's Qualification as a REIT.................. 106
Taxation of PSI Shareholders...................................................... 109
State and Local Taxes............................................................. 111
Legal Opinions....................................................................... 111
Experts.............................................................................. 111
Independent Auditors................................................................. 111
Shareholder Proposals................................................................ 111
Glossary............................................................................. 112
</TABLE>
iv
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<TABLE>
<S> <C> <C>
Appendix A - Agreement and Plan of Reorganization among PSI, PPY, PPY2 and PPY3 dated as of August 15,
1996
Appendix B-1 - Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants, Inc. for PPY dated August
14, 1996
Appendix B-2 - Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants, Inc. for PPY2 dated
August 14, 1996
Appendix B-3 - Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants, Inc. for PPY3 dated
August 14, 1996
Appendix C-1 - Opinion of Robert A. Stanger & Co., Inc. (PPY Merger) dated October 15, 1996
Appendix C-2 - Opinion of Robert A. Stanger & Co., Inc. (PPY2 Merger) dated October 15, 1996
Appendix C-3 - Opinion of Robert A. Stanger & Co., Inc. (PPY3 Merger) dated October 15, 1996
Appendix D - Chapter 13 of the California General Corporation Law Concerning Dissenters' Rights
Appendix E-1 - Proposed Amendment to PPY's Bylaws
Appendix E-2 - Proposed Amendment to PPY2's Bylaws
Appendix E-3 - Proposed Amendment to PPY3's Bylaws
Appendix F-1 - Financial Statements of PPY
Appendix F-2 - Financial Statements of PPY2
Appendix F-3 - Financial Statements of PPY3
Appendix G-1 - Management's Discussion and Analysis of Financial Condition and Results of Operations of PPY
Appendix G-2 - Management's Discussion and Analysis of Financial Condition and Results of Operations of PPY2
Appendix G-3 - Management's Discussion and Analysis of Financial Condition and Results of Operations of PPY3
</TABLE>
v
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AVAILABLE INFORMATION
Each of PSI, PPY, PPY2 and PPY3 is 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 7 World Trade Center, 13th Floor, New York, New York 10048;
and Citicorp 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 or by accessing the Commission's Worldwide Web site at
http://www.sec.gov. Such material can also be inspected, in the case of PSI, at
the NYSE, 20 Broad Street, New York, New York 10005 and, in the case of PPY,
PPY2 or PPY3, at the AMEX, 86 Trinity Place, New York, New York 10006.
PSI 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 Combined 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 PSI 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,
1995, as amended by Form 10-K/As dated April 29, 1996, May 14, 1996 and May 15,
1996; (ii) the Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996 and June 30, 1996; and (iii) the Current Reports on Form 8-K dated January
22, 1996, September 6, 1996 and September 18, 1996.
All documents filed by PSI pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Combined Proxy Statement and
Prospectus and prior to the date of the special meetings of the shareholders of
PPY, PPY2 and PPY3 shall be deemed to be incorporated by reference herein from
the date of filing such documents.
The following documents filed by PPY with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-10902) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1995, as amended by a Form 10-K/A dated April 26, 1996; (ii) the Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996;
and (iii) the Current Report on Form 8-K dated August 15, 1996.
The following documents filed by PPY2 with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-10926) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1995, as amended by a Form 10-K/A dated April 26, 1996; (ii) the Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996;
and (iii) the Current Report on Form 8-K dated August 15, 1996.
The following documents filed by PPY3 with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-10925) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1995, as amended by a Form 10-K/A dated April 26, 1996; (ii) the Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996;
and (iii) the Current Report on Form 8-K dated August 15, 1996.
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 Combined 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
1
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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 Combined Proxy Statement and Prospectus.
Also incorporated by reference herein is the Merger Agreement, which is
attached as Appendix A to this Combined Proxy Statement and Prospectus.
THIS COMBINED 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
COMBINED 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, 701 WESTERN AVENUE, SUITE 200, GLENDALE,
CALIFORNIA 91201-2397 OR BY TELEPHONE AT (818) 244-8080. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY _______________,
1996.
CAUTIONARY STATEMENT
Statements contained in this Combined Proxy Statement and Prospectus that
are not based on historical fact are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "continue" or similar terms, variations
of those terms or the negative of those terms. Cautionary statements set forth
in "Risk Factors and Material Considerations" and elsewhere in this Proxy
Statement and Prospectus identify important factors that could cause actual
results to differ materially from those in the forward-looking statements.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Combined Proxy Statement and Prospectus.
See "Glossary" for definitions of certain terms used in this Combined Proxy
Statement and Prospectus.
OVERVIEW OF MERGERS
MERGER OF PPY INTO PSI. PPY will be merged into PSI, which will be the
surviving corporation. Each share of PPY Common Stock outstanding immediately
prior to the consummation of the PPY Merger (other than shares held by PSI or
PPY Shareholders who have properly exercised dissenter's rights under California
law ("Dissenting PPY Shares")) will be converted into the right to receive cash,
PSI Common Stock or a combination of the two, as follows: (i) with respect to a
certain number of shares of PPY Common Stock (not to exceed 20% of the
outstanding PPY Common Stock, or 615,406 shares, less any Dissenting PPY
Shares), upon a PPY Shareholder's election (a "PPY Cash Election"), $19.00 in
cash, subject to reduction as described below, or (ii) that number of shares of
PSI Common Stock (subject to rounding) determined by dividing $19.00, subject to
reduction as described below, by the average of the per share closing prices on
the NYSE of PSI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders of PPY.
If a PPY Shareholder does not make a PPY Cash Election, all of his or her PPY
Common Stock will be converted into PSI Common Stock. The consideration paid by
PSI to PPY Shareholders in the PPY Merger will be reduced by the amount of cash
distributions required to be paid to PPY Shareholders by PPY prior to completion
of the PPY Merger (estimated at $.70 per share) in order to satisfy PPY's REIT
distribution requirements ("Required PPY REIT Distributions"). The
consideration received by PPY Shareholders in the PPY Merger, however, along
with any Required PPY REIT Distributions, will not be less than $19.00 per share
of PPY Common Stock, which amount represents the interest of the PPY
Shareholders in the market value of PPY's real estate assets at June 30, 1996
(based on an independent appraisal) and the interest of the PPY Shareholders in
the estimated net asset value of its other assets at December 31, 1996. PPY
Shareholders would receive the Required PPY REIT Distributions upon any
liquidation of PPY, regardless of the PPY Merger. Additional distributions
would be made to the PPY Shareholders to cause PPY's estimated net asset value
allocable to the PPY Shareholders as of the date of the PPY Merger to be
substantially equivalent to $19.00 per share. The PPY Common Stock and PPY
Common Stock Series B, C and D held by PSI will be cancelled in the PPY Merger.
See "The Mergers -- Determination of Payments to be Received by PPY, PPY2 and
PPY3 Shareholders in Connection with the Mergers." For a description of the
terms of the PPY Merger, see "The Mergers -- The Merger Agreement."
MERGER OF PPY2 INTO PSI. PPY2 will be merged into PSI, which will be the
surviving corporation. Each share of PPY2 Common Stock outstanding immediately
prior to the consummation of the PPY2 Merger (other than shares held by PSI or
by PPY2 Shareholders who have properly exercised dissenter's rights under
California law ("Dissenting PPY2 Shares")) will be converted into the right to
receive cash, PSI Common Stock or a combination of the two, as follows: (i)
with respect to a certain number of shares of PPY2 Common Stock (not to exceed
20% of the outstanding PPY2 Common Stock, or 626,021 shares, less any Dissenting
PPY2 Shares), upon a PPY2 Shareholder's election (a "PPY2 Cash Election"),
$20.39 in cash, subject to reduction as described below, or (ii) that number of
shares of PSI Common Stock (subject to rounding) determined by dividing $20.39,
subject to reduction as described below, by the average of the per share closing
prices on the NYSE of PSI Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the special meeting of the shareholders
of PPY2. If a PPY2 Shareholder does not make a PPY2 Cash Election, all of his
or her PPY2 Common Stock will be converted into PSI Common Stock. The
consideration paid by PSI to PPY2 Shareholders in the PPY2 Merger will be
reduced by the amount of cash distributions required to be paid to PPY2
Shareholders by PPY2 prior to completion of the PPY2 Merger (estimated at $.83
per share) in order to satisfy PPY2's REIT distribution requirements ("Required
PPY2 REIT Distributions"). The consideration received by PPY2 Shareholders in
the PPY2 Merger, however, along with any Required PPY2 REIT Distributions, will
not be less than $20.39 per share of PPY2 Common Stock, which amount represents
the interest of the PPY2 Shareholders in the market value of PPY2's real estate
assets at June 30, 1996 (based on an independent appraisal) and the interest of
the PPY2 Shareholders in the estimated net asset value of its other assets at
December 31, 1996. PPY2 Shareholders would receive the Required PPY2 REIT
Distributions upon any liquidation of PPY2, regardless of the PPY2 Merger.
Additional distributions would be made to the PPY2 Shareholders to cause PPY2's
estimated net asset value allocable to the PPY2 Shareholders as of the date of
the PPY2
3
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Merger to be substantially equivalent to $20.39 per share. The PPY2 Common
Stock and PPY2 Common Stock Series B, C and D held by PSI will be cancelled in
the PPY2 Merger. See "The Mergers -- Determination of Payments to be Received
by PPY2 Shareholders and PPY Shareholders in Connection with the Mergers." For
a description of the terms of the PPY2 Merger, see "The Mergers -- The Merger
Agreement."
MERGER OF PPY3 INTO PSI. PPY3 will be merged into PSI, which will be the
surviving corporation. Each share of PPY3 Common Stock outstanding immediately
prior to the consummation of the PPY3 Merger (other than shares held by PSI or
by PPY3 Shareholders who have properly exercised dissenter's rights under
California law ("Dissenting PPY3 Shares")) will be converted into the right to
receive cash, PSI Common Stock or a combination of the two, as follows: (i)
with respect to a certain number of shares of PPY3 Common Stock (not to exceed
20% of the outstanding PPY3 Common Stock, or 262,677 shares, less any Dissenting
PPY3 Shares), upon a PPY3 Shareholder's election (a "PPY3 Cash Election"),
$20.47 in cash, subject to reduction as described below, or (ii) that number of
shares of PSI Common Stock (subject to rounding) determined by dividing $20.47,
subject to reduction as described below, by the average of the per share closing
prices on the NYSE of PSI Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the special meeting of the shareholders
of PPY3. If a PPY3 Shareholder does not make a PPY3 Cash Election, all of his
or her PPY3 Common Stock will be converted into PSI Common Stock. The
consideration paid by PSI to PPY3 Shareholders in the PPY3 Merger will be
reduced by the amount of cash distributions required to be paid to PPY3
Shareholders by PPY3 prior to completion of the PPY3 Merger (estimated at $.74
per share) in order to satisfy PPY3's REIT distribution requirements ("Required
PPY3 REIT Distributions"). The consideration received by PPY3 Shareholders in
the PPY3 Merger, however, along with any Required PPY3 REIT Distributions, will
not be less than $20.47 per share of PPY3 Common Stock, which amount represents
the interest of the PPY3 Shareholders in the market value of PPY3's real estate
assets at June 30, 1996 (based on an independent appraisal) and the interest of
the PPY3 Shareholders in the estimated net asset value of its other assets at
December 31, 1996. PPY3 Shareholders would receive the Required PPY3 REIT
Distributions upon any liquidation of PPY3, regardless of the PPY3 Merger.
Additional distributions would be made to the PPY3 Shareholders to cause PPY3's
estimated net asset value allocable to the PPY3 Shareholders as of the date of
the PPY3 Merger to be substantially equivalent to $20.47 per share. The PPY3
Common Stock and PPY3 Common Stock Series B, C and D held by PSI will be
cancelled in the PPY3 Merger. See "The Mergers -- Determination of Payments to
be Received by PPY3 Shareholders and PPY Shareholders in Connection with the
Mergers." For a description of the terms of the PPY3 Merger, see "The Mergers -
- - The Merger Agreement."
The Required PPY, PPY2 and PPY3 REIT Distributions are sometimes
collectively referred to as the "Required REIT Distributions," and a PPY, PPY2
and PPY3 Cash Election are sometimes collectively referred to as a "Cash
Election."
All shares of PPY, PPY2 and PPY3 Common Stock Series B, C and D are owned
by PSI and Hughes. Upon consummation of the PPY Merger, each share of PPY
Common Stock Series B, C and D (other than shares held by PSI which will be
cancelled in the PPY Merger) will be converted into the right to receive $11.66
in PSI Common Stock (valued as in the case of the PPY Common Stock), plus (i)
any additional distributions equal to the amount by which PPY's estimated net
asset value allocable to the holders of the PPY Common Stock Series B, C and D
as of the date of the PPY Merger exceeds $11.66 per share and (ii) any Required
PPY REIT Distributions payable to the holders of the PPY Common Stock Series B.
Upon consummation of the PPY2 Merger, each share of PPY2 Common Stock Series B,
C and D (other than shares held by PSI which will be cancelled in the PPY2
Merger) will be converted into the right to receive $12.26 in PSI Common Stock
(valued as in the case of the PPY2 Common Stock), plus (i) any additional
distributions equal to the amount by which PPY2's estimated net asset value
allocable to the holders of the PPY2 Common Stock Series B, C and D as of the
date of the PPY2 Merger exceeds $12.26 per share and (ii) any Required PPY2 REIT
Distributions payable to the holders of the PPY2 Common Stock Series B. Upon
consummation of the PPY3 Merger, each share of PPY3 Common Stock Series B, C and
D (other than shares held by PSI which will be cancelled in the PPY3 Merger)
will be converted into the right to receive $12.30 in PSI Common Stock (valued
as in the case of the PPY3 Common Stock), plus (i) any additional distributions
equal to the amount by which PPY3's estimated net asset value allocable to the
holders of the PPY3 Common Stock Series B, C and D as of the date of the PPY3
Merger exceeds $12.30 per share and (ii) any Required PPY3 REIT Distributions
payable to the holders of the PPY3 Common Stock Series B. See "The Mergers --
Determination of Payments to be Received by PPY, PPY2 and
4
<PAGE>
PPY3 Shareholders." The Common Stock Series B, C and D will be voted with the
majority of shares of Common Stock of the respective corporation held by
unaffiliated owners.
The PSI Common Stock is listed on the NYSE, and the PPY, PPY2 and PPY3
Common Stock are listed on the AMEX. On August 14, 1996, the last full trading
day prior to the first announcement of the proposed Mergers, the reported
closing sales price per share of PSI Common Stock on the NYSE was $21 3/4, and
the reported closing sales prices per share of PPY, PPY2 and PPY3 Common Stock
on the AMEX were $17, $17 3/4 and $19 7/8, respectively. On _______________,
1996, the last full trading day prior to the date of this Combined Proxy
Statement and Prospectus, the reported closing sales prices per share of PSI,
PPY, PPY2 and PPY3 Common Stock were $______, $______ and $______, respectively.
THE PPY MERGER, THE PPY2 MERGER AND THE PPY3 MERGER ARE NOT CONDITIONED ON
EACH OTHER.
MEETINGS AND VOTE REQUIREMENTS OF SHAREHOLDERS
<TABLE>
<CAPTION>
PPY PPY2 PPY3
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C>
Meeting Date December 17, 1996 at December 17, 1996 at December 17, 1996 at
10:00 a.m. 10:00 a.m. 10:00 a.m.
Record Date October 21, 1996 October 21, 1996 October 21, 1996
Purpose To Approve the PPY Merger To Approve the PPY2 Merger To Approve the PPY3 Merger
and Proposed Bylaw Amendment and Proposed Bylaw Amendment and Proposed Bylaw Amendment
Shares Outstanding 3,077,028 shares of 3,130,103 shares of 1,313,384 shares of
PPY Common Stock PPY2 Common Stock PPY3 Common Stock
831,485 shares of PPY 831,485 shares of PPY2 333,304 shares of PPY3
Common Stock Series B, C and D Common Stock Series B, C and D Common Stock Series B, C and D
Vote Required Majority of outstanding shares Majority of outstanding shares Majority of outstanding shares
of PPY Common Stock and of PPY2 Common Stock and of PPY3 Common Stock and
PPY Series B, C and D, PPY2 Series B, C and D, PPY3 Series B, C and D,
voting together as a class* voting together as a class* voting together as a class*
Percentage Ownership of Total
Combined Outstanding Shares
of Common Stock and Common
Stock Series B, C and D by
PSI and Hughes 32.5% 32.1% 25.4%
</TABLE>
_______________
* In accordance with the bylaws of PPY, PPY2 and PPY3, the Common Stock
Series B, C and D will be voted with the holders of a majority of the
unaffiliated shares of the Common Stock of the respective corporation.
PPY
PPY is a REIT organized as a California corporation that was formed to
succeed to the business of Partners Preferred Yield, Ltd., a California limited
partnership (the "PPY Partnership"), in a reorganization transaction completed
on October 21, 1991. PPY owns 19 mini-warehouses located in 10 states. All of
these facilities are operated under the "Public Storage" name. See "Description
of PPY's Properties." The PPY Common Stock is traded on the AMEX under the
symbol "PYA".
PPY's properties are managed by PSI. PPY'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. The same persons are the directors of
each of PPY, PPY2 and PPY3. See "-- Relationships."
5
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PPY2
PPY2 is a REIT organized as a California corporation that was formed to
succeed to the business of Partners Preferred Yield II, Ltd., a California
limited partnership (the "PPY2 Partnership"), in a reorganization transaction
completed on November 8, 1991. PPY2 owns 24 mini-warehouses located in 10
states. All of these facilities are operated under the "Public Storage" name.
See "Description of PPY2's Properties." The PPY2 Common Stock is traded on the
AMEX under the symbol "PYB".
PPY2's properties are managed by PSI. PPY2'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. The same persons are the
directors of each of PPY, PPY2 and PPY3. See "-- Relationships."
PPY3
PPY3 is a REIT organized as a California corporation that was formed to
succeed to the business of Partners Preferred Yield III, Ltd., a California
limited partnership (the "PPY3 Partnership"), in a reorganization transaction
completed on November 8, 1991. PPY3 owns nine mini-warehouses located in seven
states. All of these facilities are operated under the "Public Storage" name.
See "Description of PPY3's Properties." The PPY3 Common Stock is traded on the
AMEX under the symbol "PYC".
PPY3's properties are managed by PSI. PPY3'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. The same persons are the
directors of each of PPY, PPY2 and PPY3. See "-- Relationships."
PSI
PSI is a fully integrated, self-administered and self-managed REIT,
organized as a California corporation that acquires, develops, owns and operates
mini-warehouses, which are self-service facilities offering storage space for
personal and business use. PSI is the largest owner and operator of mini-
warehouses in the United States. PSI also owns and operates, to a lesser extent,
business parks containing commercial and industrial rental space. At June 30,
1996, PSI had equity interests (through direct ownership, as well as general and
limited partnership and capital stock interests) in 1,068 properties located in
37 states, consisting of 1,033 mini-warehouse facilities and 35 business parks.
In a series of mergers among Public Storage Management, Inc. and its
affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger
of PSMI into Storage Equities, Inc. ("SEI") (the "PSMI Merger"), SEI became
self-administered and self-managed, acquired substantially all of PSMI's United
States real estate interests and was renamed "Public Storage, Inc." In
addition, the outstanding capital stock of PSMI was converted into an aggregate
of 29,449,513 shares of PSI Common Stock (exclusive of shares of PSI Common
Stock held by PSMI prior to the PSMI Merger) and 7,000,000 shares of PSI Class B
Common Stock.
The principal executive offices of PSI, PPY, PPY2 and PPY3 are located at
701 Western Avenue, Suite 200, Glendale, California 91201-2397. The telephone
number is (818) 244-8080.
RISK FACTORS AND MATERIAL CONSIDERATIONS
Each of the Mergers involve certain factors that should be considered by
PPY, PPY2 and PPY3 Shareholders, including the following:
. No Arm's Length Negotiation or Unaffiliated Representatives. The
Mergers have not been negotiated at arm's length, and no unaffiliated
representatives were appointed to negotiate the terms of the Mergers
on behalf of PPY, PPY2 or PPY3. If such persons had been engaged, the
terms of the Mergers may have been more favorable to PPY, PPY2 and
PPY3 Shareholders. In addition, no third party proposals for PPY,
PPY2 or PPY3 or their properties were solicited. Such proposals could
have generated higher prices.
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. Change from Finite Life to Infinite Life. The nature of the investment
of PPY, PPY2 and PPY3 Shareholders who receive PSI Common Stock is
being changed from holding an interest in specified properties for a
finite period to holding an investment in an ongoing integrated real
estate company, whose portfolio of properties is changed from time to
time without approval of shareholders, which does not plan to
liquidate its assets within a fixed period of time and which is
engaged in all aspects of the mini-warehouse industry, including
property development and management. PPY, PPY2 and PPY3 Shareholders
who receive PSI Common Stock in the Mergers will be able to liquidate
their investment only by selling their shares in the market.
. Lower Level of Distributions After the Mergers. The level of
distributions to PPY, PPY2 and PPY3 Shareholders who receive PSI
Common Stock in the Mergers is expected to be lower after the Mergers
than before. Based on a market price of PSI Common Stock of $21 3/4
and the current regular quarterly distribution rate for PSI ($.22 per
share), PPY ($.27 per share), PPY2 ($.28 per share) and PPY3 ($.34 per
share), (a) PPY Shareholders would receive approximately $.08 (29%)
less in regular quarterly distributions per share of PPY Common Stock
after the PPY Merger from PSI than before the PPY Merger from PPY and
approximately $.01 less per share in regular quarterly distributions
for each $1.25 (6%) increase in the market price of PSI Common Stock
above $21 3/4, (b) PPY2 Shareholders would receive approximately $.07
(26%) less in regular quarterly distributions per share of PPY2 Common
Stock after the PPY2 Merger from PSI than before the PPY2 Merger from
PPY2 and approximately $.01 less per share in regular quarterly
distributions for each $1.125 (6%) increase in the market price of PSI
Common Stock above $21 3/4 and (c) PPY3 Shareholders would receive
approximately $.13 (39%) less in regular quarterly distributions per
share of PPY3 Common Stock after the PPY3 Merger from PSI than before
the PPY3 Merger from PPY3 and approximately $.01 less per share in
regular quarterly distributions for each $1.125 (6%) increase in the
market price of PSI Common Stock above $21 3/4.
. Potential Loss of Future Appreciation. The properties of PPY, PPY2 and
PPY3 may continue to appreciate in value and might be able to be
liquidated at a later date for more consideration than in the Mergers.
. Limitation on Dissenters' Rights of Appraisal. Under California law,
PPY, PPY2 and PPY3 Shareholders will be entitled to dissenters' rights
of appraisal in connection with the Mergers ("Dissenters' Rights")
only if demands for payment are filed with respect to 5% or more of
the outstanding shares of PPY, PPY2 and PPY3 Common Stock,
respectively.
. Conflicts of Interest. PSI and its affiliates, which are affiliated
with PPY, PPY2 and PPY3, have conflicts of interest in connection with
the Mergers.
. Control and Influence by the Hughes Family and Ownership Limitations.
The public PSI Shareholders are substantially limited in their ability
to control PSI. The Hughes Family owns approximately 44% of the PSI
Common Stock (approximately 49% upon conversion of the PSI Class B
Common Stock). Also, there are restrictions on beneficial ownership
of PSI securities in PSI's Articles of Incorporation. Such ownership
factors should prevent any takeover of PSI not approved by Hughes.
. Tax Risks -- Additional Risks to Continued REIT Qualification. As a
result of the PSMI Merger, PSI is subject to tax risks, including
risks as to PSI's continued qualification as a REIT resulting from a
substantial increase in PSI's nonqualifying income.
. Financing Risks. In making real estate investments, PSI, unlike PPY,
PPY2 and PPY3, 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 PSI Shareholders can be
diluted through the issuance of additional securities by PSI. PSI has
outstanding, and intends to issue additional, securities with priority
over PSI Common Stock.
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. Uncertainty Regarding Market Price of PSI Common Stock. The market
price of PSI Common Stock may fluctuate following establishment of the
number of shares to be issued to PPY, PPY2 and PPY3 Shareholders in
the Mergers and prior to issuance and could decrease as a result of
increased selling activity following issuance of shares in the Mergers
and other factors.
. Merger Consideration Based on Appraisals Instead of Arm's Length
Negotiations. The consideration to be paid to the PPY, PPY2 and PPY3
Shareholders is based on third party appraisals of the properties of
PPY, PPY2 and PPY3. 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 the properties of PPY, PPY2 and
PPY3. There can be no assurance that if the properties of PPY, PPY2
and PPY3 were sold, they would be sold at the appraised values; the
sales price might be higher or lower.
. Tax to PPY, PPY2 and PPY3 Shareholders Upon Receipt of Cash. PPY, PPY2
and PPY3 Shareholders who receive any cash in connection with the
Mergers may recognize a taxable gain. In addition, the Required PPY
REIT Distributions, the Required PPY2 REIT Distributions and the
Required PPY3 REIT Distributions will be taxable to PPY, PPY2 and PPY3
Shareholders, respectively, as ordinary income.
BACKGROUND AND REASONS FOR THE MERGERS
THE MERGERS HAVE BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO ARE
EXECUTIVE OFFICERS OF PSI, PPY, PPY2 AND PPY3. SPECIAL COMMITTEES COMPOSED OF
INDEPENDENT DIRECTORS OF PPY, PPY2 AND PPY3 (THE "PPY SPECIAL COMMITTEE," "PPY2
SPECIAL COMMITTEE" AND "PPY3 SPECIAL COMMITTEE," RESPECTIVELY) HAVE REVIEWED THE
TERMS OF THE MERGERS, AND THE BOARDS OF DIRECTORS OF PPY, PPY2 AND PPY3, BASED
ON RECOMMENDATIONS OF THE PPY, PPY2 AND PPY3 SPECIAL COMMITTEES WHICH THE BOARDS
OF DIRECTORS HAVE ADOPTED, AND ON THE OPINIONS OF FINANCIAL ADVISORS IN WHICH
THEY CONCUR, BELIEVE THAT THE MERGERS ARE FAIR TO THE PUBLIC PPY, PPY2 AND PPY3
SHAREHOLDERS, RESPECTIVELY, AND RECOMMEND THAT PPY, PPY2 AND PPY3 SHAREHOLDERS,
RESPECTIVELY, VOTE FOR THE MERGERS.
THE PPY, PPY2 AND PPY3 SPECIAL COMMITTEES ARE COMPRISED OF THE SAME TWO
INDEPENDENT DIRECTORS OF PPY, PPY2 AND PPY3. THE MEETINGS OF THE PPY, PPY2 AND
PPY3 SPECIAL COMMITTEES OCCURRED SIMULTANEOUSLY AND THE PPY, PPY2 AND PPY3
SPECIAL COMMITTEES BELIEVE THAT THE SAME GENERAL CONSIDERATIONS ARE APPLICABLE
TO EACH OF THE MERGERS, EXCEPT AS NOTED IN THIS COMBINED PROXY STATEMENT AND
PROSPECTUS.
PPY, PPY2 and PPY3 were organized to succeed to the business of the PPY
Partnership, the PPY2 Partnership and the PPY3 Partnership, respectively, in
reorganization transactions completed in October and November 1991. In response
to changes in the reorganizations requested by the unaffiliated dealer manager
of the partnerships' original offerings of limited partnership interests, PPY,
PPY2 and PPY3 added provisions to their bylaws to the effect that their
shareholders be presented with proposals in 1999 to sell all or substantially
all of their properties, distribute the proceeds from such sale and liquidate
the corporations. Later, in settlement of litigation arising from the
reorganizations their bylaw provisions were amended to expand the terms of the
proposals to include possible financings of their properties. See "The Mergers
- -- Background."
IF APPROVED BY THE SHAREHOLDERS OF PPY, PPY2 AND PPY3, THE MERGERS WOULD
OBVIATE THE OBLIGATION OF PPY, PPY2 OR PPY3 TO PRESENT PROPOSALS TO THEIR
SHAREHOLDERS FOR THE SALE OF THEIR PROPERTIES. IF THE SHAREHOLDERS OF PPY, PPY2
OR PPY3 DO NOT APPROVE THE MERGER OF THE RESPECTIVE CORPORATION OR IF SUCH
MERGER IS NOT COMPLETED BECAUSE OTHER CONDITIONS ARE NOT SATISFIED, SUCH
CORPORATION WOULD CONTINUE TO BE OBLIGATED TO PRESENT A PROPOSAL TO ITS
SHAREHOLDERS IN 1999 FOR THE SALE OF ITS PROPERTIES.
The PPY, PPY2 and PPY3 Special Committees and Boards of Directors believe
that the proposed Mergers are consistent with their respective bylaw provisions.
In the Mergers, PPY, PPY2 and PPY3 would be disposing of their properties to PSI
for value, i.e., PSI Common Stock and cash (if Cash Elections are made), and the
corporate existence of PPY, PPY2 and PPY3 would cease. Furthermore, the
consideration to be received in the Mergers is based
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on the appraised value of the assets of PPY, PPY2 and PPY3, and PPY, PPY2 and
PPY3 Shareholders have the right, with respect to up to 20% of the outstanding
PPY, PPY2 and PPY3 Common Stock (less any Dissenting PPY, PPY2 and PPY3 Shares),
respectively, to receive cash in the Mergers. The applicable bylaw provisions
do not (i) define the terms "sale," "liquidation" or "financing," (ii) specify
what types of transactions would satisfy the requirement imposed by these bylaw
provisions or (iii) preclude sales of the properties of PPY, PPY2 or PPY3 to
PSI.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification. Between
September 1994 and September 1996, PSI merged with seven REITs which, like PPY,
PPY2 and PPY3, had been organized by PSMI to succeed to the business of
predecessor partnerships.
On July 18, 1996, each of the PPY, PPY2 and PPY3 Boards of Directors
appointed the PPY, PPY2 and PPY3 Special Committees to consider and make
recommendations to their respective Boards of Directors and shareholders
regarding possible mergers with PSI. On August 15, 1996, each of the PPY, PPY2
and PPY3 Boards of Directors based on recommendations of its respective Special
Committee, which were adopted by the respective Board of Directors, approved the
respective Merger and determined to recommend that the respective shareholders
vote for the respective Merger.
The PPY, PPY2 and PPY3 Boards of Directors and Special Committees believe
that the respective consideration being offered in the Mergers compares
favorably with the trading price of the PPY, PPY2 and PPY3 Common Stock
immediately prior to the first announcement of the Mergers and during other
periods, a range of estimated going-concern values per share of PPY, PPY2 and
PPY3 Common Stock, an estimated liquidation value per share of PPY, PPY2 and
PPY3 Common Stock and the book value per share of PPY, PPY2 and PPY3 Common
Stock. The PPY, PPY2 and PPY3 Boards of Directors and Special Committees
recognize that this comparison is subject to significant assumptions,
qualifications and limitations. See "The Mergers -- Comparison of Consideration
to be Received in the Mergers to Other Alternatives."
Prior to concluding that the Mergers should be proposed to PPY, PPY2 and
PPY3 Shareholders, the PPY, PPY2 and PPY3 Boards of Directors and Special
Committees considered several alternatives to the Mergers, including liquidation
of PPY, PPY2 and PPY3, continued operation of PPY, PPY2 and PPY3 and an
amendment to the organizational documents of PPY, PPY2 and PPY3. In order to
determine whether the Mergers or one of the alternatives would be more
advantageous to PPY, PPY2 and PPY3 Shareholders, the PPY, PPY2 and PPY3 Boards
of Directors and Special Committees compared the potential benefits and
detriments of the Mergers with the potential benefits and detriments of other
alternatives. Based upon a comparison of the potential benefits and detriments
of the Mergers with their alternatives, the PPY, PPY2 and PPY3 Boards of
Directors and Special Committees have concluded that the Mergers are more
attractive to PPY, PPY2 and PPY3 Shareholders, respectively, than any of the
alternatives considered. The PPY, PPY2 and PPY3 Boards of Directors did not
solicit any other proposals for the acquisition of PPY, PPY2 or PPY3 or their
properties. See "The Mergers -- No Solicitation of Other Proposals."
In comparing the Mergers to other alternatives, the PPY, PPY2 and PPY3
Boards of Directors and Special Committees noted the following:
Liquidation. The PPY, PPY2 and PPY3 Boards of Directors and Special
Committees do not believe this is an opportune time to sell the properties of
the respective corporation because the properties may continue to appreciate in
value. The Mergers provide PPY, PPY2 and PPY3 Shareholders with the opportunity
either to convert their investment into an investment in PSI, which like PPY,
PPY2 and PPY3 primarily owns mini-warehouses, on a tax-free basis (to the extent
that PPY, PPY2 and PPY3 Shareholders receive only PSI Common Stock) or to
receive cash based on the appraised value of PPY's, PPY2's and PPY3's properties
as to a portion of their investment. However, if PPY, PPY2 or PPY3 liquidated
its assets through asset sales to unaffiliated third parties, PPY, PPY2 and PPY3
Shareholders would not need to rely upon real estate portfolio appraisals to
estimate the fair market value of the respective corporation's properties.
Continued Operation. Nothing requires the liquidation or merger of PPY,
PPY2 or PPY3 at this time. All are operating profitably. Continued operation
should provide PPY, PPY2 and PPY3 Shareholders with continued distributions of
net operating cash flow and participation in future appreciation of the
respective corporation's
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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 Mergers described under "The Mergers -- Potential
Advantages of the Mergers."
Amendment of Bylaws of PPY, PPY2 and PPY3. An amendment to the bylaws of
PPY, PPY2 and PPY3 to remove the restrictions on investment of cash flow and
issuance of securities by PPY, PPY2 and PPY3 would permit them to take advantage
of investment opportunities and to grow as new investments are made. However,
the PPY, PPY2 and PPY3 Boards of Directors and Special Committees believe that
PSI's larger capital base and greater liquidity and diversification better
enable PSI to take advantage of investment opportunities and to raise investment
capital.
POTENTIAL ADVANTAGES OF THE MERGERS
The following are the principal potential benefits to PPY, PPY2 and PPY3
Shareholders who receive PSI Common Stock:
. Acquisition of Additional Properties. Following the Mergers, PPY, PPY2
and PPY3 Shareholders will be investors in an entity with a larger asset
base and market capitalization than PPY, PPY2 or PPY3. PSI has grown
and is expected to continue to grow, as new investments are made.
. Increased Liquidity. PPY has 3,077,028 shares of PPY Common Stock listed
on the AMEX (3,745,477 shares upon conversion of the PPY Common Stock
Series B and C into PPY Common Stock) with an average daily trading
volume during the 12 months ended June 30, 1996 of 2,626 shares. PPY2
has 3,130,103 shares of PPY2 Common Stock listed on the AMEX (3,798,552
shares upon conversion of the PPY2 Common Stock Series B and C into PPY2
Common Stock) with an average daily trading volume during the same
period of 2,261 shares. PPY3 has 1,313,384 shares of PPY3 Common Stock
listed on the AMEX (1,581,334 shares upon conversion of the PPY3 Common
Stock Series B and C into PPY3 Common Stock) with an average daily
trading volume during the same period of 722 shares. In comparison, PSI
has approximately 84.4 million shares of PSI Common Stock listed on the
NYSE (48.6 million of which are freely tradeable) with an average daily
trading volume during the same period of 52,138 shares. Given PSI's
greater market capitalization and trading volume than PPY's, PPY2's or
PPY3's, shareholders who receive PSI Common Stock in the Mergers are
likely to enjoy a more active trading market and increased liquidity for
their shares.
. Tax-Free Treatment if Only PSI Common Stock is Received. Each of the
Mergers is intended to qualify as a tax-free reorganization. Assuming
such qualification, no taxable gain or loss will be recognized in
connection with the Mergers by PPY, PPY2 and PPY3 Shareholders who
exchange their PPY, PPY2 and PPY3 Common Stock solely for PSI Common
Stock. However, the Required PPY REIT Distributions, Required PPY2 REIT
Distributions and Required PPY3 REIT Distributions will be taxable to
shareholders of the respective distributing corporation as ordinary
income. Hughes, who has little tax basis in his PPY, PPY2 and PPY3
Common Stock, has advised PSI, PPY, PPY2 and PPY3 that he intends to
exchange his PPY, PPY2 and PPY3 Common Stock solely for PSI Common
Stock. See "Certain Federal Income Tax Matters -- The Mergers."
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Chapter 13 of the Corporations Code of the State of California
(the "California Code"), PPY, PPY2 and PPY3 Shareholders will be entitled to
Dissenters' Rights only if demands for payment are filed with respect to 5% or
more of the respective outstanding shares of PPY, PPY2 or PPY3 Common Stock,
respectively.
A dissenting PPY, PPY2 or PPY3 Shareholder who wishes to require PPY, PPY2
or PPY3 to purchase his or her shares of Common Stock of the respective
corporation must:
(1) vote against the respective Merger any or all of the shares of
Common Stock entitled to be voted (shares of Common Stock not voted are not
considered to be voted against a Merger and
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will not be counted toward the 5% minimum for Dissenters' Rights to exist);
provided that if a PPY, PPY2 or PPY3 Shareholder votes part of the shares
entitled to be voted in favor of the respective 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 the respective corporation or its transfer
agent, which is received not later than the date of the meeting of
shareholders of the respective corporation, setting forth the number of
shares of Common Stock demanded to be purchased by the respective
corporation and a statement as to claimed fair market value of such shares
at August 14, 1996; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval of the Merger by the shareholders of the respective
corporation is mailed to such shareholders, to the respective corporation
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. PPY,
PPY2 and PPY3 Shareholders desiring to exercise appraisal rights and to obtain
appraisal of the fair value of their shares should consult counsel, since the
failure to comply strictly with the provisions of Chapter 13 may result in a
waiver or forfeiture of their appraisal rights. A copy of Chapter 13 of the
California Code is attached hereto as Appendix D. See "Dissenting Shareholders'
Rights of Appraisal."
DETERMINATION OF PAYMENTS TO BE RECEIVED BY PPY SHAREHOLDERS IN CONNECTION WITH
THE PPY MERGER
In connection with the PPY Merger, PPY Shareholders will receive the net
asset value or $19.00 per share of PPY Common Stock. PPY's net asset value
allocable to the PPY Common Stock is the sum of (a) the appraised value of PPY's
real estate assets determined by Nicholson-Douglas Realty Consultants, Inc.
("NDRC"), as of June 30, 1996, plus (b) the estimated book values of PPY's non-
real estate assets as of December 31, 1996, less (c) PPY's estimated liabilities
as of December 31, 1996 and less (d) the amount of PPY's net asset value
allocable to the PPY Common Stock Series B, C and D (estimated at $9,991,000, or
$11.66 per share, plus the Required PPY REIT Distributions payable to holders of
the PPY Common Stock Series B, if any). Additional distributions would be made
to PPY Shareholders to cause PPY's estimated net asset value as of the date of
the PPY Merger to be substantially equivalent to $19.00 per share. The
consideration paid to PPY Shareholders by PSI in the PPY Merger will be reduced
by the amount of the Required PPY REIT Distributions paid to PPY Shareholders by
PPY prior to completion of the PPY Merger. See "The Mergers -- Determination of
Payments to be Received by PPY Shareholders in Connection with the Mergers."
However, the consideration received by PPY Shareholders in the PPY Merger along
with the Required PPY REIT Distributions (which will be paid in cash) will not
be less than $19.00 per share of PPY Common Stock.
DETERMINATION OF PAYMENTS TO BE RECEIVED BY PPY2 SHAREHOLDERS IN CONNECTION WITH
THE PPY2 MERGER
In connection with the PPY2 Merger, PPY2 Shareholders will receive the net
asset value or $20.39 per share of PPY2 Common Stock. PPY2's net asset value
allocable to the PPY2 Common Stock is the sum of (a) the appraised value of
PPY2's real estate asset determined by NDRC, as of June 30, 1996, plus (b) the
estimated book values of PPY2's non-real estate assets as of December 31, 1996,
less (c) PPY2's estimated liabilities as of December 31, 1996 and less (d) the
amount of PPY2's net asset value allocable to the PPY2 Common Stock Series B, C
and D (estimated at $10,541,000, or $12.26 per share, plus the Required PPY2
REIT Distributions payable to holders of the PPY2 Common Stock Series B, if
any). Additional distributions would be made to PPY2 Shareholders to cause
PPY2's estimated net asset value as of the date of the PPY2 Merger to be
substantially equivalent to $20.39 per share. The consideration paid to PPY2
Shareholders by PSI in the PPY2 Merger will be reduced by the amount of the
Required PPY2 REIT Distributions paid to PPY2 Shareholders by PPY2 prior to
completion of the PPY2 Merger. See "The Mergers -- Determination of Payments to
be Received by PPY2 Shareholders in Connection with the Mergers." However, the
consideration received by PPY2 Shareholders in the PPY2 Merger along with the
Required PPY2 REIT Distributions (which will be paid in cash) will not be less
than $20.39 per share of PPY2 Common Stock.
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DETERMINATION OF PAYMENTS TO BE RECEIVED BY PPY3 SHAREHOLDERS IN CONNECTION WITH
THE PPY3 MERGER
In connection with the PPY3 Merger, PPY3 Shareholders will receive the net
asset value or $20.47 per share of PPY3 Common Stock. PPY3's net asset value
allocable to the PPY3 Common Stock is the sum of (a) the appraised value of
PPY3's real estate asset determined by NDRC, as of June 30, 1996, plus (b) the
estimated book values of PPY3's non-real estate assets as of December 31, 1996,
less (c) PPY3's estimated liabilities as of December 31, 1996 and less (d) the
amount of PPY3's net asset value allocable to the PPY3 Common Stock Series B, C
and D (estimated at $4,226,000, or $12.30 per share, plus the Required PPY3 REIT
Distributions payable to holders of the PPY3 Common Stock Series B, if any).
Additional distributions would be made to PPY3 Shareholders to cause PPY3's
estimated net asset value as of the date of the PPY3 Merger to be substantially
equivalent to $20.47 per share. The consideration paid to PPY3 Shareholders by
PSI in the PPY3 Merger will be reduced by the amount of the Required PPY3 REIT
Distributions paid to PPY3 Shareholders by PPY3 prior to completion of the PPY3
Merger. See "The Mergers -- Determination of Payments to be Received by PPY3
Shareholders in Connection with the Mergers." However, the consideration
received by PPY3 Shareholders in the PPY3 Merger along with the Required PPY3
REIT Distributions (which will be paid in cash) will not be less than $20.47 per
share of PPY3 Common Stock.
FEDERAL INCOME TAX MATTERS
Each of the Mergers is intended to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), in which case generally (A) (i) no gain or loss would be recognized by
PPY Shareholders who receive solely PSI Common Stock in exchange for their PPY
Common Stock; (ii) gain or loss would be recognized by PPY Shareholders who
receive solely cash in exchange for their PPY Common Stock in an amount equal to
the difference between their adjusted basis in their PPY Common Stock and the
amount of cash received in exchange therefor; and (iii) gain or loss would be
recognized by PPY Shareholders who receive a combination of PSI Common Stock and
cash in exchange for their PPY Common Stock in an amount equal to the lesser of
(a) the cash received and (b) the difference between their adjusted basis in
their PPY Common Stock and the sum of (1) the fair market value of the PSI
Common Stock received and (2) the amount of cash received, but only to the
extent of the amount of cash received; (B) (i) no gain or loss would be
recognized by PPY2 Shareholders who receive solely PSI Common Stock in exchange
for their PPY2 Common Stock; (ii) gain or loss would be recognized by PPY2
Shareholders who receive solely cash in exchange for their PPY2 Common Stock in
an amount equal to the difference between their adjusted basis in their PPY2
Common Stock and the amount of cash received in exchange therefor; and (iii)
gain or loss would be recognized by PPY2 Shareholders who receive a combination
of PSI Common Stock and cash in exchange for their PPY2 Common Stock in an
amount equal to the lesser of (a) the cash received and (b) the difference
between their adjusted basis in their PPY2 Common Stock and the sum of (1) the
fair market value of the PSI Common Stock received and (2) the amount of cash
received, but only to the extent of the amount of cash received; and (C) (i) no
gain or loss would be recognized by PPY3 Shareholders who receive solely PSI
Common Stock in exchange for their PPY3 Common Stock; (ii) gain or loss would be
recognized by PPY3 Shareholders who receive solely cash in exchange for their
PPY3 Common Stock in an amount equal to the difference between their adjusted
basis in their PPY3 Common Stock and the amount of cash received in exchange
therefor; and (iii) gain or loss would be recognized by PPY3 Shareholders who
receive a combination of PSI Common Stock and cash in exchange for their PPY3
Common Stock in an amount equal to the lesser of (a) the cash received and (b)
the difference between their adjusted basis in their PPY3 Common Stock and the
sum of (1) the fair market value of the PSI Common Stock received and (2) the
amount of cash received, but only to the extent of the amount of cash received.
The Required PPY REIT Distributions, Required PPY2 REIT Distributions and
Required PPY3 REIT Distributions would not be treated as cash paid in exchange
for the PPY Common Stock, PPY2 Common Stock and PPY3 Common Stock, respectively,
but rather as a dividend taxable to all recipients as ordinary income. See
"Certain Federal Income Tax Matters -- The Mergers."
RECOMMENDATIONS; OPINIONS OF FINANCIAL ADVISORS
RECOMMENDATIONS OF PPY, PPY2 AND PPY3 BOARDS OF DIRECTORS TO PPY, PPY2 AND
PPY3 SHAREHOLDERS. Based upon an analysis of each of the Mergers, the PPY, PPY2
and PPY3 Special Committees and Boards of Directors have concluded that (i) the
terms of the Mergers are fair to PPY, PPY2 and PPY3 Shareholders, respectively,
(ii) after comparing the potential benefits and detriments of the Mergers with
those of several alternatives, the Mergers are more
12
<PAGE>
advantageous to PPY, PPY2 and PPY3 Shareholders, respectively, than such
alternatives and (iii) PPY, PPY2 and PPY3 Shareholders should vote for the
respective Merger.
The PPY, PPY2 and PPY3 Special Committees and Boards of Directors based
their conclusions on the following factors: (i) the bylaws of PPY, PPY2 and
PPY3 require proposals for the sale or financing of each of the properties of
the respective corporation in 1999; (ii) the Mergers provide PPY, PPY2 and PPY3
Shareholders with a choice of converting their investment into an investment in
PSI or, with respect to up to 20% of the outstanding PPY, PPY2 and PPY3 Common
Stock (less any Dissenting Shares), receiving cash for their investment; (iii)
the properties of PPY, PPY2 and PPY3 have been appraised by an independent
appraiser and PPY, PPY2 and PPY3 each has received a fairness opinion from
Robert A. Stanger & Co. Inc. ("Stanger") relating to the consideration to be
received in the respective Merger; (iv) each of the Mergers is required to be
approved by a majority of the shares of Common Stock and Common Stock Series B,
C and D of the respective corporation entitled to vote on the respective Merger,
counted together as a single class, with the shares of Common Stock Series B, C
and D of the respective corporation voting with a majority of the shares of
Common Stock of the respective corporation held by unaffiliated owners and,
subject to certain limitations, PPY, PPY2 and PPY3 Shareholders will have the
right to exercise Dissenters' Rights; and (v) based on certain significant
assumptions, qualifications and limitations, the consideration being offered in
the Mergers compares favorably with other alternatives.
ABSENCE OF ARM'S LENGTH NEGOTIATION. The terms of the Mergers are not the
result of arm's length negotiation. Each of the PPY, PPY2 and PPY3 Boards of
Directors believes that the absence of independent representatives to negotiate
the Mergers does not undermine the fairness of each of the Mergers because the
terms of each of the Mergers have been reviewed and approved, respectively, by
the PPY, PPY2 and PPY3 Special Committees, each of which is comprised of
independent directors.
FAIRNESS OPINIONS FROM STANGER. Stanger was engaged by PPY, PPY2 and PPY3
through the PPY, PPY2 and PPY3 Special Committees to deliver a written summary
of its determination as to the fairness of the respective consideration to be
received in each Merger, from a financial point of view, to the public PPY, PPY2
and PPY3 Shareholders, respectively. The full text of the opinions is set forth
in Appendix C-1, C-2 and C-3 to this Combined Proxy Statement and Prospectus.
Subject to the assumptions, qualifications and limitations contained therein,
the fairness opinions conclude that, as of the date of the fairness opinions,
the consideration to be received in each Merger is fair to the public PPY, PPY2
and PPY3 Shareholders, respectively, from a financial point of view. In
arriving at its opinions, Stanger considered, among other things, the
independent appraised value of the portfolio of properties of each of PPY, PPY2
and PPY3, the estimated liquidation value of PPY, PPY2 and PPY3 prepared by PPY,
PPY2 and PPY3, respectively, based upon liquidation of the portfolio on a
property-by-property basis, financial analyses and projections prepared by PPY,
PPY2 and PPY3, respectively, concerning the going-concern value from continuing
operation of each of PPY, PPY2 and PPY3 as a stand-alone entity, and a
comparison of the historical market prices of the common stock of each of PPY,
PPY2 and PPY3 with the consideration offered in the Mergers. Stanger was not
requested to, and therefore did not: (i) select the method of determining the
consideration offered in the Mergers; (ii) make any recommendation to the PPY,
PPY2 or PPY3 Shareholders with respect to whether to approve or reject the
Mergers or whether to select the cash or PSI Common Stock option in the Mergers;
or (iii) express any opinion as to the business decision to effect the Mergers,
alternatives to the Mergers, or tax factors resulting from the Mergers or the
PSMI Merger or relating to PSI's continued qualification as a REIT. Stanger's
opinions are based on business, economic, real estate and securities markets,
and other conditions as of the date of its analysis. See "The Mergers --
Fairness Opinions from Stanger."
13
<PAGE>
COMPARISON OF PPY, PPY2 AND PPY3 COMMON STOCK WITH PSI COMMON STOCK
The information below summarizes certain principal differences between the
PPY, PPY2 and PPY3 Common Stock and the PSI Common Stock and the effect of the
Mergers on PPY, PPY2 and PPY3 Shareholders who receive PSI Common Stock in the
Mergers (set forth in italics below each caption). For an expanded discussion
of these and other comparisons and effects, see "The Mergers -- Comparison of
PPY, PPY2 and PPY3 Common Stock with PSI Common Stock."
PPY, PPY2 AND PPY3 PSI
INVESTMENT OBJECTIVES AND POLICIES
<TABLE>
<S> <C>
To provide (i) quarterly cash To maximize funds from operations
distributions from operations and ("FFO") allocable to holders of PSI
(ii) long-term capital gains through Common Stock and to increase
appreciation in the value of shareholder value through internal
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 PSI. Accordingly, FFO is not a
substitute for PSI's net cash
provided by operating activities or
net income as a measure of PSI's
liquidity or operating performance.
An increase in PSI's FFO will not
necessarily correspond with an
increase in distributions to holders
of PSI Common Stock. See "--
Liquidity, Marketability and
Distributions."
</TABLE>
PPY, PPY2 and PPY3 Shareholders who receive PSI Common Stock in the
Mergers 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 PSI Common Stock. The interest of PSI Shareholders can be diluted
through the issuance of additional securities, including securities that would
have priority over PSI Common Stock as to cash flow, distributions and
liquidation proceeds. PSI has an effective registration statement for
preferred stock, common stock and warrants and intends to issue additional
securities under this registration statement. There is no assurance that any
such securities will be issued. See "Risk Factors and Material Considerations
-- Uncertainty Regarding Market Price of PSI Common Stock" and "-- Financing
Risks -- Dilution and Subordination."
BORROWING POLICIES
<TABLE>
<S> <C>
Not permitted to incur borrowings in Permitted to borrow in furtherance of
acquisition of properties. its investment objectives, subject to
certain limitations.
</TABLE>
PSI, unlike PPY, PPY2 and PPY3, incurs debt in the acquisition of
properties and reinvests proceeds from borrowings. The incurrence of debt
increases the risk of loss of investment.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<S> <C>
Restricted from entering into a Restricted from acquiring properties
variety of business transactions from its affiliates or from selling
with its affiliates without properties to them unless the
shareholder approval. See transaction is approved by a majority
"Amendment to Bylaws of PPY, PPY2 of PSI's independent directors and is
and PPY3." fair to PSI based on an independent
appraisal.
</TABLE>
It is easier for PSI to enter into transactions with its affiliates than
in the case of PPY, PPY2 or PPY3 because shareholder approval is not required.
14
<PAGE>
PPY, PPY2 AND PPY3 PSI
PROPERTIES (As of June 30, 1996)
<TABLE>
<S> <C>
PPY - 19 wholly owned properties in Direct and indirect equity interests
10 states. in 1,068 properties in 37 states.
PPY2 - 24 wholly owned properties in
10 states.
PPY3 - Nine properties (eight wholly
owned) in seven states.
</TABLE>
Because PSI owns substantially more property interests in more states
than PPY, PPY2 or PPY3, PSI's results of operations are less affected by the
operations of a single property than are those of PPY, PPY2 or PPY3, and it
would be more difficult to liquidate PSI than PPY, PPY2 or PPY3 within a
reasonable period of time.
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<TABLE>
<S> <C>
The PPY, PPY2 and PPY3 Common Stock PSI Common Stock is traded on the
is traded on the AMEX. During the NYSE. During the 12 months ended
12 months ended June 30, 1996, the June 30, 1996, the average daily
average daily trading volume of PPY, trading volume of PSI Common Stock
PPY2 and PPY3 Common Stock was was 52,138 shares. PSI has issued,
2,626, 2,261 and 722 shares, and may in the future issue,
respectively. PPY, PPY2 and PPY3 securities that have priority over
may not issue securities having PSI Common Stock as to cash flow,
priority over the PPY, PPY2 and PPY3 distributions and liquidation
Common Stock, respectively. proceeds.
</TABLE>
Distributions may be declared by the Boards of Directors of PSI, PPY,
PPY2 and PPY3 out of any funds legally available for that purpose. PSI, PPY,
PPY2 and PPY3 are required to distribute at least 95% of their ordinary REIT
taxable income in order to maintain their qualification as REITs. PSI
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 PPY, PPY2 or PPY3 Shareholder who receives PSI Common Stock in the
Mergers should have an investment for which the market is broader and more
active than the market for PPY, PPY2 or PPY3 Common Stock. Distributions on
PSI Common Stock are subject, however, to priority of preferred stock.
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
PPY, PPY2 and PPY3 Shareholders must Subject to the rules of the NYSE and
approve all additional issuances of applicable provisions of California
capital stock. law, PSI has issued and intends to
continue to issue authorized common
and preferred stock without
shareholder approval.
</TABLE>
Given the ownership level of PSI Common Stock by the Hughes Family and
PSI's greater flexibility to issue capital stock, including senior securities
with special voting rights and priority over PSI Common Stock, PSI should be
in a better position to deter attempts to obtain control in transactions not
approved by its Board of Directors than PPY, PPY2 or PPY3, and PSI
Shareholders could be less likely to benefit from a takeover not approved by
PSI's Board of Directors than would PPY, PPY2 or PPY3 Shareholders in a
similar circumstance.
15
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial data in this section should be read in conjunction with the
financial statements included in the documents incorporated herein by reference,
including the pro forma financial statements in the Form 8-K dated September 6,
1996.
PSI
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ----------------------- ---- ----
Historical Pro forma(1)
---------- ---------
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 93,528 $ 97,448 $114,680 $147,196 $ 212,650 $347,562 $ 91,110 $ 157,238
Depreciation and amortization 21,773 22,405 24,998 28,274 40,760 69,823 16,926 30,734
Interest expense 10,621 9,834 6,079 6,893 8,508 27,653 3,214 4,813
Minority interest in income 6,693 6,895 7,291 9,481 7,137 6,992 3,715 4,815
Net income $ 11,954 $ 15,123 $ 28,036 $ 42,118 $ 70,386 $128,855 $ 29,751 $ 70,080
BALANCE SHEET DATA
(AT END OF PERIOD):
Total cash and cash equivalents $ 6,439 $ 8,384 $ 10,532 $ 20,151 $ 80,436 $ 89,759 $ 19,827
Total assets 548,220 537,724 666,133 820,309 1,937,461 1,116,857 2,222,796
Total debt 104,244 69,478 84,076 77,235 158,052 58,497 121,070
Shareholders' equity $188,113 $253,669 $376,066 $587,786 $1,634,503 $ 892,664 $1,939,070
PER SHARE OF COMMON STOCK:
Net income(2) $ .81 $ .90 $ .98 $ 1.05 $ .95 $ 1.08 $ .50 $ .51
Distributions(3) .82 .84 .84 .85 .88 .88 .44 .44
Book value (at end of period)(4) $ 12.75 $ 12.02 $ 11.93 $ 12.66 $ 13.99 $ 13.26 $ 14.34
Weighted average shares of
Common Stock (in thousands) 14,751 15,981 17,558 24,077 41,171 81,280 32,708 72,749
</TABLE>
16
<PAGE>
PPY - HISTORICAL
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 7,645 $ 7,883 $ 8,597 $ 9,370 $ 9,686 $ 4,749 $ 4,906
Depreciation and amortization 1,919 1,854 1,840 1,900 1,946 967 1,001
Reorganization costs(5) 587 (210) - - - - -
Interest expense - - - 4 - - 41
Net income $ 2,010 $ 2,886 $ 3,229 $ 4,035 $ 4,015 $ 2,043 $ 1,973
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and cash equivalents $ 2,745 $ 2,262 $ 474 $ 1,927 $ 890 $ 1,288 $ 1,090
Total assets 55,510 52,979 49,475 49,199 46,806 47,622 46,071
Total debt - - - - - - 1,000
Shareholders' equity $53,504 $51,217 $47,682 $46,808 $44,336 $45,886 $43,095
PER SHARE OF COMMON STOCK:
Net income(6):
Primary $ .53 $ .78 $ .93 $ 1.08 $ 1.08 $ .55 $ .56
.45 .66 .78 1.00 1.02 .52 .52
Fully-diluted
Distributions(7)(9):
Series A $ 1.28 $ .96 $ .99 $ 1.18 $ 1.23 $ .54 $ .54
Series B - - - 1.05 1.23 .54 .54
Book value (at end of period)(8) $ 12.07 $ 11.99 $ 11.87 $ 11.77 $ 11.55 $ 11.75 $ 11.48
Weighted average shares of
common stock (in thousands):
Primary 3,782 3,685 3,480 3,336 3,239 3,263 3,102
Fully-diluted 4,451 4,354 4,149 4,004 3,907 3,932 3,771
</TABLE>
17
<PAGE>
PPY2 - HISTORICAL
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
----------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 8,106 $ 8,741 $ 9,318 $ 9,894 $10,535 $ 5,161 $ 5,419
Depreciation and amortization 2,032 1,851 1,986 1,940 1,998 994 1,017
Reorganization costs(5) 554 (230) - - - - -
Interest expense - - - 12 6 6 12
Net income $ 1,912 $ 3,268 $ 3,459 $ 3,854 $ 4,285 $ 2,102 $ 2,293
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and cash equivalents $ 3,261 $ 2,797 $ 826 $ 905 $ 936 $ 1,264 $ 1,500
Total assets 58,501 56,254 52,621 51,053 49,734 50,553 49,123
Shareholders' equity $55,675 $54,497 $50,131 $48,664 $47,396 $48,619 $47,176
PER SHARE OF COMMON STOCK:
Net income(6):
Primary $ .51 $ .87 $ 1.01 $ 1.08 $ 1.17 $ .57 $ .65
Fully-diluted .43 .74 .84 .97 1.11 .54 .60
Distributions(7)(10):
Series A $ 1.60 $ .80 $ 1.13 $ 1.17 $ 1.23 $ .56 $ .56
Series B - - - .67 1.23 .56 .56
Book value (at end of period)(8) $ 12.50 $ 12.65 $ 12.54 $ 12.44 $ 12.34 $ 12.45 $ 12.39
Weighted average shares of
common stock (in thousands):
Primary 3,786 3,736 3,428 3,305 3,226 3,237 3,142
Fully-diluted 4,485 4,404 4,096 3,974 3,895 3,906 3,811
</TABLE>
18
<PAGE>
PPY3 - HISTORICAL
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 3,669 $ 3,959 $ 4,413 $ 4,708 $ 4,962 $ 2,432 $ 2,585
Depreciation and amortization 978 914 806 830 861 428 440
Reorganization costs(5) 195 - - - - - -
Net income $ 784 $ 1,207 $ 1,696 $ 1,917 $ 1,865 $ 1,002 $ 1,160
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and cash equivalents $ 2,529 $ 1,951 $ 2,082 $ 579 $ 775 $ 805 $ 1,174
Total assets 24,712 23,133 22,642 20,645 20,323 20,478 20,232
Shareholders' equity $23,548 $21,978 $21,573 $19,404 $18,985 $19,396 $19,027
PER SHARE OF COMMON STOCK:
Net income(6):
Primary $ .52 $ .80 $ 1.15 $ 1.33 $ 1.22 $ .66 $ .79
Fully-diluted .44 .68 .97 1.16 1.15 .62 .73
Distributions(7)(11):
Series A $ 1.60 $ 1.60 $ 1.30 $ 1.41 $ 1.43 $ .68 $ .68
Series B - - - .47 1.43 .68 .68
Book value (at end of period)(8) $ 13.19 $ 12.56 $ 12.41 $ 12.12 $ 11.94 $ 12.12 $ 12.02
Weighted average shares of
common stock (in thousands):
Primary 1,518 1,500 1,480 1,383 1,331 1,333 1,315
Fully-diluted 1,786 1,768 1,748 1,651 1,599 1,601 1,583
</TABLE>
_______________
(1) Historical information of PSI for 1995 has been restated to reflect the pro
forma impact of the PSMI Merger which occurred November 16, 1995. The pro
forma results presented are as if the PSMI Merger and certain other
transactions occurred on the first day of the period presented.
(2) Net income per common share is computed using the weighted average shares of
PSI Common Stock outstanding (adjusted for stock options). The inclusion of
the PSI Class B Common Stock in the determination of earnings per common
share has been determined to be anti-dilutive (after giving effect to the
pro forma additional income required to satisfy certain contingencies
required for the PSI Class B Common Stock to convert into PSI Common Stock)
and, accordingly, the conversion of the PSI Class B Common Stock into PSI
Common Stock has not been assumed.
(3) For federal income tax purposes all distributions on the PSI Common Stock
are from ordinary income. The distributions for generally accepted
accounting principles ("GAAP") include a return of capital for 1991 of $.01.
All distributions for 1992, 1993, 1994, 1995 and 1996 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.
(4) Book value per share computed based on the number of shares of PSI Common
Stock and PSI Class B Common Stock outstanding.
19
<PAGE>
(5) PPY, PPY2 and PPY3 were reorganized from the PPY, PPY2 and PPY3 Partnerships
on October 21, 1991, November 8, 1991 and November 8, 1991, respectively
(the "Reorganizations"). Reorganization costs, which consist primarily of
legal fees, accounting fees, transfer taxes, registration and solicitation
fees, represent the costs incurred in the Reorganizations. In 1992, PPY and
PPY2 adjusted their remaining liability related to the Reorganizations,
resulting in credits of $210,000 and $230,000, respectively, to
Reorganization costs. The adjustments were primarily a result of a
reduction in transfer taxes paid compared to the estimated amounts provided.
(6) Net income per Share is presented on a primary and fully diluted basis.
Primary earnings per share represents the shareholders' rights to
distribution out of the respective period's net income, which is calculated
by dividing net income after reduction for any distributions made to the
holders of the Common Stock Series B (holders of the Common Stock Series C
and D are not entitled to cash distributions) by the weighted average number
of shares of Common Stock Series A. (See note 7 below.) Fully diluted
earnings per share assumes conversion of the Common Stock Series B and C
into Common Stock Series A. Common Stock Series D shares are only entitled
to a portion of distributions from sales and financings and do not convert
into Common Stock Series A and, therefore, are not included in the weighted
average number of shares.
(7) In connection with the Reorganizations, PPY, PPY2 and PPY3 issued Common
Stock Series A, B, C and D. The capital structure of PPY, PPY2 and PPY3 was
designed to reflect the economic rights of the limited partners and general
partners in the respective predecessor Partnership and the capital shares
were distributed to the limited and general partners in respect of their
interests in the respective predecessor Partnership.
Common Stock Series A shares are entitled to 100% of cash distributions from
operations from the respective corporation until (a) the sum of (1) all
cumulative dividends and other distributions from all sources to the holders
of Common Stock Series A shares of the respective corporation issued to the
limited partners of the respective predecessor Partnership and (2) the
cumulative respective predecessor Partnership distributions from all sources
with respect to all units equal (b) the product of $20 multiplied by the
number of the then-outstanding "limited partners' original Common Stock
Series A shares" less 50% of the limited partners' capital contributions of
the respective predecessor Partnership ("Participation"). Thereafter, the
Common Stock Series A shares and the Common Stock Series B shares of the
respective corporation receive equal distributions of cash distributions
from operations until (a) the sum of (1) all cumulative dividends and other
distributions from all sources to the holders of the Common Stock Series A
shares of the respective corporation issued to the limited partners and (2)
the cumulative respective predecessor Partnership distributions from all
sources with respect to all units held by limited partners equal (b) the
product of $20 multiplied by the number of the then-outstanding "limited
partners' original Common Stock Series A," at which time Common Stock Series
B and Common Stock Series C shares of the respective corporation will
automatically convert to Common Stock Series A shares of the respective
corporation ("Conversion"). The term "limited partners' original Common
Stock Series A" means the Common Stock Series A issued to limited partners
of the predecessor Partnership of the corporation.
During April 1994, October 1994 and December 1994, the requirements for
Participation occurred for PPY, PPY2 and PPY3, respectively, and the Common
Stock Series B shares began participating in distributions as described
above.
As of June 30, 1996, Conversion will occur with respect to PPY, PPY2 and
PPY3 when $23,375,000, $26,259,000 and $11,065,000, respectively, in
additional distributions are made to holders of Common Stock Series A issued
to limited partners (assuming no further repurchases of Common Stock Series
A).
(8) Book value per share computed based on the numbers of shares of Common Stock
Series A, B and C outstanding at the end of the period.
(9) For federal income tax purposes, distributions on the PPY Common Stock for
(a) 1991 consisted of $.96 of partnership distributions, $.16 of ordinary
income and $.16 of return of capital, (b) 1992 consisted of $.92 of ordinary
income and $.04 of return of capital, and (c) 1993, 1994, 1995 and 1996 were
from ordinary income. Distributions through 1995 exceeded net income in
accordance with GAAP. The distributions for GAAP
20
<PAGE>
purposes included a return of capital for 1991 of $.75, 1992 of $.17, 1993
of $.06, 1994 of $.09 and 1995 of $.13. Distributions for each year
included 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.
(10) For federal income tax purposes, distributions on the PPY2 Common Stock for
(a) 1991 consisted of $1.20 of partnership distributions, $.10 of ordinary
income and $.30 of return of capital and (b) 1992, 1993, 1994, 1995 and
1996 were from ordinary income. Distributions through 1995, except for
1992, exceeded net income computed in accordance with GAAP. The
distributions for GAAP purposes included a return of capital for 1991 of
$1.09, 1993 of $.11, 1994 of $.08 and 1995 of $.06. Distributions for each
year included 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.
(11) For federal income tax purposes, distributions on the PPY3 Common Stock for
(a) 1991 consisted of $1.20 of partnership distributions, $.08 of ordinary
income and $.32 of return of capital, (b) 1992 consisted of $.90 of
ordinary income and $.70 of return of capital, and (c) 1993, 1994, 1995 and
1996 were from ordinary income. Distributions through 1995 exceeded net
income computed in accordance with GAAP. The distributions for GAAP
purposes included a return of capital for 1991 of $1.08, 1992 of $.79, 1993
of $.15, 1994 of $.07 and 1995 of $.19. Distributions for each year
included 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.
RELATIONSHIPS
The following charts show the relationships among PSI, PPY, PPY2, and PPY3
and certain of their affiliates both before and after the Mergers (assuming
maximum Cash Elections). The properties of PPY, PPY2 and PPY3 are managed by
PSI, the largest shareholder of PPY, PPY2 and PPY3, under the supervision of
their Boards of Directors. PSI is controlled by B. Wayne Hughes, the chairman
of the board and chief executive officer of PSI, PPY, PPY2 and PPY3. (The
percentages shown reflect only common stock; the economic interest of Hughes in
PSI is substantially less than the percentages shown because of the substantial
amount of preferred stock that PSI has outstanding.)
21
<PAGE>
BEFORE THE MERGERS
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships among PPY, PPY2, PPY3, PSI
and certain affiliates before the Mergers: BWH owns 44.4% of PSI and Public
Sharholders own 55.6% of PSI; BWH owns 4.3% of PPY, PSI (which is the Property
Manager of PPY) owns 28.2% of PPY and Public Shareholders own 67.5% of PPY; BWH
owns 4.2% of PPY2, PSI (which is the Property Manager of PPY2) owns 27.9% of
PPY2 and Public Shareholders own 67.9% of PPY2; BWH owns 4.2% of PPY3, PSI
(which is the Property Manager of PPY3) owns 21.2% of PPY3 and Public
Shareholders own 74.6% of PPY3.
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER
RELATIONSHIPS. PERCENTAGE OWNERSHIP OF PPY, PPY2 AND PPY3 BY PSI AND HUGHES IS
THE TOTAL COMBINED OUTSTANDING SHARES OF THE COMMON STOCK AND THE COMMON STOCK
SERIES B, C AND D OF THE RESPECTIVE CORPORATION.
(See notes on succeeding page.)
22
<PAGE>
AFTER THE MERGERS
(Assuming Maximum Cash Elections)
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships between PSI and certain
affiliates after the Mergers: BWH owns 42.2% of PSI and Public Shareholders own
57.8% of PSI.
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER
RELATIONSHIPS.
<TABLE>
<S> <C> <C>
BWH = B. Wayne Hughes, the chairman of the board and chief executive
officer of PSI, PPY, PPY2 and PPY3
PPY = Partners Preferred Yield, Inc.
PPY2 = Partners Preferred Yield II, Inc.
PPY3 = Partners Preferred Yield III, Inc.
PSI = Public Storage, Inc. Hughes and members of his family own 44.4% of
the PSI Common Stock (48.6% upon the conversion of the PSI Class B
Common Stock).
</TABLE>
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RISK FACTORS AND MATERIAL CONSIDERATIONS
The Mergers involve the following factors which should be considered by
PPY, PPY2 and PPY3 Shareholders, including the following:
NO ARM'S LENGTH NEGOTIATION OR UNAFFILIATED REPRESENTATIVES
The Mergers have not been negotiated at arm's length, and PSI and its
affiliates have significant relationships with PPY, PPY2 and PPY3. No
unaffiliated representatives were appointed to negotiate the terms of the
Mergers on behalf of PPY, PPY2 or PPY3. If such persons had been engaged, the
terms of the Mergers might have been more favorable to the shareholders of PPY,
PPY2 or PPY3. In addition, no third party proposals for PPY, PPY2, PPY3 or
their properties were solicited. Such proposals could have generated higher
prices.
CHANGE IN NATURE OF INVESTMENT
PPY, PPY2 and PPY3 are REITs organized to hold interests in properties for
a finite period. The bylaws of PPY, PPY2 and PPY3 require that their
shareholders be presented with liquidation proposals in 1999, although they
could continue in existence for a longer period. In contrast, PSI, which is
engaged in all aspects of the mini-warehouse industry, including property
development and management, intends to operate for an indefinite period. As a
consequence of this difference, following the Mergers, PPY, PPY2 and PPY3
Shareholders receiving PSI Common Stock will be able to liquidate their
investment only by selling their shares on the NYSE or in private transactions.
LOWER LEVEL OF DISTRIBUTIONS AFTER THE MERGERS
The level of distributions to PPY, PPY2 and PPY3 Shareholders who receive
PSI Common Stock in the Mergers is expected to be lower after the Mergers.
Based on a market price of PSI Common Stock of $21 3/4 and the current regular
quarterly distribution rate for PSI ($.22 per share), PPY ($.27 per share), PPY2
($.28 per share) and PPY3 ($.34 per share), (a) PPY Shareholders would receive
approximately $.08 (29%) less in regular quarterly distributions per share of
PPY Common Stock after the PPY Merger from PSI than before the PPY Merger from
PPY and approximately $.01 less per share in regular quarterly distributions for
each $1.25 (6%) increase in the market price of PSI Common Stock above $21 3/4,
(b) PPY2 Shareholders would receive approximately $.07 (26%) less in regular
quarterly distributions per share of PPY2 Common Stock after the PPY2 Merger
from PSI than before the PPY2 Merger from PPY2 and approximately $.01 less per
share in regular quarterly distributions for each $1.125 (6%) increase in the
market price of PSI Common Stock above $21 3/4 and (c) PPY3 Shareholders would
receive approximately $.13 (39%) less in regular quarterly distributions per
share of PPY3 Common Stock after the PPY3 Merger from PSI than before the PPY3
Merger from PPY3 and approximately $.01 less per share in regular quarterly
distributions for each $1.125 (6%) increase in the market price of PSI Common
Stock above $21 3/4.
POTENTIAL LOSS OF FUTURE APPRECIATION
The properties of PPY, PPY2 and PPY3 may continue to appreciate in value
and might be able to be liquidated at a later date for more consideration than
in the Mergers.
LIMITATION ON DISSENTERS' RIGHTS OF APPRAISAL
Under California law, PPY, PPY2 and PPY3 Shareholders will be entitled to
Dissenters' Rights in connection with the Mergers only if demands for payment
are filed with respect to 5% or more of the outstanding shares of PPY, PPY2 and
PPY3 Common Stock, respectively. See "Dissenting Shareholders Rights of
Appraisal."
CONTROL AND INFLUENCE BY THE HUGHES FAMILY AND OWNERSHIP LIMITATIONS
Public PSI shareholders are substantially limited in their ability to
control PSI. The Hughes Family owns approximately 44% of the outstanding shares
of PSI Common Stock (approximately 49% upon conversion of the PSI Class B Common
Stock). Consequently, the Hughes Family controls matters submitted to a vote of
PSI Shareholders,
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including the election of directors, amendment of PSI's Articles of
Incorporation, dissolution and the approval of other extraordinary transactions,
such as a takeover attempt. Also, there are restrictions in the PSI Articles of
Incorporation and Bylaws on beneficial ownership of PSI securities. Unless such
limitations are waived by PSI's board of directors (the "PSI Board of
Directors"), no PSI Shareholder may own more than (A) 2.0% of the outstanding
shares of all common stock of PSI or (B) 9.9% of the outstanding shares of each
class or series of preferred stock of PSI. The PSI Articles of Incorporation
and Bylaws provide, however, that no person shall be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of stock to the extent that such shares of stock were beneficially owned
by such person at the time of the PSMI Merger, which includes the PSI Common
Stock owned by the Hughes Family at the time of the PSMI Merger. The principal
purpose of the foregoing limitations is to assist in preventing, to the extent
practicable, a concentration of ownership that might jeopardize the ability of
PSI to obtain the favorable tax benefits afforded a qualified REIT. See "-- Tax
Risks -- Increased Violation of Ownership Requirements." An incidental
consequence of such provisions is to make a change of control significantly more
difficult (if not impossible) even if it would be favorable to the interests of
the public PSI Shareholders. Such provisions will prevent future takeover
attempts which the PSI Board of Directors has not approved even if a majority of
the public PSI Shareholders deem it to be in their best interests or in which
the public PSI Shareholders may receive a premium for their shares over the then
market value. See "Description of PSI Capital Stock -- Ownership Limitations."
TAX RISKS
INCREASED RISK OF VIOLATION OF GROSS INCOME REQUIREMENTS. As a result of
the PSMI Merger, PSI performs property management services for properties in
which it has no or only a partial interest. Some or all of the gross income
received from these services will not be treated as income qualifying for
certain REIT gross income tests applicable to PSI ("Nonqualifying Income"). If
PSI's Nonqualifying Income were to exceed 5% of its total gross income in any
year, PSI's REIT status may terminate for that year and future years unless PSI
meets certain "reasonable cause" standards. Even if PSI meets such standards,
however, it would be subject to a 100% excise tax on any excess Nonqualifying
Income.
INCREASED RISK OF VIOLATION OF OWNERSHIP REQUIREMENTS. For PSI to qualify
as a REIT under the Code, no more than 50% in value of its outstanding stock may
be owned, directly or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year. Following the PSMI
Merger, the value of the outstanding capital stock of PSI held by the Hughes
Family was estimated at approximately 45%. Accordingly, no four individuals
other than the Hughes Family could own directly or constructively, in the
aggregate, more than 5% of the value of outstanding capital stock of PSI. In
order to assist PSI in meeting these ownership restrictions, the PSI Articles of
Incorporation and Bylaws contain the ownership limitations described under
"Description of PSI Capital Stock -- Ownership Limitations." However, even with
these ownership limitations, there still could be a violation of the ownership
restrictions if four individuals unrelated to the Hughes Family were to own the
maximum amount of capital stock permitted under the PSI Articles of
Incorporation and Bylaws. Therefore, to further assist PSI in meeting the
ownership restrictions, the Hughes Family has entered into an agreement with PSI
restricting the Hughes Family's acquisition of additional shares of capital
stock of PSI and providing that if, at any time, for any reason, more than 50%
in value of its outstanding capital stock otherwise would be considered owned by
five or fewer individuals, a number of shares of PSI Common Stock owned by
Hughes necessary to prevent such violation will automatically and irrevocably be
transferred to a designated charitable beneficiary. The provisions in the PSI
Articles of Incorporation and Bylaws and the agreement with Hughes are modeled
after certain arrangements that the Internal Revenue Service (the "IRS") has
ruled in private letter rulings will preclude a REIT from being considered to
violate the ownership restrictions so long as such arrangements are enforceable
as a matter of state law and the REIT seeks to enforce them as and when
necessary. There can be no assurance, however, that the IRS might not seek to
take a different position with respect to PSI (a private letter ruling is
legally binding only with respect to the taxpayer to whom it was issued) or
contend that PSI failed to enforce these various arrangements and, hence, there
can be no assurance that these arrangements will necessarily preserve PSI's REIT
status. No private letter ruling has been sought by PSI from the IRS on the
effect of these arrangements.
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ELIMINATION OF ANY ACCUMULATED EARNINGS AND PROFITS. Any accumulated
earnings and profits of PSMI carried over to PSI in the PSMI Merger. To retain
its REIT status, PSI would have had to distribute any acquired earnings and
profits on or before December 31, 1995. As a condition to the PSMI Merger, PSI
obtained from PSMI a study of the earnings and profits that showed that PSMI had
no earnings and profits at the time of the PSMI Merger. The determination of
earnings and profits depends upon a number of factual matters related to the
activities and operation of PSMI and its predecessors in years prior to the PSMI
Merger. Accordingly, no assurances can be given that the IRS will not challenge
such conclusion. If the IRS were subsequently to determine that such earnings
and profits existed at the time of the PSMI Merger, PSI may lose its REIT
qualification for 1995 and, perhaps, for subsequent years unless certain relief
provisions apply. See "Certain Federal Income Tax Considerations --
Consequences of the Merger on PSI's Qualification as a REIT -- Elimination of
any Accumulated Earnings and Profits Attributable to Non-REIT Years."
CONSEQUENCES OF FAILURE TO QUALITY AS A REIT. For any taxable year that
PSI fails to qualify as a REIT and the relief provisions do not apply, PSI would
be taxed at the regular corporate rates on all of its taxable income, whether or
not it makes any distributions to its shareholders. Those taxes would reduce
the amount of cash available to PSI for distribution to its shareholders or for
reinvestment. As a result, failure of PSI to qualify during any taxable year as
a REIT could have a material adverse effect upon PSI and its shareholders.
Furthermore, unless certain relief provisions apply, PSI would not be eligible
to elect REIT status again until the fifth taxable year that begins after the
first year for which PSI fails to qualify.
CORPORATE LEVEL TAX ON SALE OF CERTAIN BUILT-IN GAIN ASSETS. PSI will be
subject to a corporate level tax if it disposes of any of the assets acquired in
the PSMI Merger at any time during the 10-year period beginning at the time of
the PSMI Merger (the "Restriction Period"). This tax would be imposed at the
top regular corporate rate (currently 35%) in effect at the time of the
disposition on the excess of (i) the lesser of (a) the fair market value at the
time of the PSMI Merger of the assets disposed of and (b) the selling price of
such assets over (ii) PSI's adjusted basis at the time of the PSMI Merger in
such assets (such excess being referred to as the "Built-in Gain"). PSI
currently does not intend to dispose of any of the assets acquired in the PSMI
Merger during the Restriction Period, but there can be no assurance that one or
more such dispositions will not occur.
FINANCING RISKS
DILUTION AND SUBORDINATION. The interest of PSI Shareholders in PSI,
including persons who receive shares in the Mergers, can be diluted through the
issuance of additional securities.
Since October 1992, PSI has issued shares of preferred stock and intends to
issue additional such shares. These issuances could involve certain risks to
holders of shares of PSI Common Stock, including shares of PSI Common Stock to
be issued in the Mergers. In the event of a liquidation of PSI, the holders of
the preferred stock will be entitled to receive, before any distribution of
assets to holders of PSI Common Stock, liquidating distributions (an aggregate
of approximately $734.6 million 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 PSI Board of Directors, cash dividends (an
aggregate of approximately $68.1 million per year in respect of preferred stock
issued to date), in preference to holders of PSI Common Stock. As a REIT, PSI
must distribute at least 95% of its REIT taxable income to its shareholders
(which include not only holders of PSI Common Stock but also holders of
preferred stock). Failure to pay full dividends on the preferred stock could
jeopardize PSI'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 PSI for preferred stock, common stock and warrants.
PSI intends to issue additional securities under this registration statement.
There is no assurance that any such securities will be issued.
RISK OF LEVERAGE. In making real estate investments, PSI, unlike PPY, PPY2
and PPY3, 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 June 30, 1996, PSI's debt as a percentage of its total
capitalization was approximately 6%.
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UNCERTAINTY REGARDING MARKET PRICE OF PSI COMMON STOCK
The number of shares of PSI Common Stock that would be received by PPY,
PPY2 and PPY3 Shareholders is based on the average market price of PSI Common
Stock for the 20 consecutive trading days ending on the fifth trading day prior
to the respective shareholders' meetings. Since the market price of PSI Common
Stock fluctuates, the market value of PSI Common Stock that holders of PPY, PPY2
and PPY3 Common Stock may receive in the Mergers may decrease following
establishment of the number of shares. In addition, because of increased
selling activity following issuance of shares in the Mergers and other factors,
the market value of PSI Common Stock that PPY, PPY2 and PPY3 Shareholders may
receive in the Mergers may decrease following the Mergers.
MERGER CONSIDERATION BASED ON APPRAISALS INSTEAD OF ARM'S LENGTH NEGOTIATION
The consideration to be received by PPY, PPY2 and PPY3 Shareholders is
based on third party appraised values of the properties of PPY, PPY2 and PPY3 of
$68,250,000, $72,500,000 and $30,000,000, respectively. 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 these properties. There can
be no assurance that if these properties were sold, they would be sold at the
appraised values; the sales prices might be higher or lower.
TAX TO PPY, PPY2 AND PPY3 SHAREHOLDERS
PPY. Any PPY Shareholder who receives only cash in connection with the PPY
Merger in exchange for his or her PPY Common Stock will recognize taxable gain
to the extent that the amount of cash received exceeds the adjusted basis of
such PPY Shareholder in his or her PPY Common Stock. A PPY Shareholder
receiving a combination of cash and PSI Common Stock in the PPY Merger in
exchange for his or her PPY 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 PPY Common Stock and the sum of (1) the fair
market value of the PSI Common Stock received and (2) the amount of cash
received, but only to the extent of the cash received.
PPY2. Any PPY2 Shareholder who receives only cash in connection with the
PPY2 Merger in exchange for his or her PPY2 Common Stock will recognize taxable
gain to the extent that the amount of cash received exceeds the adjusted basis
of such PPY2 Shareholder in his or her PPY2 Common Stock. A PPY2 Shareholder
receiving a combination of cash and PSI Common Stock in the PPY2 Merger in
exchange for his or her PPY2 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 PPY2 Common Stock and the sum of (1) the fair
market value of the PSI Common Stock received and (2) the amount of cash
received, but only to the extent of the cash received.
PPY3. Any PPY3 Shareholder who receives only cash in connection with the
PPY3 Merger in exchange for his or her PPY3 Common Stock will recognize taxable
gain to the extent that the amount of cash received exceeds the adjusted basis
of such PPY3 Shareholder in his or her PPY3 Common Stock. A PPY3 Shareholder
receiving a combination of cash and PSI Common Stock in the PPY3 Merger in
exchange for his or her PPY3 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 PPY3 Common Stock and the sum of (1) the fair
market value of the PSI Common Stock received and (2) the amount of cash
received, but only to the extent of the cash received.
The Required PPY REIT Distributions, Required PPY2 REIT Distributions and
Required PPY3 REIT Distributions will be taxable to PPY, PPY2 and PPY3
Shareholders, respectively, as ordinary income.
OPERATING RISKS
GENERAL RISKS OF REAL ESTATE OWNERSHIP. Like PPY, PPY2 and PPY3, PSI is
subject to the risks generally incident to the ownership of real estate-related
assets, including lack of demand for rental spaces or units 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
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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 PPY, PPY2 and PPY3,
most of PSI'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. Competition may be accelerated by any increase in availability of
funds for investment in real estate. Recent increases in development of mini-
warehouses are expected to further intensify competition among mini-warehouse
operators in certain market areas in which PSI operates.
RISK OF ENVIRONMENTAL LIABILITIES. 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.
PSI has recently conducted preliminary environmental assessments of most of
its properties (and intends to conduct such assessments in connection with
property acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, such properties. 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 these
recent property assessments, PSI's operations and recent property acquisitions,
PSI 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. In this regard, certain such facilities
are or may be the subject of federal or state environmental investigations or
remedial actions. PSI has obtained, with respect to recent acquisitions and
intends to obtain with respect to pending or future acquisitions, appropriate
purchase price adjustments or indemnifications that it believes are sufficient
to cover any such potential liabilities. Although there can be no assurance,
based on the recent preliminary environmental assessments, PSI believes it has
funds available to cover any liability from environmental contamination or
potential contamination and PSI is not aware of any environmental contamination
of its facilities material to its overall business or financial condition.
TENANT REINSURANCE. A corporation owned by the Hughes Family continues to
reinsure policies insuring against losses to goods stored by tenants in the
mini-warehouses operated by PSI. PSI believes that the availability of
insurance reduces its potential liability to tenants for losses to their goods
from theft or destruction. This corporation will continue to receive the
premiums and bear the risks associated with the insurance. PSI has a right of
first refusal to acquire the stock or assets of this corporation if the Hughes
Family or the corporation agree to sell them, but PSI has no interest in its
operations and no right to acquire the stock or assets of the corporation in the
absence of a decision to sell. If the reinsurance business were owned directly
by PSI, the insurance premiums would be Nonqualifying Income to PSI. PSI would
be precluded from exercising its right of first refusal with respect to the
stock of the reinsurance corporation if such exercise would cause PSI to violate
any of the requirements for qualification as a REIT under the Code.
CANADIAN OPERATIONS. The Hughes Family continues to own and operate mini-
warehouses in Canada. PSI has a right of first refusal to acquire the stock or
assets of the corporation engaged in these operations if the Hughes Family or
the corporation agree to sell them, but PSI has no interest in its operations
and no right to acquire the stock or assets in the absence of a decision to
sell.
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PSCP. Prior to the PSMI Merger, Public Storage Commercial Properties
Group, Inc. ("PSCP"), a subsidiary of PSMI, managed commercial properties for
PSI and others. Because certain of the revenues generated by PSCP would be
Nonqualifying Income to PSI, prior to the PSMI Merger, the common stock of PSCP
held by PSMI was converted into nonvoting preferred stock (representing 95% of
the equity) and the voting common stock of PSCP (representing 5% of the equity)
was issued to the Hughes Family. While PSI acquired the preferred stock of PSCP
in the PSMI Merger, the Hughes Family is able to continue to control the
operations of PSCP by reason of its ownership of all of PSCP's voting stock.
MERCHANDISE COMPANY. Prior to the PSMI Merger, PSMI sold locks, boxes and
tape at certain mini-warehouse locations. Because the revenues received from
the sale of these items would be Nonqualifying Income to PSI, immediately
following the PSMI Merger, PSI transferred this lock and box business to a
separate corporation (the "Lock/Box Company"). The nonvoting preferred stock of
the Lock/Box Company (representing 95% of the equity) was issued to PSI. The
voting common stock of the Lock/Box Company (representing 5% of the equity) was
issued to the Hughes Family, which will be able to control the operations of the
Lock/Box Company by reason of ownership of the Lock/Box Company's voting stock.
LIABILITIES WITH RESPECT TO ACQUIRED GENERAL PARTNER INTERESTS. Upon
succeeding to substantially all of the properties and operations of PSMI in the
PSMI Merger, PSI may be subject to certain liabilities and associated costs in
its capacity as general partner of former PSMI limited partnerships arising out
of facts and circumstances in existence prior to such merger, and PSI will also
have general partner liability for post-merger activities of these partnerships,
as it does for other partnerships for which it is a general partner. Subject to
certain limitations, Hughes has agreed to indemnify PSI for pre-merger
activities and place in escrow shares of PSI Class B Common Stock received in
the PSMI Merger to support such indemnification.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of PSI Common Stock in the public
market could adversely affect prevailing market prices. There are approximately
84.4 million shares of PSI Common Stock and seven million shares of PSI Class B
Common Stock outstanding. Of these shares, approximately 48.6 million shares of
PSI Common Stock are tradeable without restriction (except as to affiliates of
PSI) or further registration under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining approximately 35.8 million shares of PSI
Common Stock and seven million shares of PSI Class B Common Stock were issued in
the PSMI Merger without registration under the Securities Act in reliance on an
exemption from registration and are "restricted securities" within the meaning
of Rule 144 adopted under the Act (the "Restricted Shares"). The beneficial
owners of 15.5 million of the Restricted Shares (including all of the PSI Class
B Common Stock) have agreed not to offer, sell or otherwise dispose (except for
gifts and pledges) of any of their shares until November 13, 1998, in the case
of the PSI Common Stock, or until November 13, 2002, in the case of the PSI
Class B Common Stock. Upon expiration of such periods, each will be entitled to
sell his or her shares in the public market subject to Rule 144, which contains
certain public information, volume, holding period and manner of sale
requirements. The remaining approximately 27.3 million Restricted Shares will
be available for sale in the public market pursuant to Rule 144, subject to the
foregoing requirements that include, as the Rule is currently in effect, a two-
year holding period. Sales of substantial amounts of such PSI Common Stock in
the public market could adversely affect the market price of the PSI Common
Stock.
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CONFLICTS OF INTEREST IN THE MERGERS
PSI and its affiliates have conflicts of interest in connection with the
Mergers. PSI and Hughes have a significant ownership interest in PPY, PPY2 and
PPY3, owning 32.5%, 32.1% and 25.4% of the total combined Common Stock and
Common Stock Series B, C and D of PPY, PPY2 and PPY3, respectively. See
"Summary -- Relationships."
The Mergers have been initiated and structured by individuals who are
executive officers of each of PSI, PPY, PPY2 and PPY3, and the Mergers have not
been negotiated at arm's length. No independent representatives have been
retained to negotiate the terms of the Mergers on behalf of PPY, PPY2 or PPY3.
If such representatives had been retained, the terms of the Mergers might have
been more favorable to the PPY, PPY2 and PPY3 Shareholders. Although
independent representatives were not retained, PPY, PPY2 and PPY3 have created
Special Committees, comprised of independent directors, which have engaged an
independent financial advisor, to evaluate the fairness of the consideration to
be received by the PPY, PPY2 and PPY3 Shareholders in the Mergers. Each of the
Special Committees has reviewed the terms of the respective Merger and
recommends that the PPY, PPY2 and PPY3 Shareholders vote for the respective
Merger. Based upon the use of an independent appraisal firm to determine the
value of consideration to be paid to PPY, PPY2 and PPY3 Shareholders, the
fairness opinions and the participation of the PPY, PPY2 and PPY3 Special
Committees, the Boards of Directors of PPY, PPY2 and PPY3 considered that the
engagement of independent representatives to negotiate the terms of each of the
Mergers was not necessary or cost effective.
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THE MERGERS
GENERAL
PPY. As a result of the PPY Merger, the separate existence of PPY would
cease. Upon consummation of the PPY Merger, each outstanding share of PPY
Common Stock (other than shares held by PSI or Dissenting PPY Shares) would be
converted into the right to receive cash, PSI Common Stock or a combination of
the two, as follows: (i) with respect to a certain number of shares of PPY
Common Stock (not to exceed 20% of the outstanding PPY Common Stock, or 615,406
shares, less any Dissenting PPY Shares), upon a PPY Cash Election, $19.00 in
cash, subject to reduction as described below, or (ii) that number of shares of
PSI Common Stock (subject to rounding) determined by dividing $19.00, subject to
reduction as described below, by the average of the per share closing prices on
the NYSE of PSI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders of PPY.
If a PPY Shareholder does not make a PPY Cash Election, all of his or her PPY
Common Stock will be converted into PSI Common Stock in the PPY Merger. The
consideration paid to PPY Shareholders by PSI in the PPY Merger will be reduced
by the Required PPY REIT Distributions (estimated at $.70 per share). The
consideration received by PPY Shareholders in the PPY Merger, however, along
with any Required PPY REIT Distributions, will not be less than $19.00 per share
of PPY Common Stock, which amount represents the interest of the PPY
Shareholders in the market value of PPY's real estate assets at June 30, 1996
(based on an independent appraisal) and the interest of the PPY Shareholders in
the estimated net asset value of its other assets at December 31, 1996. PPY
Shareholders would receive the Required PPY REIT Distributions upon any
liquidation of PPY, regardless of the PPY Merger. Additional distributions
would be made to the PPY Shareholders to cause PPY's estimated net asset value
allocable to the PPY Shareholders as of the date of the PPY Merger to be
substantially equivalent to $19.00 per share. The PPY Common Stock and PPY
Common Stock Series B, C and D held by PSI will be cancelled in the PPY Merger.
It is estimated that the aggregate consideration (cash and PSI Common
Stock) to be paid by PSI to purchase all of the PPY Common Stock and the PPY
Common Stock Series B, C and D (other than stock held by PSI) in the PPY Merger
and to pay related costs and expenses would be $53,662,000 (assuming no Required
PPY REIT Distributions) and that the total amount of cash that would be required
by PSI to purchase the PPY Common Stock from PPY Shareholders making PPY Cash
Elections and to pay the allocated portion of the costs and expenses of the PPY
Merger would be $13,094,000 (assuming maximum PPY Cash Elections). See "--
Determination of Payments to be Received by PPY, PPY2 and PPY3 Shareholders in
Connection with the Mergers" and "-- Costs of the Mergers." These amounts would
be reduced to the extent PPY must pay a Required PPY REIT Distribution, and the
total amount of cash would also be reduced to the extent that PPY Cash Elections
are less than the maximum.
PPY2. As a result of the PPY2 Merger, the separate existence of PPY2 would
cease. Upon consummation of the PPY2 Merger, each outstanding share of PPY2
Common Stock (other than shares held by PSI or Dissenting PPY2 Shares) would be
converted into the right to receive cash, PSI Common Stock or a combination of
the two, as follows: (i) with respect to a certain number of shares of PPY2
Common Stock (not to exceed 20% of the outstanding PPY2 Common Stock, or 626,021
shares, less any Dissenting PPY2 Shares), upon a PPY2 Cash Election, $20.39 in
cash, subject to reduction as described below, or (ii) that number of shares of
PSI Common Stock (subject to rounding) determined by dividing $20.39, subject to
reduction as described below, by the average of the per share closing prices on
the NYSE of PSI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders of PPY2.
If a PPY2 Shareholder does not make a PPY2 Cash Election, all of his or her PPY2
Common Stock will be converted into PSI Common Stock in the PPY2 Merger. The
consideration paid to PPY2 Shareholders by PSI in the PPY2 Merger will be
reduced by the Required PPY2 REIT Distributions (estimated at $.83 per share).
The consideration received by PPY2 Shareholders in the PPY2 Merger, however,
along with any Required PPY2 REIT Distributions, will not be less than $20.39
per share of PPY2 Common Stock, which amount represents the interest of the PPY2
Shareholders in the market value of PPY2's real estate assets at June 30, 1996
(based on an independent appraisal) and the interest of the PPY2 Shareholders in
the estimated net asset value of its other assets at December 31, 1996. PPY2
Shareholders would receive the Required PPY2 REIT Distributions upon any
liquidation of PPY2, regardless of the PPY2 Merger. Additional distributions
would be made to the PPY2 Shareholders to cause PPY2's estimated net asset value
allocable to the PPY2 Shareholders as of the date of the PPY2
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Merger to be substantially equivalent to $20.39 per share. The PPY2 Common Stock
and PPY2 Common Stock Series B, C and D held by PSI will be cancelled in the
PPY2 Merger.
It is estimated that the aggregate consideration (cash and PSI Common
Stock) to be paid by PSI to purchase all of the PPY2 Common Stock and the PPY2
Common Stock Series B, C and D (other than stock held by PSI) in the PPY2 Merger
and to pay related costs and expenses would be $58,621,000 (assuming no Required
PPY2 REIT Distributions) and that the total amount of cash that would be
required by PSI to purchase the PPY2 Common Stock from PPY2 Shareholders making
PPY2 Cash Elections and to pay the allocated portion of the costs and expenses
of the PPY2 Merger would be $14,324,000 (assuming maximum PPY2 Cash Elections).
See "-- Determination of Payments to be Received by PPY, PPY2 and PPY3
Shareholders in Connection with the Mergers" and "-- Costs of the Mergers."
These amounts would be reduced to the extent PPY2 must pay a Required PPY2 REIT
Distribution, and the total amount of cash would also be reduced to the extent
that PPY2 Cash Elections are less than the maximum.
PPY3. As a result of the PPY3 Merger, the separate existence of PPY3 would
cease. Upon consummation of the PPY3 Merger, each outstanding share of PPY3
Common Stock (other than shares held by PSI and Dissenting PPY3 Shares) would be
converted into the right to receive cash, PSI Common Stock or a combination of
the two, as follows: (i) with respect to a certain number of shares of PPY3
Common Stock (not to exceed 20% of the outstanding PPY3 Common Stock, or 262,677
shares, less any Dissenting PPY3 Shares), upon a PPY3 Cash Election, $20.47 in
cash, subject to reduction as described below, or (ii) that number of shares of
PSI Common Stock (subject to rounding) determined by dividing $20.47, subject to
reduction as described below, by the average of the per share closing prices on
the NYSE of PSI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders of PPY3.
If a PPY3 Shareholder does not make a PPY3 Cash Election, all of his or her PPY3
Common Stock will be converted into PSI Common Stock in the PPY3 Merger. The
consideration paid to PPY3 Shareholders by PSI in the PPY3 Merger will be
reduced by the Required PPY3 REIT Distributions (estimated at $.74 per share).
The consideration received by PPY3 Shareholders in the PPY3 Merger, however,
along with any Required PPY3 REIT Distributions, will not be less than $20.47
per share of PPY3 Common Stock, which amount represents the interest of the PPY3
Shareholders in the market value of PPY3's real estate assets at June 30, 1996
(based on an independent appraisal) and the interest of the PPY3 Shareholders in
the estimated net asset value of its other assets at December 31, 1996. PPY3
Shareholders would receive the Required PPY3 REIT Distributions upon any
liquidation of PPY3, regardless of the PPY3 Merger. Additional distributions
would be made to the PPY3 Shareholders to cause PPY3's estimated net asset value
allocable to the PPY3 Shareholders as of the date of the PPY3 Merger to be
substantially equivalent to $20.47 per share. The PPY3 Common Stock and PPY3
Common Stock Series B, C and D held by PSI will be cancelled in the PPY3 Merger.
It is estimated that the aggregate consideration (cash and PSI Common
Stock) to be paid by PSI to purchase all of the PPY3 Common Stock and the PPY3
Common Stock Series B, C and D (other than stock held by PSI) in the PPY3 Merger
and to pay related costs and expenses would be $26,673,000 (assuming no Required
PPY3 REIT Distributions) and that the total amount of cash that would be
required by PSI to purchase the PPY3 Common Stock from PPY3 Shareholders making
PPY3 Cash Elections and to pay the allocated portion of the costs and expenses
of the PPY3 Merger would be $5,945,000 (assuming maximum PPY3 Cash Elections).
See "-- Determination of Payments to be Received by PPY, PPY2 and PPY3
Shareholders in Connection with the Mergers" and "-- Costs of the Mergers."
These amounts would be reduced to the extent PPY3 must pay a Required PPY3 REIT
Distribution, and the total amount of cash would also be reduced to the extent
that PPY3 Cash Elections are less than the maximum.
The Boards of Directors of PPY, PPY2 and PPY3 are also proposing that the
bylaws of PPY, PPY2 and PPY3 be amended to authorize the Mergers. See
"Amendment to Bylaws of PPY, PPY2 and PPY3."
All shares of PPY, PPY2 and PPY3 Common Stock Series B, C and D are owned
by PSI and Hughes. Upon consummation of the PPY Merger, each share of PPY
Common Stock Series B, C and D (other than shares held by PSI which will be
cancelled in the PPY Merger) will be converted into the right to receive $11.66
in PSI Common Stock (valued as in the case of the PPY Common Stock), plus (i)
any additional distributions equal to the amount by which PPY's estimated net
asset value allocable to the holders of the PPY Common Stock Series B, C and D
as of the date of the PPY Merger exceeds $11.66 per share and (ii) any Required
PPY REIT Distributions payable to the holders of the PPY Common Stock Series B.
Upon consummation of the PPY2 Merger, each share of PPY2 Common Stock
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Series B, C and D (other than shares held by PSI which will be cancelled in the
PPY2 Merger) will be converted into the right to receive $12.26 in PSI Common
Stock (valued as in the case of the PPY2 Common Stock), plus (i) any additional
distributions equal to the amount by which PPY2's estimated net asset value
allocable to the holders of the PPY2 Common Stock Series B, C and D as of the
date of the PPY2 Merger exceeds $12.26 per share and (ii) any Required PPY2 REIT
Distributions payable to the holders of the PPY2 Common Stock Series B. Upon
consummation of the PPY3 Merger, each share of PPY3 Common Stock Series B, C and
D (other than shares held by PSI which will be cancelled in the PPY3 Merger)
will be converted into the right to receive $12.30 in PSI Common Stock (valued
as in the case of the PPY3 Common Stock), plus (i) any additional distributions
equal to the amount by which PPY3's estimated net asset value allocable to the
holders of the PPY3 Common Stock Series B, C and D as of the date of the PPY3
Merger exceeds $12.30 per share and (ii) any Required PPY3 REIT Distributions
payable to the holders of the PPY3 Common Stock Series B. See "-- Determination
of Payments to be Received by PPY, PPY2 and PPY3 Shareholders." The Common
Stock Series B, C and D will be voted with the majority of shares of Common
Stock of the respective corporation held by unaffiliated owners.
THE PPY MERGER, THE PPY2 MERGER AND THE PPY3 MERGER ARE NOT CONDITIONED ON
EACH OTHER.
BACKGROUND
GENERAL. THE MERGERS HAVE BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO
ARE EXECUTIVE OFFICERS OF PSI, PPY, PPY2 AND PPY3. EACH OF THE PPY, PPY2 AND
PPY3 SPECIAL COMMITTEES HAS REVIEWED THE TERMS OF THE RESPECTIVE MERGER, AND
EACH OF THE BOARDS OF DIRECTORS OF PPY, PPY2 AND PPY3, BASED ON RECOMMENDATIONS
OF THE PPY, PPY2 AND PPY3 SPECIAL COMMITTEES, RESPECTIVELY, WHICH EACH
RESPECTIVE BOARD OF DIRECTORS HAS ADOPTED, AND ON THE OPINION OF FINANCIAL
ADVISORS IN WHICH EACH CONCURS, BELIEVES THAT EACH RESPECTIVE MERGER IS FAIR TO
THE PUBLIC PPY, PPY2 AND PPY3 SHAREHOLDERS, RESPECTIVELY, AND RECOMMENDS THAT
PPY, PPY2 AND PPY3 SHAREHOLDERS, RESPECTIVELY, VOTE FOR THE RESPECTIVE MERGER.
PPY, PPY2 and PPY3 were organized to succeed to the business of the PPY
Partnership, the PPY2 Partnership and the PPY3 Partnership, respectively, in
reorganization transactions completed in October and November 1991. The PPY,
PPY2 and PPY3 Partnerships were formed to acquire mini-warehouses, raising $75
million, $75 million and $30 million, respectively, in public offerings
completed in mid 1988-early 1990. All of the proceeds from the offerings have
been invested. PSMI was the sponsor of the PPY, PPY2 and PPY3 Partnerships.
Each of the PPY, PPY2 and PPY3 Partnerships originally anticipated selling
or financing its properties from seven to 10 years after acquisition, i.e.,
between 1996 and 1999 in the case of the PPY Partnership and between 1997 and
2000 in the case of the PPY2 Partnership and the PPY3 Partnership. 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 and business parks 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.
In view of the events affecting the timing of the sale or financing of the
PPY, PPY2 and PPY3 Partnerships' properties, PSMI concluded that the limited
partners of these partnerships, as well as the limited partners of other
partnerships sponsored by PSMI, 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, PSMI commenced
planning the reorganization of the PPY, PPY2 and PPY3 Partnerships and other
public limited partnerships sponsored by PSMI into individual corporations taxed
as REITs, and, between December 1990 and November 1991, PSMI completed such
reorganization of the PPY, PPY2 and PPY3 Partnerships and 15 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
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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 PPY, PPY2 and PPY3 Partnerships' properties.
In response to changes requested by the unaffiliated dealer manager of the
PPY, PPY2 and PPY3 Partnerships' original offerings of limited partnership
interests, PPY, PPY2 and PPY3 added provisions to their bylaws to the effect
that their shareholders be presented with proposals in 1999 to sell all or
substantially all of the properties, distribute the proceeds from such sale and
liquidate the corporations. Later, in settlement of litigation arising from the
reorganizations of PPY, PPY2 and PPY3, their bylaw provisions were amended to
expand the terms of the proposals to include possible financings of their
properties.
IF APPROVED BY PPY, PPY2 AND PPY3 SHAREHOLDERS, THE MERGERS WOULD OBVIATE
THE OBLIGATION OF PPY, PPY2 OR PPY3 TO PRESENT PROPOSALS TO THEIR SHAREHOLDERS
FOR THE SALE OF THEIR PROPERTIES. IF THE SHAREHOLDERS OF PPY, PPY2 OR PPY3 DO
NOT APPROVE THE MERGER OF THE RESPECTIVE CORPORATION OR IF SUCH MERGER IS NOT
COMPLETED BECAUSE OTHER CONDITIONS ARE NOT SATISFIED, SUCH CORPORATION WOULD
CONTINUE TO BE OBLIGATED TO PRESENT A PROPOSAL TO ITS SHAREHOLDERS IN 1999 FOR
THE SALE OF ITS PROPERTIES.
The PPY, PPY2 and PPY3 Special Committees and Boards of Directors believe
that the proposed Mergers are consistent with their respective bylaw provisions.
In the Mergers, PPY, PPY2 and PPY3 would be disposing of their properties to PSI
for value, i.e., PSI Common Stock and cash (if Cash Elections are made), and the
corporate existence of PPY, PPY2 and PPY3 would cease. Furthermore, the
consideration to be received in the Mergers is based on the appraised value of
the assets of PPY, PPY2 and PPY3, and PPY, PPY2 and PPY3 Shareholders have the
right, with respect to up to 20% of the outstanding PPY, PPY2 and PPY3 Common
Stock (less any Dissenting PPY, PPY2 and PPY3 Shares), respectively, to receive
cash in the Mergers. The applicable bylaw provisions do not (i) define the
terms "sale," "liquidation" or "financing," (ii) specify what types of
transactions would satisfy the requirement imposed by these bylaw provisions or
(iii) preclude sales of the properties of PPY, PPY2 or PPY3 to PSI.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification. Between
September 1994 and September 1996, PSI merged with seven REITs, which like PPY,
PPY2 and PPY3 had been organized to succeed to the business of predecessor
partnerships sponsored by PSMI and in June 1996 PSI merged with another REIT
sponsored by PSMI.
PPY, PPY2 AND PPY3 BOARD ACTIONS. Each of the Boards of Directors of PPY,
PPY2 and PPY3 consists of the same three persons: B. Wayne Hughes, the chief
executive officer of PSI, PPY, PPY2 and PPY3, Vern O. Curtis and Jack D. Steele.
At a telephonic meeting on July 18, 1996, which included individuals who
are officers of PPY, PPY2, PPY3 and PSI, the Boards of Directors of PPY, PPY2
and PPY3 appointed the PPY, PPY2 and PPY3 Special Committees, consisting of Vern
O. Curtis and Jack D. Steele, both independent directors, to consider and make
recommendations to the Boards of Directors of PPY, PPY2 and PPY3 regarding
proposed mergers of PPY, PPY2 and PPY3 into PSI. Messrs. Curtis and Steele were
the members of the special committees that considered the mergers of eight other
REITs into PSI from September 1994 - September 1996. Following the July 18
board meetings, the PPY, PPY2 and PPY3 Special Committees held organizational
meetings by telephone, which were attended by individuals who are officers of
PPY, PPY2, PPY3 and PSI, and discussed generally the properties of PPY, PPY2 and
PPY3 and the timing of the proposed Mergers. Following the discussion, the PPY,
PPY2 and PPY3 Special Committees approved NDRC, on behalf of PSI, PPY, PPY2 and
PPY3, to appraise the properties of PPY, PPY2 and PPY3, determined to engage
Hogan & Hartson L.L.P. as special counsel to represent and advise the PPY, PPY2
and PPY3 Special Committees as to their legal obligations in making
recommendations regarding the proposed Mergers with PSI and approved the
engagement of Stanger to render opinions as to the fairness, from a financial
point of view, of the consideration to be received by PPY, PPY2 and PPY3
Shareholders in the Mergers. NDRC, Hogan & Hartson L.L.P. and Stanger had acted
in similar capacities in connection with the mergers of other REITs into PSI.
On August 13, 1996, the PPY, PPY2 and PPY3 Special Committees held a
meeting, which was attended by an individual who is an officer of PPY, PPY2,
PPY3 and PSI. The individual described generally the mechanics of
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arriving at a value per share of PPY, PPY2 and PPY3 Common Stock and the Special
Committees discussed the alternatives to each respective Merger.
On August 15, 1996, the PPY, PPY2 and PPY3 Special Committees held a
meeting, which was attended by individuals who are officers of PPY, PPY2, PPY3
and PSI, and representatives of NDRC, Stanger and Hogan & Hartson L.L.P. First,
the officers described the capital structure of PPY, PPY2 and PPY3 and the
mechanics of arriving at the value per share of PPY, PPY2 and PPY3 Common Stock,
including the allocation of value between the PPY, PPY2 and PPY3 Common Stock
and the PPY, PPY2 and PPY3 Common Stock Series B, C and D and the provision
giving PSI the right to terminate the Merger Agreement if the average price of
PSI Common Stock during the measurement period is below $20 per share. Next,
the NDRC representatives described generally the methodology used in appraising
the properties of PPY, PPY2 and PPY3 (both the fee and the leasehold interests),
including a physical inspection of all of their properties and an analysis of
other recent and pending transactions, including acquisitions of assembled
portfolios by PSI and others, operating information on the properties and market
conditions. The NDRC representatives noted that NDRC had reviewed and
reconciled capitalization rates and prices paid in recent and pending multi-
property transactions involving both PSI and others with the capitalization
rates and values resulting from the appraisals and that PPY3's portfolio
included two properties on leased land (representing about 26% of PPY3's net
operating income). 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 prior mergers of REITs into PSI,
including a review of the portfolio appraisals; (3) they noted that Stanger
reviewed the appraisal methodologies utilized by NDRC; (4) they noted that
Stanger reviewed the effective capitalization rates of the portfolio appraisals,
which were approximately 9.30% in the case of PPY, 9.34% in the case of PPY2,
and 9.92% (9.23% excluding the leased properties) in the case of PPY3, based on
net operating income generated for the 12 months ended June 30, 1996 (adjusted
for non-recurring expenses and after certain property tax adjustments); (5) they
noted that Stanger reviewed the capitalization rates on PSI transactions during
the prior 12 months, reviewed capitalization rates currently cited by industry
sources for mini-warehouse transactions, and concluded that the capitalization
rates used in NDRC's appraisals were consistent with transactions in the market;
(6) they noted that Stanger reviewed liquidation analyses, including assumptions
(liquidation of PPY's, PPY2's and PPY3's properties on a property-by-property
basis) prepared by PPY, PPY2 and PPY3 based on certain information provided by
NDRC and that the projected consideration per share resulting from liquidation
under that analysis was less than the consideration offered in the Mergers; (7)
they noted that Stanger reviewed going-concern analyses, based on analyses of
five-year and 10-year projections provided by PPY, PPY2 and PPY3, under
scenarios in which the PPY, PPY2 and PPY3 Common Stock would be liquidated into
the securities markets or the properties of PPY, PPY2 and PPY3 would be
liquidated after 10 years at their residual value (from NDRC's appraisals), that
Stanger reviewed the FFO multiples used in the various scenarios regarding the
sale of the PPY, PPY2 and PPY3 Common Stock, and that, under all but one of the
scenarios (liquidation of PPY3 Common Stock in the securities markets after 10
years at the higher multiple and lower discount rate), the estimated value per
share on a going-concern basis was lower than the consideration offered in the
Mergers; (8) they noted that Stanger had reviewed the historical market prices
of PPY's Common Stock and compared them with the consideration offered in the
PPY Merger, and they noted that the consideration offered in the PPY Merger,
reduced by estimated retained earnings between the date of the NDRC appraisal
and December 31, 1996, represents an approximately 10.1% premium over the then
current price of the PPY Common Stock and a 12.2%, 13.7%, 15.3% and 20.1%
premium over its average closing price for the prior 20 days, 60 days, 180 days
and 360 days, respectively; (9) they noted that Stanger had reviewed the
historical market prices of PPY2's Common Stock and compared them with the
consideration offered in the PPY2 Merger, and they noted that the consideration
offered in the PPY2 Merger, reduced by estimated retained earnings between the
date of the NDRC appraisal and December 31, 1996, represents an approximately
11.8% premium over the then current price of the PPY2 Common Stock and a 15.7%,
18.4%, 21.2% and 26.8% premium over its average closing price for the prior 20
days, 60 days, 180 days and 360 days, respectively; (10) they noted that Stanger
had reviewed the historical market prices of PPY3's Common Stock and compared
them with the consideration offered in the PPY3 Merger, and they noted that the
consideration offered in the PPY3 Merger, reduced by estimated retained earnings
between the date of the NDRC appraisal and December 31, 1996, represents an
approximately 0.3% premium over the then current price of the PPY3 Common Stock
and a 3.5%, 9.6%, 6.4% and 14.6% premium over its average closing price for the
prior 20 days, 60 days, 180 days and 360 days, respectively; and (11) they
indicated that, subject to receipt of certain documents, Stanger was prepared to
render its opinions that the consideration to be received in each of the
respective Mergers is fair to the public PPY, PPY2 and PPY3 Shareholders,
respectively, from a financial point of view. The PPY, PPY2 and PPY3 Special
Committees and Stanger representatives discussed the
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reduction in distributions to PPY, PPY2 and PPY3 Shareholders who receive PSI
Common Stock in the respective Mergers (assuming a trading price of PSI Common
Stock of $21 3/4 per share). The Stanger representatives noted that the
estimated value per share of PPY3 Common Stock on a going-concern basis
(assuming liquidation in the securities markets after 10 years at the higher
multiple and utilizing the lower discount rate) was higher than the
consideration offered in the PPY3 Merger, but the multiple at which PPY3 Common
Stock might trade in 10 years would likely be adversely impacted by the
expiration of the land leases of two of the properties in the years 2010-11 and
the resulting reduction in cash flow due to the loss of such properties.
Following the discussion, the PPY, PPY2 and PPY3 Special Committees expressed
the belief that each of the Mergers is fair to, and in the best interests of,
public PPY, PPY2 and PPY3 Shareholders, respectively, and determined to
recommend to the Boards of Directors that each of the Mergers be approved and to
recommend that PPY, PPY2 and PPY3 Shareholders vote for each respective Merger.
Based on the foregoing recommendations of the PPY, PPY2 and PPY3 Special
Committees, which were adopted by the PPY, PPY2 and PPY3 Boards of Directors,
the PPY, PPY2 and PPY3 Boards of Directors expressed the belief that each of the
Mergers is fair to, and in the best interests of, public PPY, PPY2 and PPY3
Shareholders, respectively, approved the Mergers, determined to recommend that
PPY, PPY2 and PPY3 Shareholders, respectively, vote for each respective Merger
and approved the filing with the Commission of preliminary proxy materials. See
"-- Comparison of Consideration to be Received in the Merger to Other
Alternatives" and "Risk Factors and Material Considerations -- Lower Level of
Distributions to PPY, PPY2 and PPY3 Shareholders."
PUBLIC ANNOUNCEMENT OF MERGERS AND COMMISSION FILINGS. On August 15, 1996,
PSI, PPY, PPY2 and PPY3 signed the Merger Agreement and publicly announced the
general terms of the Mergers. On August 30, 1996, PPY, PPY2 and PPY3 filed
preliminary proxy materials with the Commission. On _______________, 1996, PSI
filed a registration statement, which was declared effective on _______________,
1996.
REASONS FOR THE MERGERS AND TIMING
The reasons for the decision of the PPY, PPY2 and PPY3 Special Committees
and Boards of Directors to recommend the Mergers include:
. Each of the bylaws of PPY, PPY2 and PPY3 includes a provision that
shareholders be presented with a proposal to sell or finance all of the
corporation's properties, distribute the proceeds from such sale and
liquidate the corporation. The proposed Mergers satisfy these
obligations. See "-- Background."
. The Mergers provide the PPY, PPY2 and PPY3 Shareholders with the choice
of either (A) converting their investment in PPY, PPY2 and PPY3,
respectively, into an investment in PSI, which generally owns the same
type of properties on a tax-free basis (assuming each of the Mergers is
a tax-free reorganization and that a PPY, PPY2 or PPY3 Shareholder
receives only PSI Common Stock in the Mergers) and which has, and
intends to continue, to acquire additional properties or (B) with
respect to up to 20% of the outstanding PPY, PPY2 and PPY3 Common Stock
(less any Dissenting Shares), receiving in cash the amounts they would
receive if the properties of PPY, PPY2 and PPY3 were sold at their
appraised values and the corporations were liquidated (without any
reduction for real estate commissions and other sales expenses). See
"-- Recommendation to PPY, PPY2 and PPY3 Shareholders and Fairness
Analysis."
. The PPY, PPY2 and PPY3 Special Committees and Boards of Directors
believe that the Mergers are more advantageous to PPY, PPY2 and PPY3
Shareholders than any of the alternatives. See "-- Alternatives to
Mergers" and "-- Recommendation to PPY, PPY2 and PPY3 Shareholders and
Fairness Analysis."
. PSI has agreed to merge with PPY, PPY2 and PPY3 at this time, subject
to approval by PPY, PPY2 and PPY3 Shareholders and certain other
conditions. See "-- The Merger Agreement -- Conditions to Consummation
of the Mergers."
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ALTERNATIVES TO THE MERGERS
The following is a brief discussion of the benefits and disadvantages of
alternatives to the Mergers that were considered and rejected by the PPY, PPY2
and PPY3 Boards of Directors.
LIQUIDATION
BENEFITS OF LIQUIDATION. An alternative to the Mergers would be to
liquidate the assets of PPY, PPY2 and PPY3, distribute the net liquidation
proceeds to their respective shareholders and thereafter dissolve PPY, PPY2 and
PPY3. Through such liquidation, PPY, PPY2 and PPY3 would provide for a final
disposition of their shareholders' interests in the corporations. PPY, PPY2 and
PPY3 Shareholders would receive cash liquidation proceeds (as they will as to a
portion of their investment if they make Cash Elections). Liquidating PPY, PPY2
and PPY3 would be consistent with their bylaws that provide that their
shareholders be presented with proposals for the sale of their properties and
liquidation in 1999. If PPY, PPY2 and PPY3 liquidated their assets through
asset sales to unaffiliated third parties, their shareholders would not need to
rely upon real estate portfolio appraisals of the fair market value of their
real estate assets. Such assets would be valued through arm's length
negotiations between PPY, PPY2 and PPY3 and prospective purchasers.
DISADVANTAGES OF LIQUIDATION. Over the last several years, the
performance of the properties of PPY, PPY2 and PPY3 has improved as described
under "-- Continued Operation of PPY, PPY2 and PPY3 -- Benefits of
Continuation." The PPY, PPY2 and PPY3 Boards of Directors and Special
Committees believe that the improvement may continue, making liquidation (other
than through the Merger) inadvisable at this time. The Merger provides PPY,
PPY2 and PPY3 Shareholders with the opportunity either to convert their
investment in PPY, PPY2 or PPY3 into an investment in PSI, which like PPY, PPY2
and PPY3 primarily owns mini-warehouses, on a tax-free basis (to the extent that
PPY, PPY2 and PPY3 Shareholders receive only PSI Common Stock) or to receive
cash based on the appraised value of the properties of PPY, PPY2 and PPY3 as to
a portion of their investment. In addition, for many PPY, PPY2 and PPY3
Shareholders, the proceeds available for reinvestment after liquidation would be
reduced as a result of federal and state income taxes (as they would be in the
case of Cash Elections) and real estate commissions and other sales expenses
(estimated at $.86 per share of PPY Common Stock, $.88 per share of PPY2 Common
Stock and $.84 per share of PPY3 Common Stock).
PPY, PPY2 and PPY3 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 these properties. There can
be no assurance that if these 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. As with a merger, a liquidation of PPY, PPY2
or PPY3 would require approval by the holders of a majority of the outstanding
common stock of the respective corporation. Upon the dissolution of PPY, PPY2
or PPY3, the properties of the respective corporation would be sold and any
funds remaining after payment of debts, and liabilities would be distributed to
the shareholders of the respective corporation in respect of their shares. PSI
and its affiliates would receive their share of the available funds in the
liquidation. The process for liquidating the assets of PPY, PPY2 and PPY3 would
in large measure be within the control of the PPY, PPY2 and PPY3 Boards 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 PPY, PPY2 and PPY3 Boards of Directors may engage real estate
brokers, investment bankers, financial consultants and others to assist with the
disposition of the corporations' assets. These persons may assist with the
identification of prospective purchasers, arrangements for asset financing, and
assistance with the structure of the transaction. The PPY, PPY2 and PPY3 Boards
of Directors, as fiduciaries to PPY, PPY2 and PPY3 Shareholders, respectively,
remain responsible for determining the terms and conditions of such
transactions. One of the more significant considerations for the PPY, PPY2 and
PPY3 Boards 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 the respective
corporation until receipt of those amounts by the respective corporation and
their distribution to its
37
<PAGE>
shareholders. Such arrangements would also expose the respective corporation to
the risk that deferred payments might not be collected in full and that the
respective corporation 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 PPY, PPY2 or PPY3 because it
would depend on market conditions at the time of liquidation.
CONTINUED OPERATION OF PPY, PPY2 AND PPY3
BENEFITS OF CONTINUATION. Another alternative to the Mergers would be
to continue PPY, PPY2 and PPY3 in accordance with their existing business plans,
with PPY, PPY2 and PPY3 remaining as separate legal entities and with their own
assets and liabilities. Nothing requires the liquidation or merger of PPY, PPY2
and PPY3 at this time, since PPY, PPY2 and PPY3 are operating profitably and do
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 has been improvement in the mini-warehouse markets. As the pace
of new mini-warehouse development has slowed from the peak levels of 1984-88,
there has been a corresponding improvement in the financial performance of
existing properties. This improvement is evidenced by the performance of the
mini-warehouses of PPY, PPY2 and PPY3. For example, from 1993 to 1995,
occupancy per square foot changed from an average of 90% to 89%, 86% to 91% and
92% to 93% in the case of PPY, PPY2 and PPY3, respectively, and realized monthly
rents per square foot increased from an average of $.67 to $.71, $.67 to $.71
and $.70 to $.71 in the case of PPY, PPY2 and PPY3, respectively. Despite
recent increases in the development of new mini-warehouses, the PPY, PPY2 and
PPY3 Boards of Directors believe that the financial performance from existing
facilities may continue to improve, although not necessarily at the rate of
improvement experienced in prior years. Should such improvements continue, the
value of the properties of PPY, PPY2 and PPY3 could be expected to increase.
See "Description of PPY's Properties," "Description of PPY2's Properties" and
"Description of PPY3's Properties."
A number of advantages could be expected to arise from the continued
operation of PPY, PPY2 and PPY3. PPY, PPY2 and PPY3 Shareholders would continue
to receive regular quarterly distributions of net cash flow arising from
operations and the sale or refinancing of the respective corporation's assets.
Given the currently improving market conditions for mini-warehouses, the PPY,
PPY2 and PPY3 Boards of Directors and Special Committees believe that the level
of these distributions to the shareholders of the respective corporation may
increase. Continuing PPY, PPY2 and PPY3 affords the shareholders of the
respective corporation with the opportunity to participate in any future
appreciation in their respective corporation's properties. In addition, the
decision to continue PPY, PPY2 and PPY3, if elected, would mean that there would
be no change in the nature of the investment of the shareholders of the
respective corporation. This option avoids whatever disadvantages might be
deemed inherent in the Mergers. See "Risk Factors and Material Considerations"
for discussion of various risks associated with the Mergers.
DISADVANTAGES OF CONTINUATION. The primary disadvantage with
continuing PPY, PPY2 and PPY3 is the failure of that strategy to secure the
benefits that their boards of directors expect to result from the Mergers.
These benefits are highlighted under "-- Potential Advantages of the Mergers."
The Mergers afford PPY, PPY2 and PPY3 Shareholders increased liquidity. In
addition, because PPY, PPY2 and PPY3 are not authorized to issue new securities
or to reinvest sale or financing proceeds, they are less able to take advantage
of new real estate investment opportunities. In contrast, PSI has a
substantially larger, more diversified, investment portfolio that reduces the
risks associated with any particular assets or group of assets and increases
PSI's ability to access capital markets for new capital investments.
AMENDMENT OF BYLAWS
BENEFITS OF BYLAW AMENDMENT. Another alternative to the Mergers would
be an amendment to the bylaws of PPY, PPY2 and PPY3 to remove the restrictions
on investment of cash flow and on the issuance of securities. If approved, such
action would provide some of the advantages of the Mergers. PPY, PPY2 and PPY3
could take advantage of new real estate opportunities through the reinvestment
of cash flow and the investment of proceeds from the issuance of securities.
38
<PAGE>
DISADVANTAGES OF BYLAW AMENDMENT. The PPY, PPY2 and PPY3 Boards of
Directors and Special Committees believe that such an amendment has
disadvantages. It is believed that PPY, PPY2 and PPY3 Shareholders could better
take advantage through PSI than through PPY, PPY2 or PPY3 of the current market
for REIT securities for the following reasons. First, PSI has a larger capital
base. At June 30, 1996, PPY, PPY2 and PPY3 had total shareholders' equity of
$43,095,000, $47,176,000 and $19,027,000, respectively, compared with PSI's
total shareholders' equity of $1,939,070,000 (including preferred stock) and
$1,204,498,000 (without preferred stock). Second, the market for PSI Common
Stock should be more liquid than the market for Common Stock of PPY, PPY2 or
PPY3. PPY, PPY2 and PPY3 have 3,077,028 shares, 3,130,103 shares and 1,313,384
shares of Common Stock, respectively (3,745,477 shares, 3,798,552 shares and
1,581,334 shares of Common Stock, respectively, upon conversion of the Common
Stock Series B and C), traded on the AMEX, and, during the 12 months ended June
30, 1996, the average daily trading volume of the Common Stock of PPY, PPY2 and
PPY3 was 2,626, 2,261 and 722 shares, respectively. In comparison, PSI has
approximately 84,400,000 shares of PSI Common Stock traded on the NYSE
(approximately one-half of which are freely tradeable) and, during the 12 months
ended June 30, 1996, the average daily trading volume of PSI Common Stock was
52,138 shares. Third, PSI has broader geographic diversification than PPY, PPY2
or PPY3. At June 30, 1996, PPY owned 19 properties in ten states, PPY2 owned 24
properties in ten states, PPY3 owned nine properties in seven states and PSI
owned equity interests (directly, as well as through general and limited
partnership interests and stock interests) in 1,068 properties in 37 states.
For additional information on the properties owned by PPY, PPY2, PPY3 and PSI,
see "-- Comparison of PPY, PPY2 and PPY3 Common Stock with PSI Common Stock,"
"Description of PPY's Properties," "Description of PPY2's Properties,"
"Description of PPY3's Properties" and "Description of PSI's Properties."
NO SOLICITATION OF OTHER PROPOSALS
Neither the Boards of Directors nor the Special Committees of PPY, PPY2 or
PPY3 solicited any other proposals for the acquisition of PPY, PPY2 or PPY3 or
their properties. The Boards of Directors of PPY, PPY2 and PPY3 agreed to the
Merger Agreement, which includes a provision against soliciting other offers to
buy, because they believe that the potential advantages to PPY, PPY2 and PPY3
Shareholders described under "-- Potential Advantages of the Mergers" are more
likely to be achieved through the Mergers than in a transaction with another
party. In particular, assuming the Mergers qualify as tax-free reorganizations,
no taxable gain or loss will be recognized by PPY, PPY2 and PPY3 Shareholders
who exchange their PPY, PPY2 and PPY3 Common Stock solely for PSI Common Stock.
The Required PPY REIT Distributions, the Required PPY2 REIT Distributions and
the Required PPY3 REIT Distributions generally will be taxable to PPY
Shareholders, PPY2 Shareholders and PPY3 Shareholders, respectively, as ordinary
income to the extent of the respective corporation's earnings and profits. PSI
and Hughes have little tax basis in their common stock of PPY, PPY2 and PPY3,
and many PPY, PPY2 and PPY3 Shareholders have a tax basis in their PPY, PPY2 and
PPY3 Common Stock (approximately $17.39 for most original PPY Shareholders,
approximately $17.76 for most original PPY2 Shareholders and approximately
$18.22 for most original PPY3 Shareholders) lower than the consideration to be
received in the Mergers. Accordingly, for many PPY, PPY2 and PPY3 Shareholders,
the proceeds available for reinvestment after liquidation would be reduced as a
result of federal and state income taxes (as they would be in the case of Cash
Elections) and real estate commissions and other sales expenses (estimated at
$.86 per share of PPY Common Stock, $.88 per share of PPY2 Common Stock and $.84
per share of PPY3 Common Stock). However, other proposals could have been for a
higher price and possibly also structured as mergers qualifying as tax-free
reorganizations. Under California law, most acquisitions of PPY, PPY2 or PPY3
or their properties would require approval by the shareholders of PPY, PPY2 and
PPY3, respectively. PSI and Hughes in the aggregate own 32.5%, 32.1% and 25.4%
of the total combined outstanding shares of Common Stock and Common Stock Series
B, C and D of PPY, PPY2 and PPY3, respectively.
DETERMINATION OF PAYMENTS TO BE RECEIVED BY PPY, PPY2 AND PPY3 SHAREHOLDERS IN
CONNECTION WITH THE MERGERS
PPY. In connection with the PPY Merger, PPY Shareholders will receive a
value of $19.00 (less the amount of any Required PPY REIT Distributions) per
share of PPY Common Stock in cash, PSI Common Stock, or a combination of the
two, calculated as follows:
39
<PAGE>
1. The market value (not book value) of PPY's real estate assets has been
determined by NDRC, showing such values as of June 30, 1996. In valuing PPY's
real estate assets, NDRC considered the applicability of all three commonly
recognized approaches to valuation: the cost approach, the income approach and
the sales comparison approach. NDRC did not consider the cost approach to be
applicable to PPY's properties. NDRC reconciled the values indicated from the
sales comparison and income approaches to arrive at a final valuation
conclusion. NDRC gave primary emphasis to the income approach. The resulting
effective implied capitalization rate for PPY's portfolio of real estate assets
based on property operations (before non-recurring charges and after certain
property tax adjustments) for the 12 months ended June 30, 1996 averaged 9.30%.
NDRC's valuation is as of June 30, 1996 in the context of the information
available on that date. See "-- Real Estate Portfolio Appraisals by NDRC."
2. PPY's net asset value has been computed as (a) the market value of
PPY's real estate assets as of June 30, 1996 ($68,250,000) plus (b) the
estimated book value of PPY's non-real estate assets as of December 31, 1996 (a
total of $1,240,000) less (c) PPY's estimated liabilities as of December 31,
1996 (a total of $1,029,000).
3. PPY's net asset value per share of PPY Common Stock was calculated at
$19.00 by reducing PPY's net asset value (as computed in 1 and 2 above,
$68,461,000) by the amount of PPY's net asset value allocable to the PPY Common
Stock Series B, C and D (estimated at $9,696,000, or $11.66 per share) and the
estimated Required PPY REIT Distributions attributable to the PPY Common Stock
Series B ($295,000 or $.70 per share) and dividing the result by the number of
outstanding shares of PPY Common Stock.
4. Upon completion of the PPY Merger, each share of PPY Common Stock
(other than PPY Dissenting Shares and shares of PPY Common Stock held by PSI)
would be converted into the right to receive $19.00 in cash (with respect to up
to 20% of the outstanding PPY Common Stock, less any PPY Dissenting Shares),
subject to reduction as described below, or that number of shares of PSI Common
Stock determined by dividing $19.00, subject to reduction as described below, by
the average of the closing prices on the NYSE of PSI Common Stock during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
shareholders of PPY. Additional distributions would be made to PPY Shareholders
to cause PPY's estimated net asset value allocable to the PPY Shareholders as of
the date of the PPY Merger to be substantially equivalent to $19.00 per share.
The consideration paid by PSI to PPY Shareholders in the PPY Merger will be
reduced by the amount of any Required PPY REIT Distributions. However, the
consideration received by PPY Shareholders in the PPY Merger along with the
Required PPY REIT Distributions (which will be paid in cash) will not be less
than $19.00 per share of PPY Common Stock.
Hughes, who owns 4.3% of the total combined outstanding shares of PPY
Common Stock and PPY Common Stock Series B, C and D would receive approximately
91,860 shares of PSI Common Stock in the PPY Merger (assuming no Required PPY
REIT Distributions and PSI Common Stock price of $21 3/4).
The following tables set forth the calculation of the payments to be paid
to PPY Shareholders:
COMPUTATION OF PAYMENTS
<TABLE>
<CAPTION>
Net book Appraised Book value PPY's PPY's net PPY's PPY's net Payments
value of market of PPY's net asset asset value net asset asset value received in
PPY's real value of other net value(1) allocable value per share connection with
estate PPY's assets(1) to PPY allocable of PPY Merger per
portfolio(1) real estate Common Stock to PPY Common original $1,000
portfolio(2) Series B, C Common Stock investment in
and D(3) Stock (1) the PPY
Partnership(4)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$43,910,000 $68,250,000 $211,000 $68,461,000 $9,991,000 $58,470,000 $19.00 $950
_______________
</TABLE>
(1) Estimated as of December 31, 1996. The net asset value per share of PPY
Common Stock includes the Required PPY REIT Distributions, estimated at $.70
per share or $2,154,000 in the aggregate. PPY Shareholders would receive
the Required PPY REIT Distributions upon any liquidation of PPY regardless
of the PPY Merger.
40
<PAGE>
(2) As of June 30, 1996.
(3) Includes $11.66 per share of PPY Common Stock Series B, C and D plus the
estimated Required PPY REIT Distributions attributable to the PPY Common
Stock Series B of $.70 per share.
(4) Does not include quarterly cash distributions to PPY Shareholders or to
limited partners of the PPY Partnership. PPY was organized in October 1991
to succeed to the business of the PPY Partnership, which completed its
offering of limited partnership interests in 1988. PPY's capital structure
was designed to reflect the economic rights of the limited and general
partners in the PPY Partnership. The market price of PSI Common Stock may
fluctuate following establishment of the number of shares to be issued to
PPY Shareholders in the PPY Merger and prior to issuance and could decrease
as a result of increased selling activity following issuance of shares in
the PPY Merger and other factors.
PPY2. In connection with the PPY2 Merger, PPY2 Shareholders will receive a
value of $20.39 (less the amount of any Required PPY2 REIT Distributions) per
share of PPY2 Common Stock in cash, PSI Common Stock, or a combination of the
two, calculated as follows:
1. The market value (not book value) of PPY2's real estate assets has
been determined by NDRC, showing such values as of June 30, 1996. In valuing
PPY2's real estate assets, NDRC considered the applicability of all three
commonly recognized approaches to valuation: the cost approach, the income
approach and the sales comparison approach. NDRC did not consider the cost
approach to be applicable to PPY2's properties. NDRC reconciled the values
indicated from the sales comparison and income approaches to arrive at a final
valuation conclusion. NDRC gave primary emphasis to the income approach. The
resulting effective implied capitalization rate for PPY2's portfolio of real
estate assets based on property operations (before non-recurring charges and
after certain property tax adjustments) for the 12 months ended June 30, 1996
averaged 9.34%. NDRC's valuation is as of June 30, 1996 in the context of the
information available on that date. See "-- Real Estate Portfolio Appraisals by
NDRC."
2. PPY2's net asset value has been computed as (a) the market value of
PPY2's real estate assets as of June 30, 1996 ($72,500,000) plus (b) the
estimated book value of PPY2's non-real estate assets as of December 31, 1996 (a
total of $2,827,000) less (c) PPY2's estimated liabilities as of December 31,
1996 (a total of $950,000).
3. PPY2's net asset value per share of PPY2 Common Stock was calculated
at $20.39 by reducing PPY2's net asset value (as computed in 1 and 2 above,
$74,377,000) by the amount of PPY2's net asset value allocable to the PPY2
Common Stock Series B, C and D (estimated at $10,192,000, or $12.26 per share)
and the estimated Required PPY2 REIT Distributions attributable to the PPY2
Common Stock Series B ($349,000 or $.83 per share) and dividing the result by
the number of outstanding shares of PPY2 Common Stock.
4. Upon completion of the PPY2 Merger, each share of PPY2 Common Stock
(other than PPY2 Dissenting Shares and shares of PPY2 Common Stock held by PSI)
would be converted into the right to receive $20.39 in cash (with respect to up
to 20% of the outstanding PPY2 Common Stock, less any PPY2 Dissenting Shares),
subject to reduction as described below, or that number of shares of PSI Common
Stock determined by dividing $20.39, subject to reduction as described below, by
the average of the closing prices on the NYSE of PSI Common Stock during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
shareholders of PPY2. Additional distributions would be made to PPY2
Shareholders to cause PPY2's estimated net asset value allocable to the PPY2
Shareholders as of the date of the PPY2 Merger to be substantially equivalent to
$20.39 per share. The consideration paid by PSI to PPY2 Shareholders in the
PPY2 Merger will be reduced by the amount of any Required PPY2 REIT
Distributions. However, the consideration received by PPY2 Shareholders in the
PPY2 Merger along with the Required PPY2 REIT Distributions (which will be paid
in cash) will not be less than $20.39 per share of PPY2 Common Stock.
Hughes, who owns 4.2% of the total combined outstanding shares of PPY2
Common Stock and PPY2 Common Stock Series B, C and D would receive approximately
96,950 shares of PSI Common Stock in the PPY2 Merger (assuming no Required PPY2
REIT Distributions and PSI Common Stock price of $21 3/4).
41
<PAGE>
The following tables set forth the calculation of the payments to be paid
to PPY2 Shareholders:
COMPUTATION OF PAYMENTS
<TABLE>
<CAPTION>
Net book Appraised Book value PPY2's PPY2's net PPY2's PPY2's net Payments
value of market of PPY2's net asset asset value net asset asset value received in
PPY2's real value of other net value(1) allocable value per share connection with
estate PPY2's assets(1) to PPY2 allocable of PPY2 Merger per
portfolio(1) real estate Common Stock to PPY2 Common original $1,000
portfolio(2) Series B, C Common Stock investment in
and D(3) Stock (1) the PPY2
Partnership(4)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$46,394,000 $72,500,000 $1,877,000 $74,377,000 $10,541,000 $63,836,000 $20.39 $1,020
_______________
</TABLE>
(1) Estimated as of December 31, 1996. The net asset value per share of PPY2
Common Stock includes the Required PPY2 REIT Distributions, estimated at
$.83 per share or $2,598,000 in the aggregate. PPY2 Shareholders would
receive the Required PPY2 REIT Distributions upon any liquidation of PPY2
regardless of the PPY2 Merger.
(2) As of June 30, 1996.
(3) Includes $12.26 per share of PPY2 Common Stock Series B, C and D plus the
estimated Required PPY2 REIT Distributions attributable to the PPY2 Common
Stock Series B of $.83 per share.
(4) Does not include quarterly cash distributions to PPY2 Shareholders or to
limited partners of the PPY2 Partnership. PPY2 was organized in November
1991 to succeed to the business of the PPY2 Partnership, which completed its
offering of limited partnership interests in 1989. PPY2's capital structure
was designed to reflect the economic rights of the limited and general
partners in the PPY2 Partnership. The market price of PSI Common Stock may
fluctuate following establishment of the number of shares to be issued to
PPY2 Shareholders in the PPY2 Merger and prior to issuance and could
decrease as a result of increased selling activity following issuance of
shares in the PPY2 Merger and other factors.
PPY3. In connection with the PPY3 Merger, PPY3 Shareholders will receive a
value of $20.47 (less the amount of any Required PPY3 REIT Distributions) per
share of PPY3 Common Stock in cash, PSI Common Stock, or a combination of the
two, calculated as follows:
1. The market value (not book value) of PPY3's real estate assets has
been determined by NDRC, showing such values as of June 30, 1996. In valuing
PPY3's real estate assets, NDRC considered the applicability of all three
commonly recognized approaches to valuation: the cost approach, the income
approach and the sales comparison approach. NDRC did not consider the cost
approach to be applicable to PPY3's properties. NDRC reconciled the values
indicated from the sales comparison and income approaches to arrive at a final
valuation conclusion. NDRC gave primary emphasis to the income approach. The
resulting effective implied capitalization rate for PPY3's portfolio of real
estate assets based on property operations (before non-recurring charges and
after certain property tax adjustments) for the 12 months ended June 30, 1996
averaged 9.92% (9.23% excluding the leased properties). NDRC's valuation is as
of June 30, 1996 in the context of the information available on that date. See
"--Real Estate Portfolio Appraisals by NDRC."
2. PPY3's net asset value has been computed as (a) the market value of
PPY3's real estate assets as of June 30, 1996 ($30,000,000) plus (b) the
estimated book value of PPY3's non-real estate assets as of December 31, 1996 (a
total of $1,814,000) less (c) PPY3's estimated liabilities as of December 31,
1996 (a total of $701,000).
3. PPY3's net asset value per share of PPY3 Common Stock was calculated at
$20.47 by reducing PPY3's net asset value (as computed in 1 and 2 above,
$31,113,000) by the amount of PPY3's net asset value allocable to the PPY3
Common Stock Series B, C and D (estimated at $4,101,000, or $12.30 per share)
and the estimated
42
<PAGE>
Required PPY3 REIT Distributions attributable to the PPY3 Common Stock Series B
($125,000 or $.74 per share) and dividing the result by the number of
outstanding shares of PPY3 Common Stock.
4. Upon completion of the PPY3 Merger, each share of PPY3 Common Stock
(other than PPY3 Dissenting Shares and shares of PPY3 Common Stock held by PSI)
would be converted into the right to receive $20.47 in cash (with respect to up
to 20% of the outstanding PPY3 Common Stock, less any PPY3 Dissenting Shares),
subject to reduction as described below, or that number of shares of PSI Common
Stock determined by dividing $20.47, subject to reduction as described below, by
the average of the closing prices on the NYSE of PSI Common Stock during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
shareholders of PPY3. Additional distributions would be made to PPY3
Shareholders to cause PPY3's estimated net asset value allocable to the PPY3
Shareholders as of the date of the PPY3 Merger to be substantially equivalent to
$20.47 per share. The consideration paid by PSI to PPY3 Shareholders in the
PPY3 Merger will be reduced by the amount of any Required PPY3 REIT
Distributions. However, the consideration received by PPY3 Shareholders in the
PPY3 Merger along with the Required PPY3 REIT Distributions (which will be paid
in cash) will not be less than $20.47 per share of PPY3 Common Stock.
Hughes, who owns 4.2% of the total combined outstanding shares of PPY3
Common Stock and PPY3 Common Stock Series B, C and D would receive approximately
41,704 shares of PSI Common Stock in the PPY3 Merger (assuming no Required PPY3
REIT Distributions and PSI Common Stock price of $21 3/4).
The following tables set forth the calculation of the payments to be paid to
PPY3 Shareholders:
<TABLE>
<CAPTION>
COMPUTATION OF PAYMENTS
Net book Appraised Book value PPY3's PPY3's net PPY3's PPY3's net Payments
value of market of PPY3's net asset asset value net asset asset value received in
PPY3's real value of other net value(1) allocable value per share connection with
estate PPY3's assets(1) to PPY3 allocable of PPY3 Merger per
portfolio(1) real estate Common Stock to PPY3 Common original $1,000
portfolio(2) Series B, C Common Stock investment in
and D(3) Stock (1) the PPY3
Partnership(4)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$18,359,000 $30,000,000 $1,113,000 $31,113,000 $4,226,000 $26,887,000 $20.47 $1,024
_______________
</TABLE>
(1) Estimated as of December 31, 1996. The net asset value per share of PPY3
Common Stock includes the Required PPY3 REIT Distributions, estimated at
$.74 per share or $972,000 in the aggregate. PPY3 Shareholders would
receive the Required PPY3 REIT Distributions upon any liquidation of PPY3,
regardless of the PPY3 Merger.
(2) As of June 30, 1996.
(3) Includes $12.30 per share of PPY3 Common Stock Series B, C and D plus the
estimated Required PPY3 REIT Distributions attributable to the PPY3 Common
Stock Series B of $.74 per share.
(4) Does not include quarterly cash distributions to PPY3 Shareholders or to
limited partners of the PPY3 Partnership. PPY3 was organized in November
1991 to succeed to the business of the PPY3 Partnership, which completed its
offering of limited partnership interests in early 1990. PPY3's capital
structure was designed to reflect the economic rights of the limited and
general partners in the PPY3 Partnership. The market price of PSI Common
Stock may fluctuate following establishment of the number of shares to be
issued to PPY3 Shareholders in the PPY3 Merger and prior to issuance and
could decrease as a result of increased selling activity following issuance
of shares in the PPY3 Merger and other factors.
43
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POTENTIAL ADVANTAGES OF THE MERGERS TO PPY, PPY2 AND PPY3
The principal potential benefits to PPY, PPY2 and PPY3 Shareholders who
receive PSI Common Stock include the following:
ACQUISITION OF ADDITIONAL PROPERTIES. The primary business activity of
PPY, PPY2 and PPY3 is operating the properties originally acquired by their
predecessors. PPY, PPY2 and PPY3 have not raised additional capital, and their
articles of incorporation and bylaws restrict their ability to reinvest cash
flow in new properties. PSI, on the other hand, has expanded, and is expected
to continue to expand, its asset and capital base. PSI is also permitted to
borrow money to fund new acquisitions. Accordingly, PPY, PPY2 and PPY3
Shareholders who receive PSI Common Stock in the Mergers will be investors in an
entity that has grown, and is expected to continue to grow, as new investments
are made.
INCREASED LIQUIDITY. PPY has 3,077,028 shares of PPY Common Stock traded
on the AMEX (3,745,477 shares upon conversion of the PPY Common Stock Series B
and C into PPY Common Stock) and, during the 12 months ended June 30, 1996, the
average daily trading volume of PPY Common Stock was 2,626 shares. PPY2 has
3,130,103 shares of PPY2 Common Stock traded on the AMEX (3,798,552 shares upon
conversion of the PPY2 Common Stock Series B and C into PPY2 Common Stock) and,
during the same period, the average daily trading volume of PPY2 Common Stock
was 2,261 shares. PPY3 has 1,313,384 shares of PPY3 Common Stock traded on the
AMEX (1,581,334 shares upon conversion of the PPY3 Common Stock Series B and C
into PPY3 Common Stock) and, during the same period, the average daily trading
volume of PPY3 Common Stock was 722 shares. In comparison, PSI has
approximately 84,400,000 shares of PSI Common Stock traded on the NYSE
(approximately 48,600,000 of which are freely tradeable) and, during the same
period, the average daily trading volume of PSI Common Stock was 52,138 shares.
Accordingly, the investment in PSI of PPY, PPY2 and PPY3 Shareholders who
receive PSI Common Stock in the Mergers should have greater liquidity than the
current investment of these same shareholders in their respective corporations.
POSSIBLE TAX-FREE TREATMENT. Each of the Mergers is intended to qualify as
a tax-free reorganization. Assuming such qualification, no taxable gain or loss
will be recognized in connection with the Mergers by PPY, PPY2 and PPY3
Shareholders who exchange their common stock solely for PSI Common Stock.
However, the Required PPY REIT Distributions, the Required PPY2 REIT
Distributions and the Required PPY3 REIT Distributions will be taxable to all
PPY Shareholders, PPY2 Shareholders and PPY3 Shareholders, respectively, as
ordinary income. Hughes, who has little tax basis in his PPY, PPY2 and PPY3
Common Stock, intends to exchange his PPY, PPY2 and PPY3 Common Stock solely for
PSI Common Stock. See "Certain Federal Income Tax Matters -- The Mergers."
RECOMMENDATION TO PPY, PPY2 AND PPY3 SHAREHOLDERS AND FAIRNESS ANALYSIS
CONCLUSIONS. Based upon an analysis of each of the Mergers, the PPY, PPY2
and PPY3 Special Committees and Boards of Directors have concluded (i) that the
terms of each respective merger are fair to PPY, PPY2 and PPY3 Shareholders,
(ii) after comparing the potential benefits and detriments of the Mergers with
alternatives, that each of the Mergers is more advantageous to PPY, PPY2 and
PPY3 Shareholders, respectively, than such alternatives and (iii) that PPY, PPY2
and PPY3 Shareholders, respectively, should vote for the Mergers.
Although the PPY, PPY2 and PPY3 Boards of Directors and Special Committees
reasonably believe the terms of each of the Mergers are fair to PPY, PPY2 and
PPY3 Shareholders and recommend that PPY, PPY2 and PPY3 Shareholders vote for
the Mergers, an affiliate of PSI is a member of the PPY, PPY2 and PPY3 Boards of
Directors, and PSI has other significant relationships with PPY, PPY2 and PPY3
and conflicts of interest with respect to the Mergers. The Mergers have been
initiated and structured by individuals who are executive officers of PPY, PPY2
and PPY3 and who are also affiliated with PSI. The PPY, PPY2 and PPY3 Special
Committees, comprised of independent directors, have reviewed and approved the
terms of the Mergers. See "Summary -- Relationships" and "Conflicts of
Interest."
MATERIAL FACTORS UNDERLYING CONCLUSIONS OF SPECIAL COMMITTEES AND BOARDS OF
DIRECTORS OF PPY, PPY2 AND PPY3. The following is a discussion of the material
factors underlying the conclusions of the PPY, PPY2 and
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PPY3 Special Committees and Boards of Directors. The PPY, PPY2 and PPY3 Boards
of Directors and Special Committees have not quantified the relative importance
of these factors.
1. Bylaw Provisions. The bylaws of PPY, PPY2 and PPY3 require proposals
for the sale of their properties in 1999. As discussed under "-- Background,"
the PPY, PPY2 and PPY3 Special Committees and Boards of Directors believe that
the proposed Mergers satisfy these requirements and that, as discussed in
paragraph 2 below, the form and amount of consideration offered to PPY, PPY2 and
PPY3 Shareholders constitute fair value in respect of their shares of PPY, PPY2
and PPY3 Common Stock, respectively. The PPY, PPY2 and PPY3 Special Committees
and Boards of Directors recognize that, if the properties of PPY, PPY2 and PPY3
were liquidated through sales to third parties, the PPY, PPY2 and PPY3
Shareholders would not need to rely upon real estate portfolio appraisals to
estimate the fair market value of their real estate assets. Such assets would
be valued through arm's length negotiations between PPY, PPY2 and PPY3 and the
prospective purchasers.
2. Consideration Offered. The PPY, PPY2 and PPY3 Boards of Directors and
Special Committees believe that (i) the proposal that the consideration to be
paid to PPY, PPY2 and PPY3 Shareholders in the Mergers be based on the value of
the assets of PPY, PPY2 and PPY3 is reasonable and consistent with the bylaws of
PPY, PPY2 and PPY3, respectively, (ii) the net asset value of PPY, PPY2 and PPY3
represents a fair estimate of the value of their respective assets, net of
liabilities, and constitutes a reasonable basis for determining the
consideration to be received by PPY, PPY2 and PPY3 Shareholders, and (iii) the
consideration to be received by PSI and Hughes in respect of their interest in
PPY, PPY2 and PPY3 is fair because it reflects the amount they would receive
upon liquidation of the respective corporation. There was no negotiation
regarding the basis for determining the consideration to be paid to PPY, PPY2
and PPY3 Shareholders in the Mergers or the consideration to be received by PSI
and Hughes in respect of their interest in PPY, PPY2 and PPY3. See "--
Background."
3. Choice as to Form of Consideration. The Mergers provide PPY, PPY2 and
PPY3 Shareholders with the choice of either (A) converting their investment into
an investment in PSI, which generally owns the same type of properties as PPY,
PPY2 and PPY3, on a tax-free basis (assuming the Mergers are tax-free
reorganizations, the PPY, PPY2 and PPY3 Shareholders receive solely PSI Common
Stock in the Mergers, 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 PPY, PPY2 and PPY3 Common Stock (less any Dissenting Shares),
receiving in cash the amounts they would receive if their properties were sold
at their appraised values and the corporations were liquidated (without any
reduction for real estate commissions and other sales expenses).
4. Independent Portfolio Appraisals and Fairness Opinions. The
conclusions of the PPY, PPY2 and PPY3 Special Committees and Boards of Directors
are based partially upon the portfolio appraisals prepared by NDRC and Stanger's
fairness opinions. The PPY, PPY2 and PPY3 Special Committees and Boards 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 NDRC's portfolio appraisals and
Stanger's fairness opinions. The PPY, PPY2 and PPY3 Special Committees and
Boards of Directors believe that the engagement of NDRC and Stanger to provide
the portfolio appraisals and the fairness opinions, respectively, assisted the
PPY, PPY2 and PPY3 Special Committees and Boards of Directors in the fulfillment
of their duties to PPY, PPY2 and PPY3 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 Appraisals by NDRC"
and "-- Fairness Opinions from Stanger."
5. Voting Procedures and Dissenters' Rights. The PPY, PPY2 and PPY3
Special Committees and Boards of Directors believe that the voting process and
the rights of dissenting shareholders of PPY, PPY2 and PPY3 support their
conclusions as to the Mergers. Each of the Mergers is required to be approved
by a majority of the outstanding shares of Common Stock and Common Stock Series
B, C and D of the respective corporation, all voting together as a class, and
the Common Stock Series B, C and D will be voted with the holders of a majority
of the unaffiliated Common Stock of each respective corporation. The PPY
Merger, PPY2 Merger and PPY3 Merger are not conditioned on each other. PPY,
PPY2 and PPY3 Shareholders will have the right to exercise Dissenters' Rights,
although the PPY, PPY2 and PPY3 Special Committees and Boards of Directors
recognize that these rights may be exercised by
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<PAGE>
PPY, PPY2 and PPY3 Shareholders only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PPY, PPY2 and PPY3 Common
Stock, respectively.
6. Comparison of Payments to be Received at the Time of the Mergers to
Other Alternatives. The payments to be received at the time of the Mergers of
$19.00 per share of PPY Common Stock, $20.39 per share of PPY2 Common Stock and
$20.47 per share of PPY3 Common Stock generally compares favorably with (A) the
trading price of the PPY, PPY2 and PPY3 Common Stock immediately prior to the
first announcement of the Mergers ($17.00, $17.75 and $19.88, respectively) and
during other periods, (B) a range of estimated going-concern value per share of
PPY, PPY2 and PPY3 Common Stock ($16.04 to $18.01, $17.05 to $19.10 and $18.38
to $20.55, respectively), (C) an estimated liquidation value per share of PPY,
PPY2 and PPY3 Common Stock ($18.14, $19.51 and $19.63, respectively) and (D) the
book value per share of PPY, PPY2 and PPY3 Common Stock as of June 30, 1996
($11.48, $12.39 and $12.02, respectively). The PPY, PPY2 and PPY3 Boards of
Directors and Special Committees recognize that this comparison is subject to
significant assumptions, qualifications and limitations. See "-- Comparison of
Consideration to be Received in the Mergers to Other Alternatives."
7. Lower Level of Distributions to PPY, PPY2 and PPY3 Shareholders After
the Mergers. The level of distributions to PPY, PPY2 and PPY3 Shareholders who
receive PSI Common Stock in the Mergers is expected to be lower after the
Mergers. Based on a market price of PSI Common Stock of $21 3/4 and the current
regular quarterly distribution rate for PSI ($.22 per share), PPY ($.27 per
share), PPY2 ($.28 per share) and PPY3 ($.34 per share), (a) PPY Shareholders
would receive approximately $.08 (29%) less in regular quarterly distributions
per share of PPY Common Stock after the Mergers from PSI than before the Mergers
from PPY and approximately $.01 less per share in regular quarterly
distributions for each $1.25 (6%) increase in the market price of PSI Common
Stock above $21 3/4, (b) PPY2 Shareholders would receive approximately $.07
(26%) less in regular quarterly distributions per share of PPY2 Common Stock
after the Mergers from PSI than before the Mergers from PPY2 and approximately
$.01 less per share in regular quarterly distributions for each $1.125 (6%)
increase in the market price of PSI Common Stock above $21 3/4 and (c) PPY3
Shareholders would receive approximately $.13 (39%) less in regular quarterly
distributions per share of PPY3 Common Stock after the Mergers from PSI than
before the Mergers from PPY3 and approximately $.01 less per share in regular
quarterly distributions for each $1.125 (6%) increase in the market price of PSI
Common Stock above $21 3/4.
8. Conflicts of Interest. The Mergers have been initiated and structured
by individuals who are executive officers of PPY, PPY2 and PPY3 and who are also
affiliated with PSI. Independent representatives were not engaged to negotiate
these arrangements on behalf of the public PPY, PPY2 and PPY3 Shareholders, and
the terms of the Mergers are not the result of arm's length negotiations.
Hughes will receive PSI Common Stock in respect of his ownership of capital
stock of PPY, PPY2 and PPY3.
The PPY, PPY2 and PPY3 Special Committees and Boards of Directors do not
believe that the absence of independent representatives to negotiate the Mergers
undermines the fairness of the Mergers because the Mergers have been reviewed
and approved by the PPY, PPY2 and PPY3 Special Committees, comprised of
independent directors. Based upon the use of an independent appraisal firm, the
Stanger fairness opinions and the participation of the PPY, PPY2 and PPY3
Special Committees, the Boards of Directors and Special Committees considered
that the engagement of such independent representatives was not necessary or
cost effective.
COMPARISON OF BENEFITS AND DETRIMENTS. Prior to concluding that the
Mergers should be proposed to PPY, PPY2 and PPY3 Shareholders, the PPY, PPY2 and
PPY3 Boards of Directors and Special Committees considered several alternatives
to the Mergers. The alternatives considered by the PPY, PPY2 and PPY3 Boards of
Directors and Special Committees were liquidation, continuation of operations
and amendments to organizational documents. In order to determine whether the
Mergers or one of its alternatives would be more advantageous to PPY, PPY2 and
PPY3 Shareholders, the PPY, PPY2 and PPY3 Boards of Directors and Special
Committees compared the potential benefits and detriments of the Mergers with
the potential benefits and detriments of the alternatives. See "-- Alternatives
to Mergers" for a discussion of the potential benefits and detriments of each of
these alternatives. Each of the Mergers and its alternatives offers potential
benefits and suffers from potential detriments not possessed by the other
alternatives. Set forth below are the conclusions of the PPY, PPY2 and PPY3
Boards of Directors and Special Committees regarding the comparison of the
Mergers to the alternatives.
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(i) The PPY, PPY2 and PPY3 Boards of Directors and Special Committees
favor the Mergers over liquidation because they believe that (A) PPY, PPY2
and PPY3 should not be liquidated at this time (other than through the
Mergers that provide PPY, PPY2 and PPY3 Shareholders who receive PSI Common
Stock with greater liquidity and increased geographic diversification,
while retaining an interest in a similar type of properties which may
increase in value) because of potential continued improvement of the
properties of PPY, PPY2 and PPY3 and (B) the Mergers provide PPY, PPY2 and
PPY3 Shareholders, with respect to up to 20% of the outstanding PPY, PPY2
and PPY3 Common Stock (less any PPY, PPY2 and PPY3 Dissenting Shares,
respectively), with the opportunity, if they so elect, to receive in cash
the amounts they would receive if PPY's, PPY2's and PPY3's properties were
sold at their appraised values and were liquidated, but without any
reduction for real estate commissions and other sales expenses.
(ii) The PPY, PPY2 and PPY3 Boards of Directors and Special Committees
have concluded that continued operation of PPY, PPY2 and PPY3 is not as
attractive an alternative as each of the Mergers because the Mergers afford
PPY, PPY2 and PPY3 Shareholders increased liquidity and the opportunity to
participate in PSI, an entity that, unlike PPY, PPY2 and PPY3, has grown,
and is expected to continue to grow, as new investments are made. However,
the PPY, PPY2 and PPY3 Boards of Directors and Special Committees recognize
that the level of distributions to PPY, PPY2 and PPY3 Shareholders who
receive PSI Common Stock is expected to be reduced. See "-- Recommendation
to PPY, PPY2 and PPY3 Shareholders -- 7. Lower Level of Distributions to
PPY, PPY2 and PPY3 Shareholders After the Mergers."
(iii) The PPY, PPY2 and PPY3 Boards of Directors and Special
Committees believe that PPY, PPY2 and PPY3 Shareholders would have better
opportunities to participate in the current markets for equity securities
of REITs through PSI than through PPY, PPY2 and PPY3, even if their bylaws
were amended to remove restrictions on reinvestment of cash flow and on the
issuance of securities of PPY, PPY2 and PPY3, because of PSI's larger
capital base, greater liquidity and broader geographic diversification.
Based upon this comparison of the potential benefits and detriments of the
Mergers with its alternatives, the PPY, PPY2 and PPY3 Boards of Directors and
Special Committees have concluded that each of the Mergers is more attractive to
PPY, PPY2 and PPY3 Shareholders, respectively, than any of the alternatives.
COMPARISON OF CONSIDERATION TO BE RECEIVED IN THE MERGERS TO OTHER ALTERNATIVES
GENERAL. To assist PPY, PPY2 and PPY3 Shareholders in evaluating the
Mergers, the PPY, PPY2 and PPY3 Boards of Directors and Special Committees
compared the consideration to be received in each of the Mergers, i.e., (A) a
value of $19.00 per share of PPY Common Stock (less the amount of any Required
PPY REIT Distributions), (B) a value of $20.39 per share of PPY2 Common Stock
(less the amount of any Required PPY2 REIT Distributions) and (C) a value of
$20.47 per share of PPY3 Common Stock (less the amount of any Required PPY3 REIT
Distributions), to: (i) the trading price of the PPY, PPY2 and PPY3 Common
Stock on the AMEX; (ii) estimates of the value of PPY, PPY2 and PPY3 on a
liquidation basis assuming that their assets were sold at their appraised fair
market value and the net proceeds distributed to the PPY, PPY2 and PPY3
Shareholders in accordance with their share ownership in PPY, PPY2 and PPY3,
respectively; and (iii) estimates of the value of each of PPY, PPY2 and PPY3 on
a going-concern basis assuming that each were to continue as a stand-alone
entity and its securities sold at the end of either a five-year or 10-year
holding period or its assets sold at the end of a 10-year holding period. Due
to the uncertainty in establishing these values, the PPY, PPY2 and PPY3 Boards
of Directors and Special Committees 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 each of the Mergers is 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 PPY, PPY2 and
PPY3 Boards of Directors and Special Committees 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 these comparative analyses are summarized in the following
tables. PPY, PPY2 and PPY3 Shareholders should bear in mind that the estimated
values assigned to the alternate forms of consideration are based
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<PAGE>
on a variety of assumptions that have been made by PPY, PPY2 and PPY3. These
assumptions relate, among other things, to: projections as to PPY's, PPY2's and
PPY3's future income, expenses, cash flow and other significant financial
matters; the capitalization rates that will be used by prospective buyers when
PPY's, PPY2's and PPY3'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 PPY, PPY2 and PPY3 Common Stock.
In addition, these estimates are based upon certain information available to
PPY, PPY2 and PPY3 at the time the estimates were computed, and no assurance can
be given that the same conditions analyzed by them in arriving at the estimates
of value would exist at the time of the Mergers. The assumptions used have been
determined by the PPY, PPY2 and PPY3 Boards of Directors and Special Committees
in good faith, and, where appropriate, are based upon current and historical
information regarding PPY, PPY2 and PPY3 and current real estate markets, and
have been highlighted below to the extent critical to the conclusions of the
PPY, PPY2 and PPY3 Boards of Directors and Special Committees.
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and PPY, PPY2 and PPY3 Shareholders should
carefully consider the following discussions to understand the assumptions,
qualifications and limitations inherent in the presented valuations. The
estimated values presented in the following table are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These estimated values are based upon certain assumptions that relate,
among other things, to (i) the price of PSI Common Stock as of the date of the
Merger being the same as during the 20 trading days ending on the fifth trading
day prior to the meeting of shareholders of PPY, PPY2 and PPY3, (ii) projections
as to the future revenues, expenses, cash flow and other significant financial
matters of PPY, PPY2 and PPY3, (iii) the capitalization rates that will be used
by prospective buyers when the assets of PPY, PPY2 and PPY3 are liquidated, (iv)
selling costs, (v) appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows and (vi) the manner of sale of the
properties of PPY, PPY2 and PPY3. Actual results may vary from those set forth
below based on numerous factors, including interest rate fluctuations, tax law
changes, supply and demand for mini-warehouses, the manner in which the
properties are sold and changes in availability of capital to finance
acquisitions of mini-warehouses.
PPY COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Estimated Liquidation
Payments in PPY Merger Estimated Going Concern Value per Share of PPY
per Share of PPY Trading Prices of PPY Value per Share of PPY Common Stock at
Common Stock Common Stock (2) Common Stock (3) Appraised Value (4)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19.00(1) $16 $17 1/4 $16.04 $18.01 $18.14
- -------------------------------------------------------------------------------------------------------
</TABLE>
PPY2 COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Estimated Liquidation
Payments in PPY2 Estimated Going Concern Value per Share of PPY2
Merger per Share of Trading Prices of PPY2 Value per Share of PPY2 Common Stock at
PPY2 Common Stock Common Stock (2) Common Stock (3) Appraised Value (4)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.39(1) $16 $17 3/8 $17.05 $19.10 $19.51
- -------------------------------------------------------------------------------------------------------
</TABLE>
PPY3 COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Estimated Liquidation
Payments in PPY3 Estimated Going Concern Value per Share of PPY3
Merger per Share of Trading Prices of PPY3 Value per Share of PPY3 Common Stock at
PPY3 Common Stock Common Stock (2) Common Stock (3) Appraised Value (4)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20.47(1) $17 3/8 $18 7/8 $18.38 $20.55 $19.63
- --------------------------------------------------------------------------------------------------------
</TABLE>
_______________
48
<PAGE>
(1) Based on the respective corporation's net asset value consisting of the
independently appraised market value of the respective corporation's real
estate portfolio as of June 30, 1996 and estimated book value of its other
net assets as of December 31, 1996 and assuming no Required REIT
Distributions. The market price of PSI Common Stock may fluctuate following
establishment of the number of shares to be issued to PPY, PPY2 and PPY3
Shareholders in the Mergers and prior to issuance and could decrease as a
result of increased selling activity following issuance of the shares in the
Mergers and other factors. See "-- Determination of Payments to be Received
by PPY, PPY2 and PPY3 Shareholders in Connection with the Mergers."
(2) High and low sales prices on the AMEX composite tape for the second quarter
of 1996, the last full calendar quarter prior to the announcement of the
Mergers. On August 14, 1996, the closing price of PPY, PPY2 and PPY3 Common
Stock was $17, $17 3/4 and $19 7/8, respectively.
(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 PPY, PPY2 and PPY3 and the date of their liquidation. See
"-- Going-Concern Value."
(4) Based upon NDRC's real estate appraisal, less estimated expenses of
liquidation. See "-- Liquidation Values."
TRADING PRICES OF PPY, PPY2 AND PPY3 COMMON STOCK.
PPY. The PPY Board of Directors and Special Committee also considered
that the trading price for PPY Common Stock averaged $16.69, $16.47, $16.24 and
$15.59 for the 20-day, 60-day, 180-day and 360-day periods preceding the
announcement of the proposed Mergers and that the closing price for PPY Common
Stock on the last trading day prior to the first announcement of the proposed
Mergers was $17. The PPY Board of Directors also considered that the
consideration offered in the PPY Merger adjusted for interim earnings of
approximately $.27 per share (which amount represents increases in current net
assets projected to be generated and retained between the date of the Appraisal
and December 31, 1996) represents a premium of 12.2%, 13.7%, 15.3%, 20.1% and
10.1% 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 Mergers, respectively.
PPY2. The PPY2 Board of Directors and Special Committee also considered
that the trading price for PPY2 Common Stock averaged $17.14, $16.75, $16.37 and
$15.65 for the 20-day, 60-day, 180-day and 360-day periods preceding the
announcement of the proposed Mergers and that the closing price for PPY2 Common
Stock on the last trading day prior to the first announcement of the proposed
Mergers was $17 3/4. The PPY2 Board of Directors also considered that the
consideration offered in the PPY2 Merger adjusted for interim earnings of
approximately $.55 per share (which amount represents increases in current net
assets projected to be generated and retained between the date of the Appraisal
and December 31, 1996) represents a premium of 15.7%, 18.4%, 21.2%, 26.8% and
11.8% 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 Mergers, respectively.
PPY3. The PPY3 Board of Directors and Special Committee also considered
that the trading price for PPY3 Common Stock averaged $19.26, $18.18, $18.74 and
$17.39 for the 20-day, 60-day, 180-day and 360-day periods preceding the
announcement of the proposed Mergers and that the closing price for PPY3 Common
Stock on the last trading day prior to the first announcement of the proposed
Mergers was $19 7/8. The PPY3 Board of Directors also considered that the
consideration offered in the PPY3 Merger adjusted for interim earnings of
approximately $.54 per share (which amount represents increases in current net
assets projected to be generated and retained between the date of the Appraisal
and December 31, 1996) represents a premium of 3.5%, 9.6%, 6.4%, 14.6% and 0.3%
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
Mergers, respectively.
GOING-CONCERN VALUE. The PPY, PPY2 and PPY3 Boards of Directors and Special
Committees have estimated the going-concern value of each of PPY, PPY2 and PPY3
by analyzing projected cash flows and distributions assuming that each of PPY,
PPY2 and PPY3 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
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<PAGE>
shares of PPY, PPY2 and PPY3 liquidated in securities markets at an FFO multiple
ranging from 9.0 to 10.0; Scenario #2 -- a 10-year holding period, with shares
of PPY, PPY2 and PPY3 liquidated in securities markets at an FFO multiple
ranging from 9.0 to 10.0; and Scenario #3 -- a 10-year holding period with the
property portfolios of PPY, PPY2 and PPY3 liquidated in private real estate
markets at the terminal value projected by the appraiser in the portfolio
appraisals and the net proceeds resulting from the liquidation of the properties
and other remaining assets of PPY, PPY2 and PPY3 paid out to the shareholders of
PPY, PPY2 and PPY3 in liquidation distributions. Dividends and sale proceeds
per share of PPY, PPY2 and PPY3 Common Stock were discounted in the projections
at rates ranging from 12.25% to 12.75%.
Scenario #3 of the going-concern analysis assumes the properties of each of
PPY, PPY2 and PPY3 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 shareholders out of the respective
corporation's cash flow from operations might be reduced because 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 per share of PPY3 Common Stock on a going-concern basis
(assuming liquidation in the securities markets after 10 years at the higher
multiple and utilizing the lower discount rate) was higher than in the PPY3
Merger, but the multiple at which PPY3 Common Stock might trade in 10 years
would likely be adversely impacted by the expiration of the leases of two of the
properties (representing approximately 26% of PPY3's net operating income) in
the years 2010-11 and the resulting reduction in cash flow due to the loss of
such properties.
The estimated value of each of PPY, PPY2 and PPY3 on a going-concern basis is
not intended to reflect the distributions payable to each of their shareholders
if their assets were to be sold at their current fair market values.
LIQUIDATION VALUES. Since one of the alternatives available to the PPY, PPY2
and PPY3 Boards of Directors is to proceed with a liquidation of PPY, PPY2 and
PPY3, and the corresponding distribution of the net liquidation proceeds to the
shareholders of PPY, PPY2 and PPY3, respectively, the PPY, PPY2 and PPY3 Boards
of Directors and Special Committees have estimated the liquidation value of PPY,
PPY2 and PPY3 assuming that the real estate portfolios of these corporations
were sold at their fair market value, based upon the NDRC real estate portfolio
appraisals. This alternative assumes non-real estate assets are sold at their
book value (such assets, excluding cash, representing less than 2% of the value
of each of PPY, PPY2 and PPY3), PPY, PPY2 and PPY3 incur selling costs at the
time of liquidation (state and local transfer taxes, real estate commissions and
legal and other closing costs) of $3,360,000, $3,499,000 and $1,376,000,
respectively, and the remaining net liquidation proceeds are distributed among
the shareholders of PPY, PPY2 and PPY3 under the terms of their respective
articles of incorporation, according priority to the PPY, PPY2 and PPY3
Shareholders.
The liquidation analysis assumes that the properties of PPY, PPY2 and PPY3
are sold in single transactions at the respective appraised values. Should the
assets be liquidated over time, even at prices equal to those projected,
distributions to PPY, PPY2 and PPY3 Shareholders out of the respective
corporation's cash flow from operations might be reduced because their
relatively fixed costs, such as general and administrative expenses, are not
proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales of each portfolio are assumed to occur
concurrently.
Applying these procedures, the PPY, PPY2 and PPY3 Boards of Directors and
Special Committees 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, NDRC's professional opinion as to
the market value of the real estate portfolios of PPY, PPY2 and PPY3 as of June
30, 1996. 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 arm's
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 the properties
of PPY, PPY2 and PPY3 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 Appraisals by NDRC."
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DISTRIBUTION COMPARISON. The PPY, PPY2 and PPY3 Boards of Directors and
Special Committees have considered the potential impact of the Mergers upon
distributions that would be made to PPY, PPY2 and PPY3 Shareholders who exchange
their PPY, PPY2 and PPY3 Common Stock for PSI Common Stock. Based on a market
price of PSI Common Stock of $21 3/4 and the current regular quarterly
distribution rate for PSI ($.22 per share), PPY ($.27 per share), PPY2 ($.28 per
share) and PPY3 ($.34 per share), (a) PPY Shareholders would receive
approximately $.08 (29%) less in regular quarterly distributions per share of
PPY Common Stock after the Mergers from PSI than before the Mergers from PPY and
approximately $.01 less per share in regular quarterly distributions for each
$1.25 (6%) increase in the market price of PSI Common Stock above $21 3/4, (b)
PPY2 Shareholders would receive approximately $.07 (26%) less in regular
quarterly distributions per share of PPY2 Common Stock after the Mergers from
PSI than before the Mergers from PPY2 and approximately $.01 less per share in
regular quarterly distributions for each $1.125 (6%) increase in the market
price of PSI Common Stock above $21 3/4 and (c) PPY3 Shareholders would receive
approximately $.13 (39%) less in regular quarterly distributions per share of
PPY3 Common Stock after the Mergers from PSI than before the Mergers from PPY3
and approximately $.01 less per share in regular quarterly distributions for
each $1.125 (6%) increase in the market price of PSI Common Stock above $21 3/4.
These estimates are based upon the actual distributions made by PSI, PPY, PPY2
and PPY3 (not upon the amounts that might have been distributed by them based
upon their cash flow from operations).
In evaluating this estimate, PPY, PPY2 and PPY3 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. A comparison of the current
distribution levels of PSI with those of PPY, PPY2 and PPY3 does not show how
the Mergers might affect a PPY, PPY2 or PPY3 Shareholder's distribution level
over a number of years.
REAL ESTATE PORTFOLIO APPRAISALS BY NDRC
NDRC was engaged by PSI, PPY, PPY2 and PPY3 to appraise the real estate
portfolios of PPY, PPY2 and PPY3 and has delivered written reports of its
analysis, based upon the review, analysis, scope and limitations described
therein, as to the fair market value of the portfolio of properties of each of
PPY, PPY2 and PPY3 as of June 30, 1996 (the "Appraisals"). PSI, PPY, PPY2 and
PPY3 selected NDRC to provide the Appraisals because of its experience and
reputation in connection with appraising mini-warehouses and NDRC's appraisal of
the properties of one other REIT in connection with its merger with PSI. The
consideration to be paid by PSI to PPY, PPY2 and PPY3 Shareholders in the
Mergers is based on the Appraisals. The Appraisals, which contain a description
of the assumptions and qualifications made, matters considered and limitations
on the review and analysis, are set forth as Appendices B-1, B-2 and B-3 and
should be read in their entirety. Certain of the material assumptions,
qualifications and limitations to the Appraisals are described below.
EXPERIENCE OF NDRC. NDRC was founded by Lawrence R. Nicholson, MAI and
Duncan O. Douglas in 1993, the principals who have specialized in the appraisal
of mini-warehouses and other properties since 1980. NDRC 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. NDRC appraised over 200 mini-warehouses in 1995.
SUMMARY OF METHODOLOGY. At the request of PSI, PPY, PPY2 and PPY3, NDRC
evaluated the portfolios of real estate of PPY, PPY2 and PPY3. In valuing the
properties, NDRC 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. NDRC did not consider the cost approach to be
applicable to the properties of PPY, PPY2 and PPY3.
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.
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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 in the case of PPY, PPY2 and PPY3
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 of the type and age of the properties of PPY, PPY2 and
PPY3 diminishes the validity of this approach.
While the Appraisals were prepared separately for the entire portfolio of
each of PPY, PPY2 and PPY3, NDRC analyzed the individual properties by (a)
reviewing each property's previous three 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 NDRC through
physical inspections, telephone calls and other sources; and (c) developing
information from a variety of sources about market conditions for each
individual property that included population, employment and housing trends
within the market.
To determine any significant differences in quality among the various
properties, NDRC considered such variables as property income growth patterns
and potential, quality of location and construction, tenant appeal, property
appearance, security and potential competition.
NDRC also interviewed management personnel responsible for the properties of
PPY, PPY2 and PPY3 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. Representatives of NDRC performed site inspections on all of the
properties of PPY, PPY2 and PPY3 between July 8, 1996 and August 9, 1996.
NDRC then estimated the value of each property in the portfolio relying
heavily upon the income approach. Indicated values were developed 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, NDRC 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, NDRC reviewed other published information concerning
acquisition criteria in use by property investors through the second quarter of
1996. Further, NDRC 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. NDRC also
reviewed information compiled by management identifying sales and acquisitions
of mini-warehouses.
In applying a discounted cash flow analysis, projections of cash flow from
each property, except PPY3's Clifton, New Jersey and Hillside, New Jersey
properties ("Leasehold Properties") which are on leased land with the leases
expiring in 2010 and 2011, respectively, were developed for a 10-year period
ending in the year 2006 with a terminal residual value computed at the end of
year 10. For the Leasehold Properties, projections of cash flow were developed
through the end of the land lease term, including all options, and the
improvements were deemed to pass to the landowner upon expiration of the land
leases. The first year's scheduled gross income was estimated taking into
consideration each property's current rent structure and the rental rates of
competitive facilities. Also included in the income estimate were trends in
ancillary income from administrative charges and late fees, if any. NDRC then
made an analysis of each subject's occupancy history, took into consideration
the occupancy level of competitive facilities and estimated a stabilized
occupancy level for each property in each of the portfolios.
Estimated expenses were based upon each property's actual operating history;
where appropriate, adjustments were made to property taxes to estimate taxes
which would be due after a sales transaction. The projected expenses were
tested for reasonableness based upon a comparison of the operating expense
ratios to market norms. Expenses
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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.
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 2.5% to 4%
depending upon property and local market conditions. NDRC then used terminal
capitalization rates that ranged from 9.75% to 10.50% to capitalize the 10th
year net income of each property's, except the Leasehold Properties, into a
residual value at the end of the holding period, assuming normal cost of
disposing of the properties. The 10 yearly cash flows were then discounted to
present worth using discount rates ranging from 11.5% to 13.0% for the
properties, again depending upon local market and property conditions. In
addition, NDRC valued each property, except the Leasehold Properties, using the
direct capitalization method by applying capitalization rates ranging from 9.25%
to 10.0% to projected cash flows for the next 12 months.
In applying the sales comparison approach to the properties of PPY, PPY2 and
PPY3, NDRC analyzed over 100 properties that were sold in 1994, 1995 and 1996.
In addition, NDRC reviewed capitalization rates and purchase prices paid in
recent and pending individual and multi-property portfolio transactions similar
to the portfolios of PPY, PPY2 and PPY3 involving both PSI and others and
reconciled the purchase prices with the values of the portfolio of properties of
PPY, PPY2 and PPY3. Using a regression analysis, a statistically significant
correlation was derived between each of the properties' net income and its sales
price per square foot.
CONCLUSIONS AS TO VALUE. NDRC reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. NDRC 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 for the
portfolios based on reported property operations (before non-recurring expenses
and after certain property tax adjustments) during the 12 months ended June 1996
averaged 9.30%, 9.34% and 9.92% (9.23% excluding the Leasehold Properties) for
PPY, PPY2 and PPY3, respectively.
Based on the valuation methodology described above, NDRC assigned a market
value to the portfolios of real property assets of PPY, PPY2 and PPY3 as of June
30, 1996 of $68,250,000, $72,500,000 and $30,000,000, respectively.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISALS. The
Appraisals reflect NDRC's valuation of the real estate portfolios of PPY, PPY2
and PPY3 as of June 30, 1996 in the context of the information available on such
date. Events occurring after June 30, 1996 and before the closing of the
Mergers could affect the properties or assumptions used in preparing the
Appraisals. NDRC has no obligation to update the Appraisals on the basis of
subsequent events; however, NDRC has informed PSI, PPY, PPY2 and PPY3 that, as
of the date of this Combined Proxy Statement and Prospectus, NDRC is not aware
of any event or change in conditions since June 30, 1996 that may have caused a
material change in the value of the portfolios of real estate of PPY, PPY2 and
PPY3 since that date.
The Appraisals are subject to certain general and specific assumptions and
limiting conditions and are in conformity with the Departure Provision of
Uniform Standards of Professional Appraisal Practice. Among other limitations,
the Appraisals (i) did not consider the effect of easements, restrictions and
other similar items on the value of the properties of PPY, PPY2 or PPY3, (ii)
assumed that the properties comply with local building codes and zoning
ordinances and (iii) did not involve the physical inspections of competing
properties. See Appendices B-1, B-2 and B-3 for a discussion of the specific
assumptions, limitations and qualifications of the Appraisals.
COMPENSATION AND MATERIAL RELATIONSHIPS. NDRC is being paid an aggregate fee
of $158,000 for preparation of the Appraisals, which fee includes reimbursement
for all of NDRC's related out-of-pocket expenses. NDRC is also entitled to
indemnification against certain liabilities. The fee was negotiated with NDRC
and payment is not dependent upon completion of the Mergers. A leading
appraiser of mini-warehouses, NDRC has prepared appraisals for PSI and its
affiliates, including appraisals of the properties of one prior REIT in
connection with its merger with PSI, and is expected to continue to prepare
appraisals for PSI.
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FAIRNESS OPINIONS FROM STANGER
Stanger was engaged by PPY, PPY2 and PPY3 through the PPY, PPY2 and PPY3
Special Committees to deliver written summaries of its determination as to the
fairness of the consideration to be received in each of the Mergers, from a
financial point of view, to the public PPY, PPY2 and PPY3 Shareholders. The
full text of the opinions, which contain descriptions of the assumptions and
qualifications made, matters considered and limitations on the review and
opinion, is set forth in Appendices C-1, C-2 and C-3 to this Combined Proxy
Statement and Prospectus and should be read in their entirety. Certain of the
material assumptions, qualifications and limitations to the fairness opinions
are set forth below. The summary set forth below does not purport to be a
complete description of the analyses used by Stanger in rendering the fairness
opinions. 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 PPY, PPY2
and PPY3 advised Stanger that it would be reasonable to make, PPY, PPY2 and PPY3
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 opinions. PPY, PPY2 and PPY3 have agreed to indemnify Stanger against
certain liabilities arising out of its engagement to prepare and deliver the
fairness opinions.
EXPERIENCE OF STANGER. Stanger, founded in 1978, has provided information,
research, investment banking and consulting services to clients throughout the
United States, including major NYSE firms and insurance companies and over 70
companies engaged in the management and operation of partnerships and REITs.
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.
SUMMARY OF MATERIALS CONSIDERED. In the course of Stanger's analysis to
render its opinions regarding the Mergers, Stanger: (i) reviewed this Combined
Proxy Statement and Prospectus; (ii) reviewed the annual reports on Form 10-K of
PSI, PPY, PPY2 and PPY3 for the three fiscal years ending December 31, 1993,
1994 and 1995, their quarterly reports on Form 10-Q for the period ending June
30, 1996; (iii) reviewed the Appraisals and discussed with management of PPY,
PPY2 and PPY3 and NDRC the methodologies and procedures employed in preparing
the Appraisals; (iv) reviewed information regarding purchases and sales of self-
storage properties by PSI 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 PPY, PPY2 and PPY3, and
based in part on the Appraisals, of the current net liquidation value per common
share of the assets of PPY, PPY2 and PPY3 and projections of cash flow from
operations, dividend distributions and going-concern values for PPY, PPY2 and
PPY3, and the calculation of the allocation of such values between (A) the PPY
Shareholders and the holders of the PPY Common Stock Series B, C and D, (B) the
PPY2 Shareholders and the holders of the PPY2 Common Stock Series B, C and D,
and (C) the PPY3 Shareholders and the holders of the PPY3 Common Stock Series B,
C and D; (vi) discussed with certain members of management of PSI, PPY, PPY2 and
PPY3 conditions in self-storage property markets, conditions in the market for
sales/acquisitions of properties similar to those owned by PPY, PPY2 and PPY3,
current and expected operations and performance, and the financial condition and
future prospects of PSI, PPY, PPY2 and PPY3; (vii) reviewed historical market
prices, trading volume and dividends for PSI, PPY, PPY2 and PPY3 Common Stock;
and (viii) conducted other studies, analyses, inquiries and investigations as
Stanger deemed appropriate.
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 opinions. The summary of the opinions and analysis of Stanger set
forth in this Combined Proxy and Prospectus is qualified in its entirety by
reference to the full text of such opinions.
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Review of Appraisals. In preparing its opinions, Stanger relied upon the
Appraisals of the portfolios of properties of PPY, PPY2 and PPY3 which were
prepared as of June 30, 1996 by NDRC, an independent appraiser. Stanger
reviewed the Appraisals rendered by NDRC, reviewed a sample of supporting
documentation for the Appraisals and discussed with NDRC its experience and
qualifications and the appraisal methodologies utilized.
Stanger observed that the Appraisals were certified by a Member of the
Appraisal Institute and were conducted utilizing the income approach to
valuation, applying the discounted cash flow and/or direct capitalization method
to establish a value for each individual property and the sales comparison
approach.
Stanger observed that the effective capitalization rate utilized in the
Appraisals was approximately 9.30%, 9.34% and 9.92% (9.23% excluding the
Clifton, New Jersey and Hillside, New Jersey properties which are subject to
ground leases and expire in the years 2010 and 2011, respectively) for the
properties of PPY, PPY2 and PPY3, respectively, based on net operating income
(before non-recurring expenses and after certain property tax adjustments)
generated for the 12 months ended June 30, 1996. Stanger further observed that
among stabilized properties acquired by PSI or affiliated entities from third-
parties between August 1994 and July 1996, capitalization rates for such
purchases averaged approximately 9.6%. Lower capitalization rates generally
reflect higher sales prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared by
management of PPY, PPY2 and PPY3 of the estimated value of PPY, PPY2 and PPY3
based upon liquidation of their portfolios on a property-by-property basis
utilizing estimates prepared by PPY, PPY2 and PPY3 and information provided by
NDRC.
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 Appraisals, to an independent third-party buyer. Costs of
such property sales by PPY to independent third-parties were estimated by PPY to
total approximately $3,360,000 and were comprised of estimates of $630,000 in
state and local transfer taxes, $2,047,000 in commissions and $683,000 in legal
and other closing costs. Costs of such property sales by PPY2 to independent
third-parties were estimated by PPY2 to total approximately $3,500,000 and were
comprised of estimates of $600,000 in state and local transfer taxes, $2,175,000
in commissions and $725,000 in legal and other closing costs. Costs of such
property sales by PPY3 to independent third-parties were estimated by PPY3 to
total approximately $1,376,000 and were comprised of estimates of $176,000 in
state and local transfer taxes, $900,000 in commissions and $300,000 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 PPY, PPY2 and PPY3
based on knowledge of real estate transactions. Stanger observed that the
estimated net proceeds from such liquidation, assuming no Required PPY REIT
Distributions (prior to the date of liquidation) and the associated dissolution
of PPY and distribution of all remaining assets was $18.14 per share of PPY
Common Stock, versus the consideration offered in the PPY Merger of $19.00 cash
per share of PPY Common Stock, or the equivalent of $19.00 of PSI Common Stock
per share of PPY Common Stock, based on the average closing price of PSI Common
Stock on the NYSE during the 20 consecutive trading days ending on the fifth
trading day prior to the meeting of shareholders of PPY. Stanger observed that
the estimated net proceeds from the liquidation of PPY2's properties, assuming
no Required PPY2 REIT Distributions (prior to the date of liquidation), and the
associated dissolution of PPY2 and distribution of all remaining assets was
$19.51 per share of PPY2 Common Stock, versus the consideration offered in the
PPY2 Merger of $20.39 cash per share of PPY2 Common Stock, or the equivalent of
$20.39 of PSI Common Stock per share of PPY2 Common Stock, based on the average
closing price of PSI Common Stock on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the meeting of shareholders of
PPY2. Stanger observed that the estimated net proceeds from the liquidation of
PPY3's properties, assuming no Required PPY3 REIT Distributions (prior to the
date of liquidation), and the associated dissolution of PPY3 and distribution of
all remaining assets was $19.63 per share of PPY3 Common Stock, versus the
consideration offered in the PPY3 Merger of $20.47 cash per share of PPY3 Common
Stock, or the equivalent of $20.47 of PSI Common Stock per share of PPY3 Common
Stock, based on the average closing price of PSI Common Stock on the NYSE during
the 20 consecutive trading days ending on the fifth trading day prior to the
meeting of shareholders of PPY3.
Stanger also reviewed information on recent and pending multi-property
purchases and sales of self-storage properties transacted by PSI, PSMI or
affiliates during 1993 through June 1996. Stanger observed that PSI, PSMI or
affiliated entities have completed or have pending 11 bulk purchases of property
portfolios during the period reviewed,
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excluding the properties associated with the mergers of eight prior REITs with
PSI. These transactions involved affiliated and unaffiliated entities with an
interest in 106 properties with an aggregate acquisition cost of approximately
$250 million. Capitalization rates ranged from 9.1% to 10.7%, averaging 9.7%,
for bulk transactions during the entire period reviewed and ranged from 9.1% to
9.8%, averaging 9.3%, for bulk transactions during the preceding six months.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and
projections prepared by the management of PPY, PPY2 and PPY3 concerning
estimated cash flows and dividend distributions from continued operation of PPY,
PPY2 and PPY3 as independent stand-alone entities and estimated sales proceeds
from the liquidation of the shares of PPY, PPY2 and PPY3 or the portfolios of
properties owned by PPY, PPY2 and PPY3. The analyses incorporated estimates of
revenues and operating expenses for each of the properties, capital
expenditures, entity-level general and administrative costs, and cash flow
distributions and proceeds from sale of either the securities of PPY, PPY2 and
PPY3 or the properties owned by PPY, PPY2 and PPY3 during projection periods of
up to 10 years. The analyses and projections assumed, among other things, that
(i) net operating income for PPY, PPY2 and PPY3 would grow at a compound annual
rate of approximately 3.6%, 3.6% and 3.9% for the properties of PPY, PPY2 and
PPY3, respectively, over the 10-year projection period; (ii) general and
administrative expenses would increase at an average rate of 3.0% per annum over
the projection period; and (iii) 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 Appraisals.
The projections evaluated the going-concern value of PPY, PPY2 and PPY3 under
three scenarios: Scenario #1 -- a five-year holding period, with shares of PPY,
PPY2 and PPY3 Common Stock liquidated in securities markets at an FFO multiple
ranging from 9.0 to 10.0; Scenario #2 -- a 10-year holding period, with shares
of PPY, PPY2 and PPY3 Common Stock liquidated in securities markets at an FFO
multiple ranging from 9.0 to 10.0; and Scenario #3 -- a 10-year holding period
with the property portfolio of PPY, PPY2 and PPY3 liquidated in private real
estate markets at the terminal value projected in the Appraisals and the net
proceeds resulting from the liquidation of the properties and other remaining
assets of PPY, PPY2 and PPY3 paid out to shareholders in liquidating
distributions. Dividends and sale proceeds per share of PPY, PPY2 and PPY3
Common Stock were discounted in the projections at rates ranging from 12.25% to
12.75%.
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 PPY, PPY2 and PPY3. This
group of publicly traded REITs are all affiliated with PSI, and include Public
Storage Properties XI, 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 PPY, PPY2 and
PPY3 Common Stock on a going-concern basis resulting from the above analysis
were as follows for each scenario: Scenario #1 -- $16.04 to $17.42, $17.05 to
$18.49 and $18.38 to $19.94, respectively; Scenario #2 -- $16.77 to $18.01,
$17.80 to $19.09 and $19.15 to $20.55, respectively; and Scenario #3 -- $17.43
to $17.96, $18.53 to $19.10 and $18.52 to $19.07, respectively, compared with
the consideration offered in the Mergers of $19.00 per share of PPY Common
Stock, $20.39 per share of PPY2 Common Stock and $20.47 per share of PPY3 Common
Stock. Stanger observed that the estimated value per share of PPY3 Common Stock
on a going-concern basis (assuming liquidation in the securities markets after
10 years at the higher multiple and utilizing the lower cash flow discount rate
to determine present value) was 0.4% higher than the consideration offered in
the PPY3 Merger, but that the multiple at which PPY3 Common Stock might trade in
10 years would likely be adversely impacted by the expiration of the Leasehold
Properties in the years 2010 and 2011 and the resulting reduction in cash flow
due to the loss of such properties.
The estimated values assigned to the alternative forms of consideration are
based on a variety of assumptions that have been made by PPY, PPY2 and PPY3.
While PPY, PPY2 and PPY3 have advised Stanger that they believe they have a
reasonable basis for these assumptions, these assumptions may not reflect the
actual experience of PPY, PPY2 and PPY3 and such differences could be material.
See "-- Comparison of Consideration to be Received in the Mergers to Other
Alternatives."
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Review of Market Value. Stanger reviewed historical market prices, trading
volume and dividend distributions for PPY, PPY2 and PPY3 Common Stock. In the
course of this review, Stanger compared the historical market prices of PPY,
PPY2 and PPY3 Common Stock with amounts to be received at the time of the
Mergers. Stanger observed that the trading price for PPY Common Stock averaged
$16.69, $16.47, $16.24 and $15.59 for the respective 20-day, 60-day, 180-day,
and 360-day periods preceding the announcement of the proposed Mergers and that
the closing price for PPY Common Stock on the last trading day prior to the
first announcement of the proposed Mergers was $17. Stanger further observed
that the consideration offered in the Mergers, reduced by $961,000, or
approximately $.27 per share (which amount represents increases in current net
assets projected by management to be generated and retained between the date of
the Appraisals and December 31, 1996) represents a premium of 12.2%, 13.7%,
15.3%, 20.1% and 10.1% 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 Mergers, respectively. Stanger observed that the trading price
for PPY2 Common Stock averaged $17.14, $16.75, $16.37 and $15.65, for the
respective 20-day, 60-day, 180-day, and 360-day periods preceding the
announcement of the proposed Mergers and that the closing price for PPY2 Common
Stock on the last trading day prior to the first announcement of the proposed
Mergers was $17 3/4. Stanger further observed that the consideration offered in
the Mergers, reduced by $1,958,000, or approximately $.55 per share (which
amount represents increases in current net assets projected by management to be
generated and retained between the date of the Appraisals and December 31, 1996)
represents a premium of 15.7%, 18.4%, 21.2%, 26.8% and 11.8% 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 Mergers,
respectively. Stanger observed that the trading price for PPY3 Common Stock
averaged $19.26, $18.18, $18.74 and $17.39, for the respective 20-day, 60-day,
180-day, and 360-day periods preceding the announcement of the proposed Mergers,
that the closing price for PPY3 Common Stock on the last trading day prior to
the first announcement of the proposed Mergers was $19 7/8. Stanger further
observed that the consideration offered in the Mergers, reduced by $793,000, or
approximately $.54 per share (which amount represents increases in current net
assets projected by management to be generated and retained between the date of
the Appraisals and December 31, 1996) represents a premium of 3.5%, 9.6%, 6.4%,
14.6% and 0.3% 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 Mergers, respectively.
In addition, Stanger observed that the consideration per share of PPY, PPY2
and PPY3 Common Stock offered in the Mergers in the form of shares of PSI Common
Stock will reflect values established in public securities trading markets
equivalent to the cash offer per share of PPY, PPY2 and PPY3 Common Stock. Such
value will be based on the average closing prices on the NYSE of PSI Common
Stock during the 20 consecutive trading days ending on the fifth trading day
prior to the respective special meeting of shareholders.
Distribution/FFO Analysis. Stanger reviewed distributions per share and FFO
per share for PPY, PPY2 and PPY3 Shareholders on an equivalent per share basis.
Stanger noted that based on a closing price of $21 3/4 for PSI Common Stock and
the resulting exchange ratio of PPY, PPY2 and PPY3 Common Stock for PSI Common
Stock and based on operating results for PSI, regular quarterly distributions
per share would decrease by approximately $.08 (29%) for PPY Shareholders
receiving PSI Common Stock, would decrease by approximately $.07 (26%) for PPY2
Shareholders receiving PSI Common Stock and would decrease by approximately $.13
(39%) for PPY3 Shareholders receiving PSI Common Stock.
Stanger observed that, at the closing price of $21 3/4 for PSI Common Stock
and based on operating results for PSI, FFO per share on a quarterly basis on an
equivalent per share basis earned by PPY Shareholders would decrease by less
than $.01 (.1%), earned by PPY2 Shareholders would increase by less than $.01
(1.6%) and earned by PPY3 Shareholders would decrease by approximately $.04
(7.2%). Stanger observed that the approximately 7% FFO decrease for PPY3
Shareholders reflects in part the higher effective capitalization rate ascribed
in the Appraisals to the Leasehold Properties which expire in the years 2010 and
2011 and the corresponding reduction in future cash flow due to the loss of such
properties.
CONCLUSIONS. Based on the foregoing, Stanger concluded that, based upon its
analysis and assumptions, and as of the date of the fairness opinions, the
consideration to be received in each of the Mergers is fair to the public PPY,
PPY2 and PPY3 Shareholders, from a financial point of view.
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ASSUMPTIONS. In evaluating each of the Mergers, Stanger relied upon and
assumed, without independent verification, the accuracy and completeness of all
financial and other information contained in the Combined 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 PSI,
PPY, PPY2 and PPY3 and relied upon and assumed the accuracy of the Appraisals.
Stanger also relied on the assurances of PSI, PPY, PPY2 and PPY3 that any pro
forma financial statements, projections, budgets, or value estimates contained
in the Combined Proxy Statement and Prospectus or otherwise provided to Stanger,
were reasonably prepared on bases consistent with actual historical experience
and reflect 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 Appraisals or the date of
the other information provided and the date of the opinions; and that PSI, PPY,
PPY2 and PPY3 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 opinions, 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
Appendices C-1, C-2 and C-3. Stanger does not intend to deliver any additional
written summary of the analysis.
COMPENSATION AND MATERIAL RELATIONSHIPS. For preparing the fairness opinions
and related services in connection with the Mergers, Stanger is being paid a fee
of $180,000. In addition, Stanger will be reimbursed for certain out-of-pocket
expenses, including legal fees, up to a maximum of $27,000 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 any of the Mergers. During
the past two years (1994 to present), Stanger has rendered consulting and
related services and provided products to PSI and to PSMI and its affiliates,
including fairness opinions to the public shareholders of eight REITs in
connection with their mergers with PSI and an analysis used in a 1992 exchange
offer involving PSI and three partnerships affiliated with PSMI, and may be
engaged in the future. Stanger has received compensation aggregating
approximately $420,000 in connection with these services and products since 1994
(exclusive of amounts received in connection with the Mergers).
LIMITATIONS AND QUALIFICATIONS. Stanger was not requested to, and therefore
did not: (i) select the method of determining the consideration offered in the
Mergers; (ii) make any recommendation to the PPY, PPY2 or PPY3 Shareholders with
respect to whether to approve or reject the Mergers or whether to select the
cash or Common Stock option in the Mergers; or (iii) express any opinion as to
the business decision to effect the Mergers, alternatives to the Mergers or tax
factors resulting from the Mergers, the PSMI Merger or relating to PSI's
continued qualification as a REIT. Stanger's opinions are based on business,
economic, real estate and securities markets, and other conditions as of the
date of its analysis. Events occurring after that date may materially affect
the assumptions used in preparing the opinions.
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of eight other REITs with PSI, 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
Mergers to PPY, PPY2 and PPY3 Shareholders, and PPY, PPY2 and PPY3 have neither
requested nor received any views, preliminary or otherwise, from any party other
than Stanger regarding the fairness of the Mergers to the PPY, PPY2 and PPY3
Shareholders.
THE MERGER AGREEMENT
If the Mergers are approved by the shareholders of PPY, PPY2 and PPY3 and the
other applicable conditions to the Mergers are satisfied or waived, the Mergers
will be consummated pursuant to the Merger Agreement which is set forth in
Appendix A hereto, and is incorporated by reference into, this Combined Proxy
Statement and Prospectus. As a result of the Mergers, all of the assets now
held by PPY, PPY2 and PPY3 will be held by PSI upon completion of the Mergers.
The Merger Agreement contains representations and warranties of PSI, PPY, PPY2
and PPY3 and certain other provisions relating to the Mergers. The
representations and warranties are extinguished by, and do not survive, the
Mergers. THE PPY MERGER, THE PPY2 MERGER AND THE PPY3 MERGER ARE NOT
CONDITIONED ON EACH OTHER.
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CONDITIONS TO CONSUMMATION OF THE MERGERS. Consummation of each Merger is
contingent upon standard conditions, including the following: (i) the
Registration Statement shall have been declared effective by the Commission and
PSI shall have received all other authorizations necessary to issue PSI Common
Stock in exchange for PPY, PPY2 and PPY3 Common Stock and to consummate the
Mergers; (ii) with respect to the PPY Merger, the Merger Agreement and the PPY
Merger shall have been approved and adopted by the requisite vote of the
shareholders of PPY; (iii) with respect to the PPY2 Merger, the Merger Agreement
and the PPY2 Merger shall have been approved and adopted by the requisite vote
of the shareholders of PPY2; (iv) with respect to the PPY3 Merger, the Merger
Agreement and the PPY3 Merger shall have been approved and adopted by the
requisite vote of the shareholders of PPY3; (v) receipt by PPY, PPY2 and PPY3,
respectively, of a legal opinion of Hogan & Hartson L.L.P. that the respective
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"); (vi) the shares of PSI Common Stock issued to PPY, PPY2 and PPY3
Shareholders shall be listed on the NYSE; (vii) the Boards of Directors of PPY,
PPY2 and PPY3, respectively, shall have received a fairness opinion from Stanger
(which opinions have been received); (viii) in the case of PSI, the average of
the per share closing prices on the NYSE of the PSI Common Stock during the 20
consecutive trading days ending on the fifth trading day prior to the special
meetings of shareholders of PPY, PPY2 and PPY3 is not less than $20; and (ix)
demands for payment by holders of Dissenting PPY, PPY2 and PPY3 Shares are filed
with respect to less than 5% of the outstanding shares of Common Stock of the
respective corporation. The obligation of PSI to effect each Merger is also
subject to PSI, in its sole discretion, being satisfied as to title to, and the
results of an environmental audit of, each property of PPY, PPY2 and PPY3,
respectively. Any of these conditions (other than the conditions of approval by
the shareholders of PPY, PPY2 and PPY3) may be waived by the board of directors
of the corporation benefiting from such condition.
AMENDMENT OR TERMINATION. The Merger Agreement provides for amendment or
modification thereof with respect to each Merger by written agreement authorized
by the boards of directors of PSI and PPY, PPY2 and PPY3, respectively, 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 Mergers or the Merger Agreement. Each 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 has not occurred on or
before June 30, 1997.
CONSUMMATION. It is contemplated that the Mergers will be consummated by
filing the Agreements of Merger (attached as Exhibits A-1, A-2 and A-3 to the
Merger Agreement) with the California Secretary of State as soon as practicable
after its approval by the shareholders of PPY, PPY2 and PPY3 and the
satisfaction or waiver of various conditions contained in the Merger Agreement.
It is currently contemplated that the Mergers will be consummated during the
fourth quarter of 1996. If the conditions to the merger of only one of the
corporations into PSI are satisfied, only that corporation will be merged with
PSI.
EXCHANGE OF CERTIFICATES. After the Mergers, holders of certificates that
evidenced outstanding shares of PPY, PPY2 and PPY3 Common Stock that were
converted into shares of PSI 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 PSI Common Stock
into which the shares of PPY, PPY2 and PPY3 Common Stock shall have been
converted and cash payment in lieu of fractional share interests, if applicable.
As soon as practicable after the Mergers, the Exchange Agent will send a notice
and a transmittal form to each holder of record whose PPY, PPY2 and PPY3 Common
Stock shall have been converted into shares of PSI Common Stock, advising of the
effectiveness of the Mergers and the procedure for surrendering to the Exchange
Agent certificates evidencing PPY, PPY2 or PPY3 Common Stock in exchange for
certificates evidencing PSI Common Stock. HOLDERS OF PPY, PPY2 AND PPY3 COMMON
STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGERS 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 MERGERS.
Until surrendered, each outstanding certificate which represents shares of
PPY, PPY2 or PPY3 Common Stock that were converted into shares of PSI Common
Stock will be deemed for all corporate purposes to evidence ownership of the
number of whole shares of PSI Common Stock into which the PPY, PPY2 and PPY3
Common Stock evidenced
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thereby were converted. However, until the certificates formerly evidencing
PPY, PPY2 and PPY3 Common Stock are surrendered, no dividend payable to holders
of record of the PSI 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 PSI Common Stock as of any record date on or subsequent to the
effectiveness of the Mergers. After the Mergers, there will be no further
registration of transfers of PPY, PPY2 and PPY3 Common Stock on the records of
PPY, PPY2 and PPY3 and, if certificates formerly evidencing such shares are
presented, they will be cancelled and exchanged for certificates evidencing PSI
Common Stock.
FRACTIONAL SHARES. No fractional shares of PSI Common Stock will be issued
in the Mergers. In lieu of any fractional share interests, each holder of PPY,
PPY2 and PPY3 Common Stock who would otherwise be entitled to a fractional share
of PSI Common Stock will, upon surrender of the certificate representing such
common stock, receive a whole share of PSI 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 PSI Common Stock
such holder is entitled to receive in the respective 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 PSI Common Stock at the time of effectiveness of the respective Merger by
(ii) the fractional interest.
RESTRICTIONS ON OTHER ACQUISITIONS. PPY, PPY2 and PPY3 have 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 them, or any purchase of all or any significant
portion of their assets, or any equity interest in them, 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 each of
the boards of directors of PPY, PPY2 and PPY3 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 PPY, PPY2 or PPY3 Shareholders, respectively, under applicable law as advised
by counsel. PPY, PPY2 and PPY3 have agreed to notify PSI 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
them, and to keep PSI informed of the status and terms of any such proposals and
any such negotiations or discussions.
DISTRIBUTIONS. Pending the Mergers, PPY, PPY2 and PPY3 are precluded from
declaring or paying any dividend on their capital stock or making any other
distribution to their shareholders other than (i) regular dividends at a
quarterly rate not in excess of $.27 per share in the case of PPY, $.28 per
share in the case of PPY2 and $.34 per share in the case of PPY3, (ii)
distributions to shareholders of record of PPY, PPY2 and PPY3 immediately prior
to the effectiveness of the Mergers equal to the amount by which the respective
corporation's estimated net asset value allocable to the respective shareholders
as of the date of the respective Merger exceeds $19.00 per share in the case of
the PPY Common Stock, $11.66 per share in the case of the PPY Common Stock
Series B, C and D, $20.39 per share in the case of the PPY2 Common Stock, $12.26
per share in the case of the PPY2 Common Stock Series B, C and D, $20.47 per
share in the case of the PPY3 Common Stock and $12.30 per share in the case of
the PPY3 Common Stock Series B, C and D, and (iii) Required REIT Distributions.
See "-- Determination of Payments to be Received by PPY, PPY2 and PPY3
Shareholders in Connection with the Mergers."
CASH ELECTION PROCEDURE
PPY. Each holder of record of PPY Common Stock may make a Cash Election to
have its shares of PPY Common Stock converted into the right to receive cash in
the PPY Merger. If the aggregate number of shares of PPY Common Stock as to
which Cash Elections are made, together with Dissenting PPY Shares (see
"Dissenting Shareholders' Rights of Appraisal"), is 20% or less than the number
of shares of PPY Common Stock outstanding as of the record date for the meeting
of shareholders of PPY, all such shares as to which Cash Elections are made
shall be converted into the right to receive cash in the PPY Merger. If the
aggregate number of such shares (together with any Dissenting PPY Shares) is
more than 20%, such shares shall be converted into the right to receive cash in
the PPY
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Merger on a pro rata basis, and the balance of such shares shall be converted
into PSI Common Stock. For a discussion of the federal income tax consequences
to PPY Shareholders receiving both cash and PSI Common Stock in connection with
the PPY Merger, see "Certain Federal Income Tax Matters -- The Mergers -- PPY,
PPY2 and PPY3 Shareholders Receiving Cash and PSI Common Stock."
PPY2. Each holder of record of PPY2 Common Stock may make a Cash Election to
have its shares of PPY2 Common Stock converted into the right to receive cash in
the PPY2 Merger. If the aggregate number of shares of PPY2 Common Stock as to
which Cash Elections are made, together with Dissenting PPY2 Shares (see
"Dissenting Shareholders' Rights of Appraisal"), is 20% or less than the number
of shares of PPY2 Common Stock outstanding as of the record date for the meeting
of shareholders of PPY2, all such shares as to which Cash Elections are made
shall be converted into the right to receive cash in the PPY2 Merger. If the
aggregate number of such shares (together with any Dissenting PPY2 Shares) is
more than 20%, such shares shall be converted into the right to receive cash in
the PPY2 Merger on a pro rata basis, and the balance of such shares shall be
converted into PSI Common Stock. For a discussion of the federal income tax
consequences to PPY2 Shareholders receiving both cash and PSI Common Stock in
connection with the PPY2 Merger, see "Certain Federal Income Tax Matters -- The
Mergers -- PPY, PPY2 and PPY3 Shareholders Receiving Cash and PSI Common Stock."
PPY3. Each holder of record of PPY3 Common Stock may make a Cash Election to
have its shares of PPY3 Common Stock converted into the right to receive cash in
the PPY3 Merger. If the aggregate number of shares of PPY3 Common Stock as to
which Cash Elections are made, together with Dissenting PPY3 Shares (see
"Dissenting Shareholders' Rights of Appraisal"), is 20% or less than the number
of shares of PPY3 Common Stock outstanding as of the record date for the meeting
of shareholders of PPY3, all such shares as to which Cash Elections are made
shall be converted into the right to receive cash in the PPY3 Merger. If the
aggregate number of such shares (together with any Dissenting PPY3 Shares) is
more than 20%, such shares shall be converted into the right to receive cash in
the PPY3 Merger on a pro rata basis, and the balance of such shares shall be
converted into PSI Common Stock. For a discussion of the federal income tax
consequences to PPY3 Shareholders receiving both cash and PSI Common Stock in
connection with the PPY3 Merger, see "Certain Federal Income Tax Matters -- The
Mergers -- PPY, PPY2 and PPY3 Shareholders Receiving Cash and PSI Common Stock."
All Cash Elections are to be made on a cash election form (a "Cash Election
Form"). A Cash Election Form is being sent to PPY, PPY2 and PPY3 Shareholders
of record on October 21, 1996. To be effective, a Cash Election Form must be
properly completed and signed and must be received by American Stock Transfer &
Trust Company (the "Depositary") accompanied by all stock certificates
representing shares of PPY, PPY2 or PPY3 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 December 16, 1996. Holders of record of shares of
PPY, PPY2 and PPY3 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 PPY, PPY2 or PPY3 Common Stock held by
such Representative for a particular beneficial owner. Any Cash Election Form
may be revoked by written notice received by the Depositary prior to 5:00 p.m.,
New York City time, on December 16, 1996. In addition, all Cash Election Forms
will automatically be revoked if the Depositary is notified in writing that the
Mergers have been abandoned. If a Cash Election Form is properly revoked, the
certificate or certificates (or any guarantee of delivery) in respect of the
PPY, PPY2 or PPY3 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 PPY, PPY2 AND PPY3 COMMON STOCK WHO WISH TO SUBMIT CASH
ELECTION FORMS SHOULD DELIVER THEIR STOCK CERTIFICATES WITH SUCH CASH ELECTION
FORMS OR PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY.
A HOLDER OF PPY, PPY2 OR PPY3 COMMON STOCK MAY NOT MAKE A CASH ELECTION AS TO
LESS THAN ALL OF THE SHARES OF PPY, PPY2 OR PPY3 COMMON STOCK OWNED BY SUCH
SHAREHOLDER. ANY HOLDER OF PPY, PPY2 OR PPY3 COMMON STOCK WHO DOES NOT SUBMIT A
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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 DECEMBER 16, 1996 WILL RECEIVE PSI COMMON STOCK IN THE
MERGERS. IF PSI 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 HOLDER OF PPY, PPY2 OR PPY3 COMMON STOCK MAKING SUCH
PURPORTED CASH ELECTION WILL, FOR PURPOSES HEREOF, RECEIVE PSI COMMON STOCK IN
THE MERGERS. NONE OF PSI, PPY, PPY2, PPY3 OR 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 PSI Common Stock are different.
See "Certain Federal Income Tax Matters -- The Mergers."
CONSEQUENCES TO PPY, PPY2 AND PPY3 IF THE MERGERS ARE NOT COMPLETED
If any Merger is not completed with respect to PPY, PPY2 or PPY3, such
corporation will remain as a separate legal entity and will continue to operate
its properties.
COSTS OF THE MERGERS
It is estimated that the total consideration (cash and PSI Common Stock) to
be paid by PSI to purchase all of the PPY, PPY2 and PPY3 Common Stock and PPY,
PPY2 and PPY3 Common Stock Series B, C and D (other than shares held by PSI) in
the Mergers and to pay related costs and expenses would be $138,956,000 (less
the amount of any Required REIT Distributions) and that the total amount of
funds that would be required by PSI to purchase the PPY, PPY2 and PPY3 Common
Stock from PPY, PPY2 and PPY3 Shareholders making Cash Elections and to pay the
cost and expenses of the Mergers would be $33,363,000 (assuming maximum Cash
Elections and no Required REIT Distributions). These amounts will be paid from
PSI's working capital or 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 $125,000,000 and bear interest at LIBOR plus
.75% to 1.25%. PSI intends to repay amounts borrowed under these facilities
from the public or private placement of securities or from PSI's undistributed
cash flow.
If the Mergers are not completed, all costs incurred in connection with the
Mergers will be paid by the party incurring such costs, except that PSI will pay
one-half of the cost of any expenses incurred in connection with the printing of
this Combined Proxy Statement and Prospectus and related registration statement,
the Appraisals, environmental and structural audits and preparation for real
estate closings and filing fees and PPY, PPY2 and PPY3 will pay the other one-
half of such costs. PPY's, PPY2's and PPY3's share of such costs would be paid
from their working capital. If the Mergers are completed, all costs incurred by
PSI, PPY, PPY2 and PPY3 in connection with the Mergers will be paid by PSI.
62
<PAGE>
The following is a statement of certain fees and expenses estimated to be
incurred in connection with the Mergers (exclusive of amounts paid as a result
of Cash Elections).
<TABLE>
<S> <C>
Preclosing Transaction Costs
Printing and Mailing $ 645,000
Proxy Solicitation 50,000
Legal 50,000
Real Estate Appraisals and Fairness Opinions 365,000
Registration, Listing and Filing Fees 235,000
Accounting 30,000
Other 55,000
----------
Subtotal 1,430,000
Closing Transaction Costs
Transfer Fees 1,405,000
Legal 130,000
Title endorsements and escrow 840,000
Other 20,000
----------
Subtotal 2,395,000*
----------
TOTAL $3,825,000
==========
</TABLE>
- ---------------
* Would not be incurred if Mergers are not approved.
ACCOUNTING TREATMENT
Each of the Mergers will be treated as a purchase. Accordingly, the assets
and liabilities of PPY, PPY2 and PPY3 will be accounted for at fair market value
based upon independent appraisals and estimates in PSI's financial statements
for periods after the Mergers.
REGULATORY REQUIREMENTS
The Mergers are subject to compliance with federal and state securities law
requirements.
63
<PAGE>
COMPARISON OF PPY, PPY2 AND PPY3 COMMON STOCK WITH PSI COMMON STOCK
The information below compares certain attributes of the PPY, PPY2 and PPY3
Common Stock with the PSI Common Stock. The effect of the Mergers on PPY, PPY2
and PPY3 Shareholders who receive PSI Common Stock in the Mergers is set forth
in italics below each caption.
PPY, PPY2 AND PPY3 PSI
INVESTMENT OBJECTIVES AND POLICIES
<TABLE>
<S> <C>
The principal investment objectives The investment objectives of PSI are
are to provide (i) quarterly cash to maximize FFO allocable to holders
distributions from its operations of PSI Common Stock and to increase
and (ii) long-term capital gains shareholder value through internal
through appreciation in the value of growth and acquisitions. FFO is a
properties. supplemental performance measure for
equity REITs used by industry
Under the organizational documents of analysts. FFO does not take into
PPY, PPY2 and PPY3, they are not consideration principal payments on
permitted to raise new capital or to debt, capital improvements,
reinvest operating cash flow or sale distributions and other obligations
or financing proceeds. PPY, PPY2 of PSI. Accordingly, FFO is not a
and PPY3 will terminate on December substitute for PSI's net cash
31, 2038, unless earlier dissolved. provided by operating activities or
The predecessors of PPY, PPY2 and net income as a measure of PSI's
PPY3 anticipated selling or liquidity or operating performance.
financing their properties within An increase in PSI's FFO will not
seven to 10 years after acquisition necessarily correspond with an
(i.e., between 1996 and 1999 in the increase in distributions to holders
case of PPY and between 1997 and of PSI Common Stock. See "--
2000 in the case of PPY2 and PPY3). Liquidity, Marketability and
Distributions."
PSI 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 PSI Common Stock (including PSI
Common Stock issued in the Mergers)
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 PSI from
satisfying the REIT distribution
requirements. Therefore, PSI
Shareholders should expect to be able
to liquidate their investment only by
selling their shares in the market,
and the market value of the PSI
Common Stock may not necessarily
equal or exceed the market value of
PSI's assets or the net proceeds
which might be available for
distribution upon liquidation if PSI
were to liquidate. PSI has grown,
and intends to continue to grow, as
new investments are made.
</TABLE>
PPY, PPY2 and PPY3 Shareholders who receive PSI Common Stock in the
Mergers 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 PSI Common Stock. The interest of PSI Shareholders can be diluted
through the issuance of additional securities, including securities that would
have priority over PSI Common Stock as to cash flow, distributions and
liquidation proceeds. PSI has an effective registration statement for
preferred stock, common stock and warrants and intends to issue additional
securities under this registration statement. 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."
PSI has no plans with respect to a sale or financing of any of the
properties of PPY, PPY2 and PPY3. PSI intends to continue to acquire
properties from other parties.
64
<PAGE>
PPY, PPY2 AND PPY3 PSI
BORROWING POLICIES
<TABLE>
<S> <C>
PPY, PPY2 and PPY3 are permitted to Subject to certain limitations in
borrow in connection with the PSI's Bylaws, PSI has broad powers to
acquisition of properties. They are borrow in furtherance of its
fully invested and would distribute investment objectives. PSI has
the proceeds from a financing of incurred in the past, and may incur
properties. PPY, PPY2 and PPY3 do in the future, both short-term and
not incur borrowings in the long-term debt to increase its funds
acquisition of properties. available for investment in real
estate, capital expenditures and
distributions. As of June 30, 1996,
PSI's ratio of "Debt" (liabilities
other than "accrued and other
liabilities" and "minority interest"
that should, in accordance with GAAP,
be reflected on PSI's balance sheet)
to "Assets" (PSI's total assets that
should, in accordance with GAAP, be
reflected on PSI's balance sheet) was
approximately 6%.
</TABLE>
PSI, unlike PPY, PPY2 and PPY3, incurs debt in the acquisition of
properties and reinvests proceeds from borrowings. The incurrence of debt
increases the risk of loss of investment.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<S> <C>
The bylaws of PPY, PPY2 and PPY3 PSI's Bylaws restrict PSI from
restrict them from entering into a acquiring properties from its
variety of business transactions affiliates or from selling properties
with affiliates. The bylaws may be to them unless the transaction (i) is
amended by a majority vote of approved by a majority of PSI's
shareholders. See "Amendment to independent directors and (ii) is
Bylaws of PPY, PPY2 and PPY3." fair to PSI based on an independent
appraisal.
</TABLE>
It is easier for PSI to enter into transactions with its affiliates than
in the case of PPY, PPY2 or PPY3 because shareholder approval is not required.
PROPERTIES (As of June 30, 1996)
<TABLE>
<S> <C>
PPY - PPY owns 19 wholly-owned PSI owns equity interests (directly,
properties in 10 states. For the as well as through general and
year ended December 31, 1995, the limited partnership interests and
weighted average occupancy level and capital stock interests) in 1,068
realized monthly rent per square properties in 37 states, including
foot of PPY's mini-warehouses were 325 wholly owned properties. See
89% and $.71, respectively. See "Description of PSI Properties."
"Description of PPY's Properties."
PPY2 - PPY2 owns 24 wholly-owned
properties in 10 states. For the
year ended December 31, 1995, the
weighted average occupancy level and
realized monthly rent per square
foot of PPY2's mini-warehouses were
91% and $.70, respectively. See
"Description of PPY2's Property."
</TABLE>
65
<PAGE>
PPY, PPY2 AND PPY3 PSI
<TABLE>
<S> <C>
PPY3 - PPY3 owns nine properties
(eight wholly-owned) in seven
states. For the year ended December
31, 1995, the weighted average
occupancy level and realized monthly
rent per square foot of PPY3's
mini-warehouses were 93% and $.71,
respectively. See "Description of
PPY3's Property."
</TABLE>
Because PSI owns substantially more property interests in more states
than PPY, PPY2 or PPY3, PSI's results of operations are less affected by the
profitability or lack of profitability of a single property than are those of
PPY, PPY2 or PPY3 and it would be more difficult to liquidate PSI than PPY,
PPY2 or PPY3 within a reasonable period of time.
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<TABLE>
<S> <C>
The PPY, PPY2 and PPY3 Common Stock PSI Common Stock is traded on the
is traded on the AMEX. During the NYSE. During the 12 months ended
12 months ended June 30, 1996, the June 30, 1996, the average daily
average daily trading volume of PPY trading volume of PSI Common Stock
Common Stock, PPY2 Common Stock and was 52,138 shares. PSI has issued,
PPY3 Common Stock was 2,626, 2,261 and may in the future issue,
and 722 shares, respectively. PPY, securities that have priority over
PPY2 and PPY3 have not issued any PSI Common Stock as to cash flow,
securities that have priority over distributions and liquidation
their Common Stock. proceeds.
</TABLE>
Distributions may be declared by the boards of directors of PSI, PPY,
PPY2 and PPY3 out of any funds legally available for that purpose. As REITs,
they 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, they can take into account subsequent year
distributions for purposes of satisfying this requirement. PSI 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 PPY, PPY2 or PPY3 Shareholder who receives PSI Common Stock in the
Mergers should have an investment for which the market is broader and more
active than the market for PPY, PPY2 or PPY3 Common Stock. Distributions of
PSI 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 PSI Common Stock,"
"Distributions and Price Range of PPY Common Stock," "Distributions and Price
Range of PPY2 Common Stock" and "Distributions and Price Range of PPY3 Common
Stock" for information on trading prices of the PSI, PPY, PPY2 and PPY3 Common
Stock.
TAXATION
Each of PSI, PPY, PPY2 and PPY3 was organized to qualify for taxation as
a REIT and intends 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
PSI, PPY, PPY2 and PPY3 Shareholders generally constitute portfolio income,
which cannot offset "passive" income and loss from other investments.
66
<PAGE>
PPY, PPY2 AND PPY3 PSI
VOTING RIGHTS
PSI, PPY, PPY2 and PPY3 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.
MANAGEMENT AND DUTIES
<TABLE>
<S> <C>
PPY, PPY2 and PPY3 are managed by PSI is managed by its board of
their boards of directors and directors and executive officers. A
executive officers. Two of the majority of the directors of PSI are
directors are independent directors independent directors.
and the third director is Hughes.
</TABLE>
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 PSI, PPY, PPY2 and PPY3 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 PSI, PPY, PPY2 and
PPY3 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. PSI, PPY, PPY2
and PPY3 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, PSI, PPY, PPY2 and PPY3 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
<TABLE>
<S> <C>
For PPY, PPY2 and PPY3 to be taxed as For PSI to be taxed as a REIT, PSI
REITs, their common stock must be Common Stock must be widely held. To
widely held. To aid PPY, PPY2 and aid PSI in meeting this requirement,
PPY3 in meeting this requirement, PSI's articles of incorporation
their boards of directors are given contain significant restrictions on
the power to restrict the transfer the ownership of PSI Common Stock.
of shares of their common stock if PSI is authorized to issue
the transfer could produce a 200,000,000 shares of PSI Common
violation of this requirement. PPY, Stock, of which approximately
PPY2 and PPY3 cannot issue 84,400,000 shares are currently
additional common and preferred outstanding, and 50,000,000 shares of
stock without shareholder approval. preferred stock, of which
approximately 13,400,000 shares are
currently outstanding. Subject to
the rules of the NYSE and applicable
provisions of California law, PSI can
issue authorized common and preferred
stock without shareholder approval.
See "Description of PSI Capital Stock
-- Effects of Issuance of Capital
Stock,"
</TABLE>
67
<PAGE>
PPY, PPY2 AND PPY3 PSI
<TABLE>
<S> <C>
"-- Ownership Limitations" and
"Certain Federal Income Tax Matters
-- General Tax Treatment of PSI."
</TABLE>
Given the ownership level of PSI Common Stock by the Hughes Family and
PSI's greater flexibility to issue capital stock, including senior securities
with special voting rights and priority over common stock, PSI should be in a
better position to deter attempts to obtain control in transactions not
approved by its board of directors than PPY, PPY2 or PPY3, and shareholders of
PSI could be less likely to benefit from a takeover not approved by PSI's
board of directors than would shareholders of PPY, PPY2 or PPY3 in a similar
circumstance.
LIMITED LIABILITY OF INVESTORS
Under California law, shareholders are not generally liable for corporate
debts or obligations. The PSI, PPY, PPY2 and PPY3 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.
AMENDMENT TO BYLAWS OF PPY, PPY2 AND PPY3
A provision of the bylaws of PPY, PPY2 and PPY3 prohibits the sale of
property to affiliates. Because this would arguably apply to the Mergers, PPY,
PPY2 and PPY3 are proposing amendments to their bylaws that expressly authorize
a merger with PSI provided any such merger is approved by the majority of
outstanding shares of their common stock. The proposed amendments have been
approved by the Boards of Directors of PPY, PPY2 and PPY3 who recommend that
PPY, PPY2 and PPY3 Shareholders vote FOR the proposals. Appendices E-1, E-2 and
E-3 contain complete texts of the proposed amendments.
68
<PAGE>
APPROVAL OF THE MERGERS AND BYLAW AMENDMENTS
GENERAL
This Combined Proxy Statement and Prospectus and the enclosed proxy are
first being mailed on or about October ___, 1996 to the shareholders of PPY,
PPY2 and PPY3 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 PPY Merger, the PPY2 Merger and the PPY3 Merger,
respectively, and the respective 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 with respect to a
particular Merger or Bylaw amendment, unspecified shares held by PPY
Shareholders will be voted in favor of the PPY Merger and the PPY Bylaw
amendment, unspecified shares held by PPY2 Shareholders will be voted in favor
of the PPY2 Merger and the PPY2 Bylaw amendment, and unspecified shares held by
PPY3 Shareholders will be voted in favor of the PPY3 Merger and the PPY3 Bylaw
amendment. A proxy is revocable by delivering a subsequently signed and dated
proxy or other written notice to the Secretary of PPY, PPY2 or PPY3, 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.
PPY
Holders of record at the close of business on October 21, 1996 of the PPY
Common Stock will be entitled to receive notice of and to vote at the meeting.
On such date, there were outstanding 3,077,028 shares of PPY Common Stock and
831,485 shares of PPY Common Stock Series B, C and D, and each share is entitled
to one vote on the PPY Merger and the PPY Bylaw amendment. Presence, in person
or by proxy, of a majority of the shares of PPY Common Stock and of PPY Common
Stock Series B, C and D, counted together as a single class, constitutes a
quorum. As of the record date, PSI and Hughes beneficially owned 438,503 shares
of PPY Common Stock and 831,485 shares of PPY Common Stock Series B, C and D
(approximately 32.5% of the total combined outstanding shares of PPY Common
Stock and PPY Common Stock Series B, C and D) and the directors and executive
officers of PPY, excluding Hughes, beneficially owned an additional 5,600 shares
of PPY Common Stock (approximately 0.1% of the total combined outstanding shares
of PPY Common Stock and PPY Common Stock Series B, C and D).
The affirmative vote of a majority of the shares of PPY Common Stock and of
PPY Common Stock Series B, C and D outstanding and entitled to vote on the
record date, counted together as a single class, is required under California
law to approve the PPY Merger and the PPY Bylaw amendment. Accordingly, for
these purposes, an abstention or a broker non-vote will have the same effect as
a vote against the PPY Merger and the PPY Bylaw amendment. The shares of PPY
Common Stock Series B, C and D will be voted with the majority of shares of PPY
Common Stock held by unaffiliated owners.
PPY2
Holders of record at the close of business on October 21, 1996 of the PPY2
Common Stock will be entitled to receive notice of and to vote at the meeting.
On such date, there were outstanding 3,130,103 shares of PPY2 Common Stock and
831,485 shares of PPY2 Common Stock Series B, C and D, and each share is
entitled to one vote on the PPY2 Merger and the PPY2 Bylaw amendment. Presence,
in person or by proxy, of a majority of the shares of PPY2 Common Stock and of
PPY2 Common Stock Series B, C and D, counted together as a single class,
constitutes a quorum. As of the record date, PSI and Hughes beneficially owned
441,503 shares of PPY2 Common Stock and 831,485 shares of PPY Common Stock
Series B, C and D (approximately 32.1% of the total combined outstanding shares
of PPY2 Common Stock and PPY2 Common Stock Series B, C and D) and the directors
and executive officers of PPY2, excluding Hughes, beneficially owned an
additional 11,300 shares of PPY2 Common Stock (approximately 0.3% of the total
combined outstanding shares of PPY2 Common Stock and PPY2 Common Stock Series B,
C and D).
The affirmative vote of a majority of the shares of PPY2 Common Stock and
of PPY2 Common Stock Series B, C and D outstanding and entitled to vote on the
record date, counted together as a single class, is required
69
<PAGE>
under California law to approve the PPY2 Merger and the PPY2 Bylaw amendment.
Accordingly, for these purposes, an abstention or a broker non-vote will have
the same effect as a vote against the PPY2 Merger and the PPY2 Bylaw amendment.
The shares of PPY2 Common Stock Series B, C and D will be voted with a majority
of shares of PPY2 Common Stock held by unaffiliated owners.
PPY3
Holders of record at the close of business on October 21, 1996 of the PPY3
Common Stock will be entitled to receive notice of and to vote at the meeting.
On such date, there were outstanding 1,313,384 shares of PPY3 Common Stock and
333,304 shares of PPY3 Common Stock Series B, C and D, and each share is
entitled to one vote on the PPY3 Merger and the PPY3 Bylaw amendment. Presence,
in person or by proxy, of a majority of the shares of PPY3 Common Stock and of
PPY3 Common Stock Series B, C and D, counted together as a single class,
constitutes a quorum. As of the record date, PSI and Hughes beneficially owned
85,584 shares of PPY3 Common Stock and 333,304 shares of PPY3 Common Stock
Series B, C and D (approximately 25.4% of the total combined outstanding shares
of PPY3 Common Stock and PPY3 Common Stock Series B, C and D) and the directors
and executive officers of PPY3, excluding Hughes, beneficially owned an
additional 4,600 shares of PPY3 Common Stock (approximately 0.3% of the total
combined outstanding shares of PPY3 Common Stock and PPY3 Common Stock Series B,
C and D).
The affirmative vote of a majority of the shares of PPY3 Common Stock and
of PPY3 Common Stock Series B, C and D outstanding and entitled to vote on the
record date, counted together as a single class, is required under California
law to approve the PPY3 Merger and the PPY3 Bylaw amendment. Accordingly, for
these purposes, an abstention or a broker non-vote will have the same effect as
a vote against the PPY3 Merger and the PPY3 Bylaw amendment. The shares of PPY3
Common Stock Series B, C and D will be voted with the majority of shares of PPY3
Common Stock held by unaffiliated owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PPY. The following table sets forth information as of October 21, 1996
with respect to the person known to PPY to be the beneficial owner of more than
5% of the outstanding shares of PPY Common Stock and PPY Common Stock Series B,
C and D:
<TABLE>
<CAPTION>
Shares of PPY Common Stock and
PPY Common Stock Series B, C and D
Beneficially Owned(1)
----------------------------------
Number
Name and Address of Shares(2)(3) Percent
---------------- --------------- -------
<S> <C> <C>
PSI A: 438,503(4) A: 14.3%
701 Western Avenue, 2nd Floor B: 420,875(4) B: 100.0%
Glendale, California 91201-2397 C: 247,574(4) C: 100.0%
D: 163,036(4) D: 100.0%
--------- -----
1,269,988(4)(5) 32.5%
</TABLE>
_______________
(Footnotes are set forth following the next table).
70
<PAGE>
The following table sets forth information as of October 21, 1996
concerning the beneficial ownership of PPY Common Stock and PPY Common Stock
Series B, C and D of each director of PPY (including Hughes, the chief executive
officer) and of all directors and executive officers of PPY as a group:
<TABLE>
<CAPTION>
Shares of PPY Common Stock and
PPY Common Stock Series B, C and D
Beneficially Owned(1)
-------------------------------------
Number
Name of Shares(2)(3) Percent
---- ---------------- -------
<S> <C> <C>
B. Wayne Hughes A: -- A: --
B: 84,175.0(6) B: 20.0%
C: 49,515.0(6) C: 20.0%
D: 32,607.2(6) D: 20.0%
--------- ----
166,297.2(6)(5) 4.3%
Vern O. Curtis A: 500.0 (7)
Jack D. Steele A: 1,100.0(8) (7)
All Directors and Executive Officers as A: 5,600.0(6)(8)(9) A: 0.2%
a Group (eight persons) B: 84,175.0(6) B: 20.0%
C: 49,515.0(6) C: 20.0%
D: 32,607.2(6) D: 20.0%
--------- ----
171,897.2(5)(6)(8)(9) 4.4%
</TABLE>
- ---------------
(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) Capital letters "A", "B", "C" and "D" denote share information with respect
to PPY Common Stock and PPY Common Stock Series B, C and D, respectively.
(3) PPY's Articles of Incorporation provide that the PPY Common Stock Series B
and C will convert automatically into PPY Common Stock on a share-for-share
basis when (A) PPY Investor Distributions (as defined below) equal (B) PPY
Remaining Investors' Capital (as defined below). The term "PPY Investor
Distributions" means the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the PPY Common Stock
distributed to the PPY Partnership's limited partners (including
distributions funded by the corporate general partner and liquidating
distributions, but not including payments made to redeem such stock other
than in liquidation or distributions with respect to the PPY Common Stock
issued to the general partners) and (2) the cumulative PPY Partnership
distributions from all sources (including distributions funded by the
corporate general partner) with respect to the limited partners'
partnership units (not including the general partners' 1% interest); the
term "PPY Remaining Investors' Capital" means the product of (1) $20
multiplied by (2) the number of the then-outstanding "PPY Limited Partners'
Original Series A Shares"; and the term "PPY Limited Partners' Original
Series A Shares" means the 3,750,000 shares of PPY Common Stock issued in
the PPY Reorganization to the limited partners (i.e., not including the 1%
of the PPY Common Stock issued to the general partners).
(4) Includes (i) 438,503 shares of PPY Common Stock Series A, 336,700 shares of
PPY Common Stock Series B, 198,059 shares of PPY Common Stock Series C and
130,428.8 shares of PPY Common Stock Series D owned by PSI as to which PSI
has sole voting and dispositive power and (ii) 84,175 shares of PPY Common
Stock Series B, 49,515 shares of PPY Common Stock Series C and 32,607.2
shares of PPY Common Stock Series D which PSI has an option to acquire
(together with other securities) from B. Wayne Hughes as trustee of the
71
<PAGE>
B.W. Hughes Living Trust and as to which PSI has sole voting power
(pursuant to an irrevocable proxy) and no dispositive power.
(5) Includes PPY Common Stock and PPY Common Stock Series B, C and D.
(6) Includes 84,175 shares of PPY Common Stock Series B, 49,515 shares of PPY
Common Stock Series C and 32,607.2 shares of PPY Common Stock Series D
owned by B. Wayne Hughes as trustee of the B.W. Hughes Living Trust as to
which Mr. Hughes has sole dispositive power and no voting power; PSI has an
option to acquire these shares and an irrevocable proxy to vote these
shares (see footnote (4) above).
(7) Less than 0.1%.
(8) Shares held by a bank custodian of a SEP for the benefit of Mr. Steele.
(9) Includes shares held of record or beneficially by members of the immediate
family of officers of PPY and shares held by custodians of individual
retirement accounts for the benefit of officers of PPY (or members of their
immediate families).
PPY2. The following table sets forth information as of October 21, 1996
with respect to the person known to PPY2 to be the beneficial owner of more than
5% of the outstanding shares of PPY2 Common Stock and PPY2 Common Stock Series
B, C and D:
<TABLE>
<CAPTION>
Shares of PPY2 Common Stock and
PPY2 Common Stock Series B, C and D
Beneficially Owned(1)
------------------------------------
Number
Name and Address of Shares(2)(3) Percent
---------------- --------------- -------
<S> <C> <C>
PSI A: 441,503(4) A: 14.1%
701 Western Avenue, 2nd Floor B: 420,875(4) B: 100.0%
Glendale, California 91201-2397 C: 247,574(4) C: 100.0%
D: 163,036(4) D: 100.0%
--------- -----
1,272,988(4)(5) 32.1%
</TABLE>
_______________
(Footnotes are set forth following the next table).
72
<PAGE>
The following table sets forth information as of October 21, 1996
concerning the beneficial ownership of PPY2 Common Stock and PPY2 Common Stock
Series B, C and D of each director of PPY2 (including Hughes, the chief
executive officer) and of all directors and executive officers of PPY2 as a
group:
<TABLE>
<CAPTION>
Shares of PPY2 Common Stock and
PPY2 Common Stock Series B, C, and D
Beneficially Owned(1)
--------------------------------------
Number
Name of Shares(2)(3) Percent
- ---- --------------- -----------
<S> <C> <C>
B. Wayne Hughes A: -- A: --
B: 84,175.0(6) B: 20.0%
C: 49,515.0(6) C: 20.0%
D: 32,607.2(6) D: 20.0%
--------- ----
166,297.2(6)(5) 4.2%
Vern O. Curtis A: 500.0 (7)
Jack D. Steele A: 1,500.0(8) (7)
All Directors and Executive Officers as A: 11,300.0(6)(8)(9) A: 0.4%
a Group (eight persons) B: 84,175.0(6) B: 20.0%
C: 49,515.0(6) C: 20.0%
D: 32,607.2(6) D: 20.0%
--------- ----
177,597.2(5)(6)(8)(9) 4.5%
</TABLE>
- ---------------
(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) Capital letters "A", "B", "C" and "D" denote share information with respect
to PPY2 Common Stock and PPY2 Common Stock Series B, C and D, respectively.
(3) PPY2's Articles of Incorporation provide that the PPY2 Common Stock Series
B and C will convert automatically into PPY2 Common Stock on a share-for-
share basis when (A) PPY2 Investor Distributions (as defined below) equal
(B) PPY2 Remaining Investors' Capital (as defined below). The term "PPY2
Investor Distributions" means the sum of (1) all cumulative dividends and
other distributions from all sources paid with respect to the PPY2 Common
Stock distributed to the PPY2 Partnership's limited partners (including
distributions funded by the corporate general partner and liquidating
distributions, but not including payments made to redeem such stock other
than in liquidation or distributions with respect to the PPY2 Common Stock
issued to the general partners) and (2) the cumulative PPY2 Partnership
distributions from all sources (including distributions funded by the
corporate general partner) with respect to the limited partners'
partnership units (not including the general partners' 1% interest); the
term "PPY2 Remaining Investors' Capital" means the product of (1) $20
multiplied by (2) the number of the then-outstanding "PPY2 Limited
Partners' Original Series A Shares"; and the term "PPY2 Limited Partners'
Original Series A Shares" means the 3,750,000 shares of PPY2 Common Stock
issued in the PPY2 Reorganization to the limited partners (i.e., not
including the 1% of the PPY2 Common Stock issued to the general partners).
(4) Includes (i) 441,503 shares of PPY2 Common Stock Series A, 336,700 shares
of PPY2 Common Stock Series B, 198,059 shares of PPY2 Common Stock Series C
and 130,428.8 shares of PPY2 Common Stock Series D owned by PSI as to which
PSI has sole voting and dispositive power and (ii) 84,175 shares of PPY2
Common Stock Series B, 49,515 shares of PPY2 Common Stock Series C and
32,607.2 shares of PPY2 Common Stock Series D which PSI has an option to
acquire (together with other securities) from B. Wayne
73
<PAGE>
Hughes as trustee of the B.W. Hughes Living Trust and as to which PSI has
sole voting power (pursuant to an irrevocable proxy) and no dispositive
power.
(5) Includes PPY2 Common Stock and PPY2 Common Stock Series B, C and D.
(6) Includes 84,175 shares of PPY2 Common Stock Series B, 49,515 shares of PPY2
Common Stock Series C and 32,607.2 shares of PPY2 Common Stock Series D
owned by B. Wayne Hughes as trustee of the B.W. Hughes Living Trust as to
which Mr. Hughes has sole dispositive power and no voting power; PSI has an
option to acquire these shares and an irrevocable proxy to vote these
shares (see footnote (4) above).
(7) Less than 0.1%.
(8) Includes 500 shares of PPY2 Common Stock held by a bank custodian of an SEP
for the benefit of Mr. Steele and 1,000 shares of PPY2 Common Stock held by
a bank custodian of an individual retirement account for the benefit of Mr.
Steele's wife.
(9) Includes shares held of record or beneficially by members of the immediate
family of officers of PPY2 and shares held by custodians of individual
retirement accounts for the benefit of officers of PPY2 (or members of
their immediate families).
PPY3. The following table sets forth information as of October 21, 1996
with respect to the person known to PPY3 to be the beneficial owner of more than
5% of the outstanding shares of PPY3 Common Stock and PPY3 Common Stock Series
B, C and D:
<TABLE>
<CAPTION>
Shares of PPY3 Common Stock and
PPY3 Common Stock Series B, C and D
Beneficially Owned(1)
-----------------------------------
Number
Name and Address of Shares(2)(3) Percent
---------------- --------------- --------
<S> <C> <C>
PSI A: 85,584(4) A: 6.5%
701 Western Avenue, 2nd Floor B: 168,709(4) B: 100.0%
Glendale, California 91201-2397 C: 99,241(4) C: 100.0%
D: 65,354(4) D: 100.0%
------- -----
418,888(4)(5) 25.4%
</TABLE>
_______________
(Footnotes are set forth following the next table).
74
<PAGE>
The following table sets forth information as of October 21, 1996
concerning the beneficial ownership of PPY3 Common Stock and PPY3 Common Stock
Series B, C and D of each director of PPY3 (including Hughes, the chief
executive officer) and of all directors and executive officers of PPY3 as a
group:
<TABLE>
<CAPTION>
Shares of PPY3 Common Stock and
PPY3 Common Stock Series B, C and D
Beneficially Owned(1)
------------------------------------
Number
Name of Shares(2)(3) Percent
- ---- --------------- -----------
<S> <C> <C>
B. Wayne Hughes A: 3,037.0(6) A: 0.2%
B: 33,742.0(6) B: 20.0%
C: 19,848.0(6) C: 20.0%
D: 13,070.8(6) D: 20.0%
-------- ----
69,697.8(6)(5) 4.2%
Vern O. Curtis A: 500.0 (7)
Jack D. Steele A: 1,100.0(8) (7)
All Directors and Executive Officers as A: 7,637.0(6)(8)(9) A: 0.6%
a Group (eight persons) B: 33,742.0(6) B: 20.0%
C: 19,848.0(6) C: 20.0%
D: 13,070.8(6) D: 20.0%
-------- ----
74,297.8(5)(6)(8)(9) 4.5%
</TABLE>
- ---------------
(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) Capital letters "A", "B", "C" and "D" denote share information with respect
to PPY3 Common Stock and PPY3 Common Stock Series B, C and D, respectively.
(3) PPY3's Articles of Incorporation provide that the PPY3 Common Stock Series
B and C will convert automatically into PPY3 Common Stock on a share-for-
share basis when (A) PPY3 Investor Distributions (as defined below) equal
(B) PPY3 Remaining Investors' Capital (as defined below). The term "PPY3
Investor Distributions" means the sum of (1) all cumulative dividends and
other distributions from all sources paid with respect to the PPY3 Common
Stock distributed to the PPY3 Partnership's limited partners (including
distributions funded by the corporate general partner and liquidating
distributions, but not including payments made to redeem such stock other
than in liquidation or distributions with respect to the PPY3 Common Stock
issued to the general partners) and (2) the cumulative PPY3 Partnership
distributions from all sources (including distributions funded by the
corporate general partner) with respect to the limited partners'
partnership units (not including the general partners' 1% interest); the
term "PPY3 Remaining Investors' Capital" means the product of (1) $20
multiplied by (2) the number of the then-outstanding "PPY3 Limited
Partners' Original Series A Shares"; and the term "PPY3 Limited Partners'
Original Series A Shares" means the 1,503,200 shares of PPY3 Common Stock
issued in the PPY3 Reorganization to the limited partners (i.e., not
including the 1% of the PPY3 Common Stock issued to the general partners).
(4) Includes (i) 82,547 shares of PPY3 Common Stock Series A, 134,967 shares of
PPY3 Common Stock Series B, 79,393 shares of PPY3 Common Stock Series C and
52,283.2 shares of PPY3 Common Stock Series D owned by PSI as to which PSI
has sole voting and dispositive power and (ii) 3,037 shares of PPY3 Common
Stock Series A, 33,742 shares of PPY3 Common Stock Series B, 19,848 shares
of PPY3 Common Stock Series C and 13,070.8 shares of PPY3 Common Stock
Series D which PSI has an option to acquire (together with other
75
<PAGE>
securities) from B. Wayne Hughes as trustee of the B.W. Hughes Living Trust
and as to which PSI has sole voting power (pursuant to an irrevocable
proxy) and no dispositive power.
(5) Includes PPY3 Common Stock and PPY3 Common Stock Series B, C and D.
(6) Includes 3,037 shares of PPY3 Common Stock Series A, 33,742 shares of PPY3
Common Stock Series B, 19,848 shares of PPY3 Common Stock Series C and
13,070.8 shares of PPY3 Common Stock Series D owned by B. Wayne Hughes as
trustee of the B.W. Hughes Living Trust as to which Mr. Hughes has sole
dispositive power and no voting power; PSI has an option to acquire these
shares and an irrevocable proxy to vote these shares (see footnote (4)
above).
(7) Less than 0.1%.
(8) Shares held by a bank custodian of a SEP for the benefit of Mr. Steele.
(9) Includes shares held of record or beneficially by members of the immediate
family of officers of PPY3 and shares held by custodians of individual
retirement accounts for the benefit of officers of PPY3 (or members of
their immediate families).
PSI. The following table sets forth information with respect to persons
known to PSI to be the beneficial owners of more than 5% of the outstanding
shares of PSI Common Stock:
<TABLE>
<CAPTION>
Shares of PSI Common Stock
Beneficially Owned
---------------------------
Number
Name and Address of Shares Percent
- --------------------------------------------------- ---------- --------
<S> <C> <C>
B. Wayne Hughes, B. Wayne Hughes, Jr.
Parker Hughes Trust No. 2, Tamara L. Hughes,
PS Orangeco, Inc. ("PSOI") 37,451,173 44.4%
701 Western Avenue, Suite 200
Glendale, California 91201-2397
PS Insurance Company, Ltd. ("PSIC")
41 Cedar Avenue
Hamilton, Bermuda(1)
FMR Corp. 5,468,355 6.5%
82 Devonshire Street
Boston, Massachusetts 02109(2)
Cohen & Steers Capital Management, Inc. 4,651,200 5.5%
757 Third Avenue
New York, New York 10017(3)
</TABLE>
_______________
(1) This information is as of September 30, 1996. The reporting persons listed
above (the "PSI Reporting Persons") have filed a joint Schedule 13D,
amended as of September 16, 1996. The number of shares of PSI Common Stock
beneficially owned by the PSI Reporting Persons at September 30, 1996
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
PSI Reporting Persons. The common stock of PSOI (representing approximately
5% of the equity) is owned one-third each by B. Wayne Hughes, Tamara L.
Hughes (an adult daughter of B. Wayne Hughes) and B. Wayne Hughes, Jr. (an
adult son of B. Wayne Hughes), and the non-voting preferred stock of PSOI
(representing approximately 95% of the equity) is owned by PSI. The stock
of PSIC is owned approximately 45% by B. Wayne Hughes, 47% by Tamara L.
Hughes and 8% by B. Wayne Hughes, Jr. Tamara L. Hughes is the trustee of
Parker Hughes Trust No. 2, an irrevocable trust for the benefit of a minor
son of B. Wayne Hughes. Each of the PSI Reporting Persons disclaims the
existence of a group within the
76
<PAGE>
meaning of Section 13(d)(3) of the Exchange Act. B. Wayne Hughes, Tamara L.
Hughes and B. Wayne Hughes, Jr. share voting and dispositive power with
respect to the 30,777 shares owned by PSOI, and B. Wayne Hughes and Tamara
L. Hughes share voting and dispositive power with respect to the 301,032
shares owned by PSIC. 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 17,615,323 shares (exclusive of the shares owned
by PSOI and PSIC) or approximately 20.9% of the shares of PSI Common Stock
outstanding (or deemed to be outstanding) as of September 30, 1996). Each
of the other PSI Reporting Persons disclaims beneficial ownership of the
shares owned by any other PSI Reporting Person.
The above table does not include 7,000,000 shares of PSI's Class B Common
Stock which are owned by Tamara L. Hughes and B. Wayne Hughes, Jr. The PSI
Class B Common Stock is convertible into PSI Common Stock on a share-for-
share basis upon satisfaction of certain conditions, but in no event
earlier than January 1, 2003.
(2) This information is as of December 31, 1995 and is based on a Schedule 13G
filed by FMR Corp. (except that the percent shown in the table is based on
the shares of PSI Common Stock outstanding at September 30, 1996). As of
December 31, 1995, FMR Corp. beneficially owned 5,468,355 shares of PSI
Common Stock. This number includes 5,136,100 shares beneficially owned by
Fidelity Management & Research Company, as a result of its serving as
investment adviser to several investment companies registered under Section
8 of the Investment Company Act of 1940, and 332,255 shares beneficially
owned by Fidelity Management Trust Company, as a result of its serving as
investment manager of various institutional accounts. FMR Corp. has sole
voting power with respect to 332,255 shares and sole dispositive power with
respect to 5,468,355 shares.
(3) This information is as of September 30, 1996 and was provided by Cohen &
Steers Capital Management, Inc. As of September 30, 1996, Cohen & Steers
Capital Management, Inc. beneficially owned 4,651,200 shares of PSI Common
Stock. Cohen & Steers Capital Management, Inc. has sole voting power with
respect to 4,109,300 shares and sole dispositive power with respect to
4,651,200 shares.
The following table sets forth information as of September 30, 1996
concerning the beneficial ownership of PSI Common Stock of each director of PSI
(including Hughes, the chief executive officer) and of all directors and
executive officers of PSI as a group:
77
<PAGE>
<TABLE>
<CAPTION>
Shares of PSI Common Stock:
Beneficially Owned(1)
Shares Subject to Options(2)
Shares Issuable Upon Conversion
of Convertible Preferred Stock(3)
---------------------------------
Name Positions Number of Shares Percent
---- --------- ---------------- -------
<S> <C> <C> <C>
B. Wayne Hughes Chairman of the Board and
Chief Executive Officer 19,835,850(1)(4) 23.5%
Harvey Lenkin President and Director 586,800(1)(5) 0.7%
15,000(2) *
4,040(3) *
---------- ----
605,840 0.7%
Robert J. Abernethy Director 70,591(1) *
17,499(2) *
---------- ----
88,090 0.1%
Dann V. Angeloff Director 80,886(1)(6) *
2,499(2) *
---------- ----
83,385 *
William C. Baker Director 10,000(1) *
22,499(2) *
---------- ----
32,499 *
Uri P. Harkham Director 499,417(1)(7) 0.6%
2,499(2) *
Director ---------- ----
501,916 0.6%
All Directors and Executive Officers
as a Group (14 persons) 21,489,423(1)(4)(5)
(6)(7)(8) 25.5%
260,162(2) 0.3%
16,664(3) *
---------- ----
21,766,249 25.7%
</TABLE>
_______________
* Less than 0.1%
(1) Shares of PSI Common Stock beneficially owned as of September 30, 1996.
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 September 30, 1996, and portion of which
will be vested within 60 days of September 30, 1996, of shares of PSI
Common Stock subject to options granted to the named individuals or the
group pursuant to PSI's 1990 Stock Option Plan and 1994 Stock Option Plan.
(3) Represents shares of PSI Common Stock which can be acquired upon conversion
of the shares of 8.25% Convertible Preferred Stock which are beneficially
owned as of September 30, 1996 by the named individuals or the group.
78
<PAGE>
(4) Includes 19,463,221 shares held of record by the B.W. Hughes Living Trust
as to which Mr. Hughes has voting and investment power, 1,428 and 1,423
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 33,143 shares held by
Mrs. Hughes as custodian FBO Parker Hughes Trust dated 3/7/91. Also
includes 30,777 shares held of record by PSOI as to which Mr. Hughes,
Tamara L. Hughes and B. Wayne Hughes, Jr. share voting and dispositive
power and 301,032 shares held of record by PSIC as to which Mr. Hughes and
Tamara L. Hughes share voting and dispositive power.
(5) Includes 1,172 and 734 shares, respectively, held by custodians of IRAs for
Mr. Lenkin and Mrs. Lenkin as to which each has investment power, 300
shares held by Mrs. Lenkin, 500 shares and 150 shares, respectively, held
by Mrs. Lenkin as custodian for two sons and 100 shares held by a custodian
of an IRA 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 5,615 shares held by a custodian of an IRA for Mr. Angeloff, 2,327
shares held by Mr. Angeloff as trustee of Angeloff's Children's Trust and
70,944 shares held by Mr. Angeloff as trustee of Angeloff Family Trust.
(7) Includes 76,400 shares held by Mr. Harkham as trustee of Jonathan Martin
Profit Sharing Plan, 371,179 shares held by Harkham Industries, Inc. (dba
Jonathan Martin, Inc.), a corporation wholly owned by Mr. Harkham, 10,463
shares held by Mr. Harkham as trustee of Uri Harkham Trust, 13,172 shares
held by Jonathan Martin, Inc. Employee Profit Sharing Plan, 650 and 690
shares, respectively, held by custodians of IRAs for Mr. Harkham and Mrs.
Harkham as to which each has investment power, and 1,950, 1,975, 2,050,
1,950 and 2,050 shares, respectively, held by Mr. Harkham as custodian for
five of his children.
(8) Includes shares held of record or beneficially by members of the immediate
family of executive officers of PSI and shares held by custodians of IRAs
for the benefit of executive officers of PSI.
The following tables set forth information as of September 30, 1996
concerning the remaining security ownership of each director of PSI (including
Hughes, the chief executive officer) and of all directors and executive officers
of PSI as a group:
<TABLE>
<CAPTION>
Shares of 8.25% Convertible Shares of 10% Cumulative
Preferred Stock Preferred Stock, Series A
Beneficially Owned(1) Beneficially Owned(1)
-------------------------------- ------------------------------
Number Number
Name of Shares Percent of Shares Percent
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
B. Wayne Hughes -- -- -- --
Harvey Lenkin 2,400(1)(2) 0.1% -- --
Robert J. Abernethy -- -- -- --
Dann V. Angeloff -- -- -- --
William C. Baker -- -- -- --
Uri P. Harkham -- -- -- --
All Directors and Executive Officers
as a Group (14 persons) 9,900(1)(2)(3) 0.4% 2,760(1)(3) 0.2%
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Shares of 9.20% Cumulative Shares of Adjustable Rate
Preferred Stock, Cumulative Preferred Stock,
Series B Series C
Beneficially Owned(1) Beneficially Owned(1)
-------------------------- ---------------------------
Number Number
Name of Shares Percent of Shares Percent
---- --------- ------- --------- -------
<S> <C> <C> <C> <C>
B. Wayne Hughes -- -- -- --
Harvey Lenkin -- -- 29,300(1)(4) 2.4%
Robert J. Abernethy -- -- -- --
Dann V. Angeloff -- -- -- --
William C. Baker -- -- -- --
Uri P. Harkham -- -- -- --
All Directors and Executive Officers
as a Group (14 persons) 4,000(1)(3) 0.2% 29,900(1)(3)(4) 2.5%
</TABLE>
- ---------------
(1) Shares of PSI 8.25% Convertible Preferred Stock, 10% Cumulative Preferred
Stock, Series A, 9.20% Cumulative Preferred Stock, Series B, or Adjustable
Rate Cumulative Preferred Stock, Series C, as applicable, beneficially
owned as of September 30, 1996. Except as otherwise indicated and subject
to applicable community property and similar statutes, the persons listed
as beneficial owners of the shares have sole voting and investment power
with respect to such shares.
(2) Includes 100 shares held by Mrs. Lenkin and 300 shares held by Mrs. Lenkin
as custodian for a son.
(3) Includes shares held of record or beneficially by members of the immediate
family of executive officers of PSI and shares held by custodians of IRAs
for the benefit of executive officers of PSI.
(4) 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.
As of September 30, 1996, the directors and executive officers of PSI did
not own any shares of PSI's 9.50% Cumulative Preferred Stock, Series D, 10%
Cumulative Preferred Stock, Series E, 9.75% Cumulative Preferred Stock, Series
F, Depositary Shares, each representing 1/1,000 of a Share of 8/7//8% Cumulative
Preferred Stock, Series G, Depositary Shares, each representing 1/1,000 of a
Share of 8.45% Cumulative Preferred Stock, Series H, Convertible Preferred
Stock, Series CC or Class B Common Stock (the Class B Common Stock is owned by
Tamara L. Hughes and B. Wayne Hughes, Jr.).
SOLICITATION OF PROXIES
Each of PPY, PPY2 and PPY3 will pay its respective cost of soliciting
proxies. In addition to solicitation by mail, certain directors, officers and
regular employees of PPY, PPY2 and PPY3 and their affiliates may solicit the
return of proxies by telephone, telegraph, personal interview or otherwise.
PPY, PPY2 and PPY3 may also reimburse brokerage firms and other persons
representing the beneficial owners of PPY, PPY2 and PPY3 Common Stock for
reasonable expenses in forwarding proxy solicitation materials to such
beneficial owners. Shareholder Communications Corporation may be retained to
assist PPY, PPY2 and PPY3 in solicitation of proxies at an estimated aggregate
cost of $50,000.
80
<PAGE>
DESCRIPTION OF PPY'S PROPERTIES
PPY owns a total of 19 mini-warehouses. The following table contains
information as of December 31, 1995 about PPY's properties. Pursuant to the
Mergers, these properties would be acquired by PSI.
<TABLE>
<CAPTION>
Net
Size of Number Rentable
Parcel of Square Acquisition
Location (Acres) Spaces Feet Date
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA
Carmichael, Fair Oaks Blvd. 3.50 725 76,000 January 1988
Napa, Industrial Way 2.40 448 36,000 January 1988
West Hollywood, Santa Monica Blvd. 1.70 1,269 103,000 May 1988
COLORADO
Englewood, E. Costilla Ave. 5.50 631 98,000 December 1987
Wheatridge, W. 44th Ave. 4.80 604 97,000 May 1988
FLORIDA
Fort Lauderdale, State Road 7 6.40 903 87,000 February 1988
Tampa, N. 15th Street 4.50 674 54,000 August 1989
Winter Springs, W. State Route 434 1.70 592 60,000 January 1989
GEORGIA
Lilburn, Beaver Ruin Road 3.20 426 51,000 February 1988
ILLINOIS
Broadview, S. 25th Ave. 5.90 921 103,000 July 1988
MICHIGAN
Warren, Schoenherr Road 4.00 407 55,000 May 1988
NEVADA
Las Vegas, Arville Street 2.00 600 62,000 March 1988
Las Vegas, Charleston Blvd. 2.10 596 61,000 March 1988
OREGON
Portland, Interstate 84 (71st St.) 1.80 524 49,000 June 1988
Portland, Southeast 105th Ave. 2.40 459 46,000 January 1988
PENNSYLVANIA
Philadelphia, Byberry Road 5.60 607 78,000 January 1988
Plymouth, Chemical Road 4.70 445 48,000 January 1988
Upper Darby, Lansdowne Ave. 2.00 527 49,000 January 1988
WASHINGTON
Seattle, 154th and Highway 99 3.70 441 41,000 July 1988
</TABLE>
As of the date of this Combined Proxy Statement and Prospectus, each of
these properties is generating sufficient revenues to cover its operating
expenses.
81
<PAGE>
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. PPY believes each
property is adequately covered by insurance.
As reflected in the table below, PPY has experienced overall improved
property operations:
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 90% 91% 89% 89% 89%
Realized monthly rent per occupied
square foot (1) $.67 $.70 $.71 $.70 $.73
</TABLE>
- ---------------
(1) Realized monthly rent per occupied square foot represents the actual
revenue earned per occupied square foot. PPY 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.
Additional information is set forth below with respect to the West
Hollywood/Santa Monica Boulevard property, because it is the only property with
a book value of at least 10% of PPY's total assets or that has accounted for
more than 10% of PPY's gross revenues.
WEST HOLLYWOOD/SANTA MONICA BOULEVARD. This mini-warehouse is located in
West Hollywood, California at the intersection of Santa Monica Boulevard and
Mansfield Avenue. Santa Monica Boulevard connects downtown Los Angeles with
many westside communities including Beverly Hills and Santa Monica. The
property's market area is dense and the number of competitors is relatively low.
No tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- -----------
<S> <C> <C>
December 31, 1995 92% $14.64
December 31, 1994 92 13.56
December 31, 1993 81 13.20
December 31, 1992 83 13.68
December 31, 1991 80 16.20
</TABLE>
82
<PAGE>
DESCRIPTION OF PPY2'S PROPERTIES
The following table sets forth information as of December 31, 1995 about
PPY2's properties. Pursuant to the Mergers, these properties would be acquired
by PSI.
<TABLE>
<CAPTION>
Net
Size of Number Rentable
Parcel of Square Acquisition
Location (Acres) Spaces Feet Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA
Eagle Rock, Colorado Blvd. .3 506 24,000 November 1988
Pittsburg, California 2.0 420 40,000 October 1988
Whittier, California 1.2 457 50,000 August 1988
COLORADO
Denver, E. Evans Road. 4.2 656 84,000 November 1988
Federal Heights, W. 84th 3.7 367 55,000 July 1988
FLORIDA
Ft. Lauderdale, Powerline Rd. 2.9 499 62,000 January 1989
Green Acres, Jog Rd. 1.8 943 29,000 March 1990
Mangonia Park, Australian 4.3 549 55,000 August 1988
Pompano Beach, Sample Rd. 4.2 1,219 54,000 January 1989
Pompano Beach, S. Dixie Hwy. 4.2 948 51,000 July 1988
W. Palm Beach, Belevedere Rd. 4.2 999 40,000 September 1989
GEORGIA
Decatur, Covington Hwy. 4.0 543 60,000 August 1988
Forest Park, Jonesboro Rd. 2.7 401 51,000 August 1988
ILLINOIS
Alsip, 115th St. 6.0 792 70,000 January 1989
KANSAS
Overland Park, Mastin 4.2 501 70,000 June 1988
Topeka, 8th Str. 2.8 289 44,000 September 1988
PENNSYLVANIA
Philadelphia, Oxford Ave. 2.8 1,101 90,000 December 1988
Wyndmoor, Ivy Hill Rd. 5.0 812 88,000 December 1988
TENNESSEE
Nashville, Dickerson Pike 3.8 481 53,000 May 1988
Nashville, Gallatin Pike 3.5 482 54,000 May 1988
TEXAS
Dallas, Lemmon Ave. 2.6 744 76,000 October 1988
WASHINGTON
Auburn, R Street 2.5 452 81,000 July 1988
Kent, Old 99 Pacific Hwy. 4.3 669 63,000 September 1988
Renton, 174th St. 2.88 541 54,000 July 1989
</TABLE>
83
<PAGE>
As of the date of this Combined Proxy Statement and Prospectus, each of
these properties is generating sufficient revenues to cover its operating
expenses.
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. PPY2 believes each
property is adequately covered by insurance.
As reflected in the table below, PPY2 has experienced overall improved
property operations:
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 86% 88% 91% 90% 91%
Realized monthly rent per occupied
square foot (1) $.66 $.69 $.70 $.69 $.72
</TABLE>
- ---------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. PPY2 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.
No single property of PPY2 has a book value of more than 10% of its total
assets or has accounted for more than 10% of its aggregate gross revenues.
84
<PAGE>
DESCRIPTION OF PPY3'S PROPERTIES
The following table sets forth information as of December 31, 1995 about
PPY3's properties. Pursuant to the Mergers, these properties would be acquired
by PSI.
<TABLE>
<CAPTION>
Net
Size of Number Rentable
Parcel of Square Acquisition
Location (Acres) Spaces Feet Date
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIZONA
Phoenix, 19th Ave 3.9 778 82,000 June 1989
CALIFORNIA
Sacramento, Northgate 3.2 595 65,000 March 1989
CONNECTICUT
Southington, Spring St. 4.0 476 65,000 January 1990
FLORIDA
Lakeworth, Lakeworth Rd. 4.2 941 64,000 September 1989
ILLINOIS
Arlington Heights, Algonquin Rd. 4.4 871 73,000 January 1990
Bedford Park, Cicero. 7.2 1,015 108,000 May 1989
NEW JERSEY
Clifton, Broad Str. (1) 3.4 800 68,000 May 1990
Hillside, Glenwood Ave. (2) 4.4 840 74,000 September 1990
WASHINGTON
Seattle, 15th Ave. 1.9 430 43,000 November 1989
</TABLE>
_______________
(1) The land on which the property is located is leased by PPY3 under a ground
lease. The lease expires in 2010 after extensions.
(2) PPY3 owns an undivided 37.5% interest in the property. The remaining 62.5%
interest is owned by PSI. The land on which the property is located is
leased under a ground lease. The lease expires in 2011 after extensions.
As of the date of this Combined Proxy Statement and Prospectus, each of
these properties is generating sufficient revenues to cover its operating
expenses.
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. PPY3 believes each
property is adequately covered by insurance.
85
<PAGE>
The table below sets forth information on overall property operations:
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 92% 94% 93% 93% 93%
Realized monthly rent per occupied
square foot (1) $.70 $.67 $.71 $.70 $.74
</TABLE>
- ---------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. PPY3 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.
Additional information is set forth below with respect to the following
properties because they are the only properties with a book value of at least
10% of PPY3's total assets or that have accounted for more than 10% of PPY3's
aggregate gross revenues.
PHOENIX/19TH AVENUE. This mini-warehouse is located in Phoenix, Arizona,
approximately ten miles north of Phoenix's central business district. The
property is situated on North 19th Avenue. No tenant occupies more than 10% of
the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- -----------
<S> <C> <C>
December 31, 1995 93% $6.48
December 31, 1994 96 6.00
December 31, 1993 94 5.40
December 31, 1992 91 5.16
December 31, 1991 85 4.68
</TABLE>
SACRAMENTO/NORTHGATE. This mini-warehouse is located in Sacramento,
California, about three miles north of the Sacramento central business district.
The property is visible and accessible from Northgate Boulevard. No tenant
occupies more than 10% of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- ------------
<S> <C> <C>
December 31, 1995 89% $8.56
December 31, 1994 88 7.80
December 31, 1993 93 7.56
December 31, 1992 90 7.80
December 31, 1991 88 6.72
</TABLE>
86
<PAGE>
SOUTHINGTON/SPRING STREET. This mini-warehouse is located in Southington,
Connecticut, approximately 15 miles southwest of the Hartford central business
district. The property has frontage on Queen Street, which forms an interchange
with Interstate 84. No tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- -----------
<S> <C> <C>
December 31, 1995 92% $6.70
December 31, 1994 94 5.88
December 31, 1993 90 5.64
December 31, 1992 80 5.76
December 31, 1991 75 5.04
</TABLE>
LAKEWORTH/LAKEWORTH ROAD. The mini-warehouse is located in Lakeworth,
Florida, approximately ten miles south of downtown West Palm Beach. The
property is situated on Engle Road, on two separate parcels directly across the
street from each other, near the intersection of Engle Road and Lakeworth Road.
This intersection, which is one mile west of Interstate 95, provides access to
the property. No tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- ------------
<S> <C> <C>
December 31, 1995 91% $9.89
December 31, 1994 88 8.64
December 31, 1993 91 8.28
December 31, 1992 92 8.52
December 31, 1991 87 8.38
</TABLE>
ARLINGTON HEIGHTS/ALGONQUIN ROAD. This mini-warehouse is located in
Arlington Heights, Illinois, approximately 20 miles northwest of downtown
Chicago and is visible and accessible from Algonquin Road. No tenant occupies
10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- -----------
<S> <C> <C>
December 31, 1995 94% $8.75
December 31, 1994 92 8.04
December 31, 1993 94 7.68
December 31, 1992 92 6.96
December 31, 1991 78 7.08
</TABLE>
87
<PAGE>
BEDFORD PARK/SOUTH CICERO AVENUE. This mini-warehouse is located in
Bedford Park, Illinois, approximately seven miles southwest of downtown Chicago.
The property has substantial frontage and is visible and accessible from South
Cicero Avenue. No tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- -----------
<S> <C> <C>
December 31, 1995 97% $8.14
December 31, 1994 93 7.20
December 31, 1993 95 6.72
December 31, 1992 71 6.36
December 31, 1991 53 7.68
</TABLE>
CLIFTON/BROAD STREET. The property is located in Clifton, New Jersey,
approximately 12 miles northwest of midtown Manhattan. The property has
approximately 765 feet of frontage on the Garden State Parkway. The property is
visible from the Garden State Parkway, Route 46 and Broad Street. No tenant
occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rates and the rent per
square foot for the facility at the dates indicated:
<TABLE>
<CAPTION>
Annual
Scheduled
Occupancy Rent Per
Date Rate Square Foot
---- --------- ------------
<S> <C> <C>
December 31, 1995 98% $14.44
December 31, 1994 96 13.56
December 31, 1993 99 13.20
December 31, 1992 94 12.12
December 31, 1991 92 12.12
</TABLE>
88
<PAGE>
DESCRIPTION OF PSI'S PROPERTIES
At December 31, 1995, PSI had equity interests (through direct ownership,
as well as general and limited partnership interests and stock ownership
interests) in 1,050 facilities (273 of which were wholly-owned) located in 37
states. These facilities consist of 1,016 mini-warehouses and 34 business
parks. None of PSI's current investments involves 10% or more of PSI's total
assets or gross revenues. In the opinion of management of PSI, the facilities
in which PSI has invested are adequately insured.
The following table reflects the geographic diversification of PSI's mini-
warehouses ("Mini") and business parks ("BP"):
<TABLE>
<CAPTION>
At December 31, 1995
------------------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
------------------------ ---------------------------
Mini(1) BP Mini(1) BP
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
California:
Southern 146 16 9,419 1,434
Northern 129 4 7,211 291
Texas 109 5 7,092 670
Florida 81 -- 4,491 --
Illinois 62 -- 3,899 --
Colorado 36 -- 2,275 --
Washington 36 1 2,228 28
Georgia 33 -- 1,727 --
New Jersey 32 -- 1,846 --
Maryland 31 -- 1,772 --
Virginia 28 3 1,921 213
New York 27 -- 1,584 --
Ohio 27 -- 1,651 --
Oregon 25 1 1,232 40
Nevada 22 -- 1,410 --
Pennsylvania 18 -- 1,227 --
Other states (22 states) 174 4 9,734 406
------ -- ------- -----
Totals 1,016 34 60,719 3,082
====== == ======= =====
</TABLE>
(1) Includes properties that combine mini-warehouse and
business park space.
As reflected in the table below, PSI has experienced overall
improved property operations:
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
------------------------ ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level (1) 87% 89% 90% 89% 91%
Realized monthly rent per occupied
square foot (1)(2) $.64 $.68 $.70 $.69 $.72
</TABLE>
- ---------------
(1) Mini-warehouses owned throughout the periods.
(2) Realized monthly rent per occupied square foot represents the actual
revenue earned per occupied square foot. PSI 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.
89
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PSI COMMON STOCK
The PSI Common Stock has been listed on the NYSE since October 19, 1984.
The following table sets forth the distributions paid per share on the PSI
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>
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
Second quarter 17 1/8 15 1/4 .22
Third quarter 18 3/4 16 3/8 .22
Fourth quarter 19 3/4 17 3/8 .22
1996:
First quarter 21 7/8 18 7/8 .22
Second quarter 21 1/2 19 3/8 .22
Third quarter 22 5/8 19 7/8 .22
Fourth quarter --
(through October __)
</TABLE>
_______________
(1) For GAAP purposes, all distributions were from investment income.
As of October 8, 1996, there were approximately 17,078 record holders of
PSI Common Stock. On August 14, 1996, the last full trading day prior to the
first public announcement of the proposed Mergers, the closing price of the
Common Stock of PSI was $21/3//4. On _______________, 1996, the last full
trading day prior to the date of this Combined Proxy Statement and Prospectus,
the closing price was $_____.
Holders of PSI 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. PSI, as a REIT, is required to distribute annually at least 95%
of its "REIT taxable income," which, as defined by the relevant tax statutes and
regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PSI 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 PSI."
PSI's revolving credit facility with a commercial bank restricts PSI'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 PSI's preferred stock have been paid
for all past dividend periods, no dividends may be paid on PSI Common Stock,
except in certain instances.
90
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PPY COMMON STOCK
The PPY Common Stock has been listed on the AMEX since November 1991. The
following table sets forth the distributions paid per share on PPY 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>
1994:
First quarter $14 1/8 $12 1/8 $.24
Second quarter 13 3/4 11 1/2 .24
Third quarter 14 1/4 12 1/4 .25
Fourth quarter 13 3/4 12 1/8 .45(2)
1995:
First quarter 13 1/2 12 1/4 .27
Second quarter 14 7/8 13 1/8 .27
Third quarter 15 7/8 13 5/8 .27
Fourth quarter 15 3/4 14 5/8 .42(2)
1996:
First quarter 16 3/8 14 1/2 .27
Second quarter 17 1/4 16 .27
Third quarter 18 3/4 16 .27
Fourth quarter --
(through October __)
</TABLE>
_______________
(1) Distributions paid per share of PPY Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For GAAP purposes, all distributions were from investment income.
(2) Includes special distributions of $.18 in the fourth quarter of 1994 and
$.15 in the fourth quarter of 1995.
As of October 6, 1996, there were approximately 2,121 record holders of
PPY's Common Stock. On August 14, 1996, the last full trading day prior to the
first public announcement of the proposed Mergers, the closing price of PPY
Common Stock was $17. On _______________, 1996, the last full trading day prior
to the date of this Combined Proxy Statement and Prospectus, the closing price
was $_____.
Holders of PPY 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. PPY, as a REIT, is required to distribute annually at least 95%
of its "REIT taxable income," which, as defined by the relevant tax statutes and
regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PPY can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
91
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PPY2 COMMON STOCK
The PPY2 Common Stock has been listed on the AMEX since November 1991. The
following table sets forth the distributions paid per share on PPY2 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>
1994:
First quarter $15 1/4 $13 1/4 $.25
Second quarter 14 12 .25
Third quarter 14 3/4 14 1/4 .26
Fourth quarter 14 7/8 12 1/4 .41(2)
1995:
First quarter 14 12 5/8 .28
Second quarter 14 7/8 12 5/8 .28
Third quarter 16 14 5/8 .28
Fourth quarter 16 14 3/8 .39(2)
1996:
First quarter 16 1/4 14 5/8 .28
Second quarter 17 3/8 16 .28
Third quarter 19 7/8 16 1/4 .28
Fourth quarter --
(through October __)
</TABLE>
_______________
(1) Distributions paid per share of PPY2 Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For GAAP purposes, all distributions were from investment income.
(2) Includes special distributions of $.13 in the fourth quarter of 1994 and
$.11 in the fourth quarter of 1995.
As of October 6, 1996, there were approximately 1,970 record holders of
PPY2's Common Stock. On August 14, 1996, the last full trading day prior to the
first public announcement of the proposed Mergers, the closing price of PPY2
Common Stock was $17 3/4. On _______________, 1996, the last full trading day
prior to the date of this Combined Proxy Statement and Prospectus, the closing
price was $_____.
Holders of PPY2 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. PPY2, as a REIT, is required to distribute annually at least 95%
of its "REIT taxable income," which, as defined by the relevant tax statutes and
regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PPY2 can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
92
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PPY3 COMMON STOCK
The PPY3 Common Stock has been listed on the AMEX since November 1991. The
following table sets forth the distributions paid per share on PPY3 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>
1994:
First quarter $15 5/8 $14 1/8 $.31
Second quarter 16 1/4 14 1/8 .31
Third quarter 16 14 5/8 .32
Fourth quarter 15 3/8 14 1/8 .47(2)
1995:
First quarter 16 1/2 14 1/8 .34
Second quarter 18 3/8 15 1/8 .34
Third quarter 17 3/8 16 1/4 .34
Fourth quarter 16 7/8 15 7/8 .41(2)
1996:
First quarter 18 3/8 15 3/4 .34
Second quarter 18 7/8 17 3/8 .34
Third quarter 20 18 1/8 .34
Fourth quarter --
(through October __)
</TABLE>
_______________
(1) Distributions paid per share of PPY3 Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For GAAP purposes, all distributions were from investment income.
(2) Includes special distributions of $.13 in the fourth quarter of 1994 and
$.07 in the fourth quarter of 1995.
As of October 6, 1996, there were approximately 842 record holders of
PPY3's Common Stock. On August 14, 1996, the last full trading day prior to the
first public announcement of the proposed Mergers, the closing price of PPY3
Common Stock was $19 7/8. On _______________, 1996, the last full trading day
prior to the date of this Combined Proxy Statement and Prospectus, the closing
price was $_____.
Holders of PPY3 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. PPY3, as a REIT, is required to distribute annually at least 95%
of its "REIT taxable income," which, as defined by the relevant tax statutes and
regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PPY3 can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
93
<PAGE>
DESCRIPTION OF PSI CAPITAL STOCK
PSI is authorized to issue 200,000,000 shares of PSI Common Stock, par
value $.10 per share, 7,000,000 shares of PSI Class B Common Stock, par value
$.10 per share and 50,000,000 shares of preferred stock, par value $.01 per
share. At September 30, 1996, PSI had outstanding 84,411,391 shares of PSI
Common Stock (exclusive of shares issuable upon conversion of PSI's convertible
capital stock and shares subject to options), 7,000,000 shares of Class B Common
Stock and 13,441,180 shares of preferred stock.
COMMON STOCK
The following description of PSI Common Stock sets forth certain general
terms and provisions of PSI Common Stock. The statements below describing PSI
Common Stock are in all respects subject to and qualified in their entirety by
reference to the applicable provisions of the PSI's Articles of Incorporation
and Bylaws.
PSI Shareholders will be entitled to receive dividends when, as and if
declared by PSI's Board of Directors, out of funds legally available therefor.
Payment and declaration of dividends on PSI Common Stock and purchases of shares
thereof by PSI will be subject to certain restrictions if PSI fails to pay
dividends on outstanding preferred stock. See "-- Preferred Stock." Upon any
liquidation, dissolution or winding up of PSI, holders of PSI 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 PSI and the preferential amounts owing with respect to any
outstanding preferred stock. Holders of PSI Common Stock have no preemptive
rights, which means they have no right to acquire any additional shares of PSI
Common Stock that may be issued by PSI at a subsequent date.
Each outstanding share of PSI Common Stock entitles the holder to one vote
on all matters presented to PSI Shareholders for a vote, with the exception that
PSI Shareholders have cumulative voting rights with respect to the election of
the Board of Directors, in accordance with California law. Cumulative voting
entitles each PSI 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 PSI
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 PSI
Shareholder chooses. PSI Shareholders have no preemptive or other rights to
subscribe for or purchase additional shares of PSI Common Stock. All
outstanding shares of PSI Common Stock are fully paid and nonassessable.
OWNERSHIP LIMITATIONS
For PSI to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. In order to maintain its qualification as a REIT, PSI's Articles
of Incorporation and Bylaws provide certain restrictions on the shares of
capital stock that any PSI Shareholder may own.
PSI's Articles of Incorporation and Bylaws provide that, subject to certain
exceptions, no holder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than (A) 2.0% of the outstanding shares of all
common stock of PSI, or (B) 9.9% of the outstanding shares of each class or
series of shares of preferred stock of PSI. The Articles of Incorporation and
Bylaws provide, however, that no person shall be deemed to exceed the ownership
limit solely by reason of the beneficial ownership of shares of any class of
stock to the extent that such shares of stock were beneficially owned by such
person (including the Hughes Family) at the time of the PSMI Merger. This
ownership limitation is necessary in order to assist in preserving PSI's REIT
status in view of the Hughes Family's substantial ownership interest in PSI.
See "Certain Federal Income Tax Considerations -- Tax Treatment of PSI."
PSI's Board of Directors, in its sole and absolute discretion, may grant an
exception to the ownership limits to any person so requesting, so long as (A)
the Board of Directors has determined that, after giving effect to (x) an
acquisition by such person of beneficial ownership (within the meaning of the
Code) of the maximum amount of capital stock of PSI permitted as a result of the
exception to be granted and (y) assuming that the four other persons who would
be treated as "individuals" for the purposes of Section 542(a)(2) of the Code
and who would beneficially own
94
<PAGE>
the largest amounts of stock of PSI (determined by value) beneficially own the
maximum amount of capital stock of PSI permitted under the ownership limits (or
any waivers of the ownership limits granted with respect to such persons), PSI
would not be "closely held" within the meaning of Section 856(h) of the Code and
would not otherwise fail to qualify as a REIT, and (B) such person provides to
PSI's Board of Directors such representations and undertakings as the Board of
Directors may require. Notwithstanding any of the foregoing ownership limits,
no holder may own or acquire, either directly, indirectly or constructively
under the applicable attribution rules of the Code, any shares of any class of
PSI's capital stock if such ownership or acquisition (i) would cause more than
50% in value of PSI's outstanding capital stock to be owned, either directly or
constructively, under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds), (ii) would
result in PSI's stock being beneficially owned by less than 100 persons
(determined without reference to any rules of attribution), or (iii) would
otherwise result in PSI's failing to qualify as a REIT.
PSI's Articles of Incorporation and Bylaws provide that, if any holder of
PSI's capital stock purports to transfer shares to a person or there is a change
in the capital structure of PSI and either the transfer or the change in capital
structure would result in PSI failing to qualify as a REIT, or such transfer or
the change in capital structure would cause the transferee to hold shares in
excess of the applicable ownership limit, then the stock being transferred (or
in the case of an event other than a transfer, the stock beneficially owned)
which would cause one or more of the restrictions on ownership or transfer to be
violated shall be automatically transferred to a trust for the benefit of a
designated charitable beneficiary. The purported transferee of such shares
shall have no right to receive dividends or other distributions with respect to
such shares and shall have no right to vote such shares. Any dividends or other
distributions paid to such purported transferee prior to the discovery by PSI
that the shares have been transferred to a trust shall be paid to the trustee of
the trust for the benefit of the charitable beneficiary upon demand. The
trustee of the trust will have all rights to dividends with respect to shares of
stock held in trust, which rights will be exercised for the exclusive benefit of
the charitable beneficiary. Any dividends or distributions paid over to the
trustee will be held in trust for the charitable beneficiary. The trustee shall
designate a transferee of such stock so long as such shares of stock would not
violate the restrictions on ownership or transfer in the PSI Articles of
Incorporation or Bylaws in the hands of such designated transferee. Upon the
sale of such shares, the purported transferee shall receive the lesser of (A)(i)
the price per share such purported transferee paid for the stock in the
purported transfer that resulted in the transfer of the shares to the trust, or
(ii) if the transfer or other event that resulted in the transfer of the shares
of the trust was not a transaction in which the purported transferee gave full
value for such shares, a price per share equal to the market price on the date
of the purported transfer or other event that resulted in the transfer of the
shares to the trust and (B) the price per share received by the trustee from the
sale or other disposition of the shares held in the trust.
CLASS B COMMON STOCK
The PSI Class B Common Stock (i) does not participate in distributions
until the later to occur of Funds from Operations ("FFO") per Common Share (as
defined below by PSI) aggregating $1.80 during any period of four consecutive
calendar quarters, or January 1, 2000; thereafter, the PSI Class B Common Stock
will participate in distributions (other than liquidating distributions), at the
rate of 97% of the per share distributions on the PSI Common Stock, provided
that cumulative distributions of at least $.22 per quarter per share have been
paid on the PSI Common Stock, (ii) does not participate in liquidating
distributions, (iii) is not entitled to vote (except as expressly required by
California law) and (iv) will automatically convert into PSI Common Stock, on a
share for share basis, upon the later to occur of FFO per Common Share
aggregating $3.00 during any period of four consecutive calendar quarters or
January 1, 2003.
For these purposes:
(1) FFO means net income (loss) (computed in accordance with GAAP) before
(i) gain (loss) on early extinguishment of debt, (ii) minority interest in
income and (iii) gain (loss) on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization (including PSI's pro-rata share of
depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the PSMI Merger, including property
management agreements and goodwill), and (ii) less FFO attributable to minority
interest. FFO is a supplemental performance measure for equity REITs as defined
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT").
The NAREIT definition does not specifically address the treatment of minority
interest in the determination of FFO
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or the treatment of the amortization of property management agreements and
goodwill. In the case of PSI, FFO represents amounts attributable to its
shareholders after deducting amounts attributable to the minority interests and
before deductions for the amortization of property management agreements and
goodwill. FFO does not take into consideration scheduled principal payments on
debt, capital improvements, distributions and other obligations of PSI.
Accordingly, FFO is not a substitute for PSI's cash flow or net income as a
measure of its liquidity or operating performance or ability to pay
distributions.
(2) FFO per Common Share means FFO less preferred stock dividends (other
than dividends on convertible preferred stock) divided by the outstanding
weighted average shares of PSI Common Stock assuming conversion of all
outstanding convertible securities and the PSI Class B Common Stock.
PREFERRED STOCK
PSI is authorized to issue 50,000,000 shares of preferred stock, $.01 par
value per share. PSI'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.
At September 30, 1996, PSI had 10 series of preferred stock outstanding:
eight series of senior preferred stock (the "Senior Preferred Stock") and two
series of convertible preferred stock. In all respects, each of the series of
Senior Preferred Stock ranks on a parity with each other and is senior to both
series of convertible preferred stock. Each of the series of Senior 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 Senior Preferred Stock as to payment of dividends (including two series
of convertible preferred stock), provides for cumulative quarterly dividends
calculated as a percentage of the stated value (ranging from 8.45% to 10% per
year in the case of the seven series of fixed rate preferred stock and a rate
adjustable quarterly ranging from 6.75% to 10.75% per year in the case of a
series of adjustable rate preferred stock) and (iii) is subject to redemption,
in whole or in part, at the option of PSI at a cash redemption price of $25.00
per share, plus accrued and unpaid dividends (on and after June 30, 1999 in the
case of the adjustable rate preferred stock and on or after various dates
between December 31, 2000 and April 30, 2005 in the case of the series of fixed
rate preferred stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of PSI, the holders of each of the series of Senior Preferred Stock
will be entitled to receive out of PSI's assets available for distribution to
stockholders, before any distribution of assets is made to holders of PSI Common
Stock or any other shares of capital stock ranking as to such distributions
junior to the Senior Preferred Stock (including both series of 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 Senior Preferred Stock are not entitled to
vote. The consent of holders of at least 66 2/3% of the outstanding shares of
the Senior Preferred Stock (and any other series of preferred stock ranking on a
parity therewith), voting as a single class, is required to authorize another
class of shares senior to such preferred stock.
In all respects, each of the series of convertible preferred stock ranks on
a parity with each other and is senior to the PSI Common Stock. One of the
series of the convertible preferred stock (i) has a stated value of $25.00 per
share, (ii) in preference to the holders of shares of the PSI 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 PSI Common Stock at a conversion price of 1.6835
shares of PSI Common Stock for each share of such convertible preferred stock
(subject to adjustment in certain circumstances) and (iv) after July 1, 1998,
under certain circumstances, is redeemable for PSI Common Stock at the option of
PSI, in whole or in part, at a redemption price of 1.6835 shares of PSI Common
Stock for each share of such convertible preferred stock (subject to adjustment
in certain circumstances).
The other series of convertible preferred stock (i) has no stated value,
(ii) in preference to the holders of shares of the PSI Common Stock and any
other capital stock ranking junior to the convertible preferred stock as to
payment
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of dividends, provides for dividends of $1,916,038 per quarter, (iii) is
convertible at the option of the holder at any time into PSI Common Stock at a
conversion price of 35.014 shares of PSI Common Stock for each share of such
convertible preferred stock (subject to adjustment under certain circumstances)
and (iv) on March 31, 2000 will be automatically converted into PSI Common Stock
at the conversion price described above.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of PSI, the holders of the convertible preferred stock will be
entitled to receive out of PSI's assets available for distribution to
stockholders, before any distribution of assets is made to holders of PSI Common
Stock or any other shares of capital stock ranking as to such distributions
junior to the convertible preferred stock, liquidating distributions (i) in the
amount of $25.00 per share, plus all accrued and unpaid dividends, in the case
of one of the series of convertible preferred stock and (ii) a minimum
liquidation preference of $58,955,000, plus all accrued and unpaid dividends, in
the case of the other series of convertible preferred stock.
Except as expressly required by law and in certain other limited
circumstances, the holders of the convertible preferred stock are not entitled
to vote. The consent of holders of at least 66 2/3% of the outstanding shares
of one of the series of convertible preferred stock and at least 50% of the
outstanding shares of the other series is required to authorize another class of
shares senior to the convertible preferred stock and junior to the Senior
Preferred Stock.
EFFECTS OF ISSUANCE OF CAPITAL STOCK
The issuance of PSI 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 PSI in transactions not approved by
PSI's Board of Directors. PSI has no intention to issue PSI Common Stock or the
preferred stock for such purposes.
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DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Chapter 13 of the California General Corporation Law ("Chapter
13"), a holder of shares of PPY, PPY2 or PPY3 Common Stock may, in some
instances, be entitled to require PPY, PPY2 or PPY3 to purchase his or her
shares in the respective corporation for cash at their fair market value as of
the day before the first announcement of the terms of the Mergers, excluding any
appreciation or depreciation in consequence of the Mergers. The general terms
of the Mergers were first announced on August 15, 1996. The following is a
brief summary of the procedures to be followed by a PPY, PPY2 or PPY3
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 Combined Proxy Statement and Prospectus as Appendix D, to
which reference is hereby made for a definitive statement of the rights of
dissenting shareholders (the "Dissenting Shareholders") and the procedures to be
followed.
Shares of PPY, PPY2 and PPY3 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 PPY, PPY2 and PPY3 Common Stock, respectively. This 5%
requirement is applicable because PPY, PPY2 and PPY3 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 PPY, PPY2 or PPY3 to
purchase his or her respective shares of Common Stock must:
(1) vote against the respective Merger any or all of the shares of
Common Stock entitled to be voted (shares of Common Stock not voted are not
considered to be voted against the Mergers and will not be counted toward
the 5% minimum for Dissenters' Rights to exist); provided that if a PPY,
PPY2 or PPY3 Shareholder votes part of the shares entitled to be voted in
favor of the respective 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 the respective corporation or its
transfer agent at the addresses listed below, which is received not later
than the date of the meeting of shareholders of the respective corporation,
setting forth the number of shares of Common Stock demanded to be purchased
by the respective corporation and a statement as to claimed fair market
value of such shares at August 14, 1996; and
(3) submit for endorsement, within 30 days after the date on which
the notice of approval of the Mergers by the shareholders of the respective
corporation described below is mailed to such shareholders, to the
respective corporation 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 Mergers 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 Mergers will be voted in favor of
the Mergers. Accordingly, shares covered by such a proxy will not be Dissenting
Shares. In addition, a vote in favor of the Mergers, 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 PPY, PPY2 or PPY3
Common Stock have made demands for payment on or prior to the date of the
respective corporation's shareholders' meeting to approve the Mergers, and have
voted against the respective Merger at the meeting, within 10 days after the
date of the approval of the respective Merger, the respective corporation will
mail to each Dissenting Shareholder who holds Common Stock a notice of such
approval together with a statement of the price determined by the respective
corporation to represent the fair market value of Dissenting Shares, a copy of
certain sections of Chapter 13, and a brief description of the
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procedure to be followed if the shareholder desires to exercise Dissenter's
Rights. The statement of price will constitute an offer by the respective
corporation to purchase at the price stated therein any Dissenting Shares.
If the respective corporation and the Dissenting Shareholder agree that any
shares of Common Stock of the respective corporation 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 respective Merger are satisfied,
whichever is later. If the respective corporation denies that the shares are
Dissenting Shares or if the respective corporation 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 respective Merger by the shareholders of the respective
corporation is mailed to such shareholder, and not thereafter, may file a
complaint in the Superior Court of Los Angeles County, California, requiring the
court to determine whether the shares are Dissenting Shares, or the fair market
value of the Dissenting Shares, or both, or may intervene in any pending action
for the appraisal of any shares of Common Stock of the respective corporation.
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 the respective corporation to the shareholder upon the
surrender of the certificates representing such shares to the respective
corporation. The costs of the proceeding shall be apportioned as the court
considers equitable, but if the appraisal exceeds the price offered by the
respective corporation, it shall pay the costs, and if the appraisal is more
than 125% of the price offered by it, it 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 the respective corporation's consent. Written demands for
payment and submissions for endorsement with respect to PPY Common Stock must be
addressed to Partners Preferred Yield, Inc., 701 Western Avenue, Suite 200,
Glendale, California 91201-2397, attention: Investor Services Department or to
PPY's transfer agent, American Stock Transfer & Trust Company, 40 Wall Street,
New York, New York 10005. Written demands for payment and submissions for
endorsement with respect to PPY2 Common Stock must be addressed to Partners
Preferred Yield II, Inc., 701 Western Avenue, Suite 200, Glendale, California
91201-2397, attention: Investor Services Department or to PPY2's transfer
agent, American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005. Written demands for payment and submissions for endorsement with
respect to PPY3 Common Stock must be addressed to Partners Preferred Yield III,
Inc., 701 Western Avenue, Suite 200, Glendale, California 91201-2397, attention:
Investor Services Department or to PPY3'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
of the respective corporation and includes a transferee of record.
A 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."
PPY, PPY2 and PPY3 Shareholders are entitled, upon written demand, to
inspect and copy the record of PPY, PPY2 or PPY3 Shareholders, respectively, at
any time during usual business hours to communicate with other shareholders of
the respective corporation with respect to the Mergers.
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CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Mergers and the subsequent ownership and disposition of
shares of PSI Common Stock that are generally applicable to PPY, PPY2 and PPY3
Shareholders. PSI, PPY, PPY2 and PPY3 do not plan to obtain any rulings from
the Internal Revenue Service ("IRS") concerning tax issues with respect to the
Mergers or the qualification of PSI, PPY, PPY2 or PPY3 as REITs. 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 PPY, PPY2 and
PPY3, has reviewed the following discussion and is of the opinion that this
discussion fairly summarizes the material federal income tax considerations to a
PPY, PPY2 and PPY3 Shareholder as a result of the PPY Merger, the PPY2 Merger
and the PPY3 Merger, respectively, and the subsequent ownership of PSI 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 PSI, PPY, PPY2 and PPY3
and certain representations made by PPY, PPY2, PPY3 and PSI and certain
shareholders of PPY, PPY2 and PPY3. 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 PSI, PPY, PPY2 and PPY3 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 PPY, PPY2 AND PPY3 SHAREHOLDERS, PPY,
PPY2 AND PPY3 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 MERGERS
Each of the Mergers is intended to be a "reorganization" for federal income
tax purposes, and accordingly no gain or loss will be recognized by PPY or PSI
in connection with the PPY Merger, by PPY2 or PSI in connection with the PPY2
Merger or by PPY3 or PSI in connection with the PPY3 Merger; and (I) no gain or
loss will be recognized by PPY Shareholders who receive solely PSI Common Stock
in exchange for their PPY Common Stock in the PPY Merger (but all PPY
Shareholders will recognize ordinary income in the amount of any Required PPY
REIT Distributions made to them), (II) no gain or loss will be recognized by
PPY2 Shareholders who receive solely PSI Common Stock in exchange for their PPY2
Common Stock in the PPY2 Merger (but all PPY2 Shareholders will recognize
ordinary income in the amount of any Required PPY2 REIT Distributions made to
them) and (III) no gain or loss will be recognized by PPY3 Shareholders who
receive solely PSI Common Stock in exchange for their PPY3 Common Stock in the
PPY3 Merger (but all PPY3 Shareholders will recognize ordinary income in the
amount of any Required PPY3 REIT Distributions made to them). No rulings have
been or will be requested from the IRS regarding the Mergers or any other aspect
of the matters discussed in this Combined Proxy Statement and Prospectus. Hogan
& Hartson L.L.P., counsel to PPY, PPY2 and PPY3, has rendered an opinion that
each of the Mergers will constitute a reorganization under Section 368(a) of the
Code, based on certain factual assumptions and representations made by PSI, PPY,
PPY2 and PPY3 and certain PPY, PPY2 and PPY3 Shareholders. Of particular
importance are certain assumptions and representations relating to the
"continuity of interest" requirement discussed below. THE PPY MERGER, THE PPY2
MERGER AND THE PPY3 MERGER ARE NOT CONDITIONED ON EACH OTHER.
Continuity of Interest Assumption. To qualify as a reorganization as to
PPY, PPY2 or PPY3, among other requirements, each of the Mergers must satisfy a
"continuity of interest" test, under which the historic PPY, PPY2 and PPY3
Shareholders (shareholders who purchase shares in anticipation of the Mergers
may not be included for this purpose), respectively, must continue to retain a
meaningful ownership interest in PSI after the PPY Merger, the PPY2 Merger and
the PPY3 Merger, respectively. Generally, this test will be considered
satisfied if historic PPY Shareholders (in the case of the PPY Merger), historic
PPY2 Shareholders (in the case of the PPY2 Merger) or historic PPY3 Shareholders
(in the case of the PPY3 Merger) exchange at least 50% of their respective
corporation's Common Stock for PSI Common Stock in the PPY Merger, the PPY2
Merger and the PPY3 Merger, respectively, and the PPY, PPY2 and PPY3
Shareholders do not at the time of the PPY Merger, the PPY2 Merger and the PPY3
Merger, respectively, plan to dispose of that PSI Common Stock. Management of
PSI and PPY, PPY2 and PPY3, respectively, have represented that they are not
aware of any plan on the part of PPY, PPY2 or PPY3 Shareholders, respectively,
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that would cause this test not to be satisfied. Based upon this representation
and similar representations from Hughes, Hogan & Hartson has assumed, for
purposes of its opinion that each of the Mergers will constitute a
reorganization that the continuity of interest test will be satisfied.
Reorganization Consequences to PSI, PPY, PPY2 and PPY3. As a result of
reorganization treatment, PSI, PPY, PPY2 and PPY3 will not recognize gain or
loss as a result of the Mergers. PSI also will succeed to the assets,
liabilities, and tax attributes of PPY, PPY2 and PPY3. Accordingly, following
the Mergers, PSI will hold the properties of PPY, PPY2 and PPY3 with a carryover
tax basis, determined by reference to the relatively low, historic basis of
those assets in the hands of PPY, PPY2 and PPY3, respectively. The tax basis
will not be increased by any cash expended by PSI pursuant to the Cash Elections
or to satisfy Dissenter's Rights, or by the amount of any gain reportable by
those PPY, PPY2 or PPY3 Shareholders who may be taxable as a result of the
Mergers.
Exchange of PPY, PPY2 or PPY3 Common Stock Solely for PSI Common Stock. As
a result of reorganization treatment (I) (i) no gain or loss will be recognized
by PPY Shareholders who exchange their PPY Common Stock solely for PSI Common
Stock pursuant to the PPY Merger (but see "Required REIT Distributions" below),
(ii) such a PPY Shareholder's aggregate tax basis in the PSI Common Stock
received will be the same as the aggregate tax basis of the shares of PPY Common
Stock surrendered and (iii) provided such PPY Common Stock is held as a capital
asset at the Effective Time, the holding period of the PSI Common Stock will
include the holding period of the surrendered PPY Common Stock; (II) (i) no gain
or loss will be recognized by PPY2 Shareholders who exchange their PPY2 Common
Stock solely for PSI Common Stock pursuant to the PPY2 Merger (but see "Required
REIT Distributions" below), (ii) such a PPY2 Shareholder's aggregate tax basis
in the PSI Common Stock received will be the same as the aggregate tax basis of
the shares of PPY2 Common Stock surrendered, and (iii) provided such PPY2 Common
Stock is held as a capital asset at the Effective Time, the holding period of
the PSI Common Stock will include the holding period of the surrendered PPY2
Common Stock; and (III) (i) no gain or loss will be recognized by PPY3
Shareholders who exchange their PPY3 Common Stock solely for PSI Common Stock
pursuant to the PPY3 Merger (but see "Required REIT Distributions" below), (ii)
such a PPY3 Shareholder's aggregate tax basis in the PSI Common Stock received
will be the same as the aggregate tax basis of the shares of PPY3 Common Stock
surrendered and (iii) provided such PPY3 Common Stock is held as a capital asset
at the Effective Time, the holding period of the PSI Common Stock will include
the holding period of the surrendered PPY3 Common Stock.
PPY, PPY2 or PPY3 Shareholders Receiving Only Cash. A PPY Shareholder who
exchanges PPY 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 PPY Shareholder's adjusted
basis in his or her PPY Common Stock and the amount of cash received. A PPY2
Shareholder who exchanges PPY2 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
PPY2 Shareholder's adjusted basis in his or her PPY2 Common Stock and the amount
of cash received. A PPY3 Shareholder who exchanges PPY3 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 PPY3 Shareholder's adjusted basis in his or her PPY3
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 PPY, PPY2 or PPY3 Shareholder
is actually or constructively related to continuing PSI Shareholders).
PPY, PPY2 or PPY3 Shareholders Receiving Cash and PSI Common Stock. As a
result of reorganization treatment (I) (i) a PPY Shareholder who, pursuant to
the PPY Merger and subject to the conditions of the Cash Election, exchanges PPY
Common Stock for a combination of PSI Common Stock and cash will not recognize
any loss realized on such exchange and (ii) such PPY 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 PSI Common Stock and cash received over
such PPY Shareholder's tax basis in the PPY Common Stock surrendered; (II) (i) a
PPY2 Shareholder who, pursuant to the PPY2 Merger and subject to the conditions
of the Cash Election, exchanges PPY2 Common Stock for a combination of PSI
Common Stock and cash will not recognize any loss realized on such exchange and
(ii) such PPY2 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 PSI
Common Stock and cash received over such PPY2 Shareholder's tax basis in the
PPY2 Common Stock
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surrendered; and (III) (i) a PPY3 Shareholder who, pursuant to the PPY3 Merger
and subject to the conditions of the Cash Election, exchanges PPY3 Common Stock
for a combination of PSI Common Stock and cash will not recognize any loss
realized on such exchange and (ii) such PPY3 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 PSI Common Stock and cash received over such PPY3
Shareholder's tax basis in the PPY3 Common Stock surrendered. The recognized
gain will be treated as capital gain (provided the Common Stock is held as a
capital asset at the Effective Time). The aggregate tax basis of the PSI Common
Stock received will be the same as the aggregate tax basis of the Common Stock
surrendered for the PSI Common Stock, reduced by the amount of cash received and
increased by the amount of gain recognized, if any. The holding period of the
PSI Common Stock will include the holding period of the Common Stock surrendered
for the PSI Common Stock, provided that the Common Stock is held as a capital
asset at the Effective Time.
Required REIT Distributions. The Required PPY REIT Distributions, the
Required PPY2 REIT Distributions and the Required PPY3 REIT Distributions would
not be treated as cash paid in exchange for the PPY Common Stock, PPY2 Common
Stock or PPY3 Common Stock, but rather as a dividend taxable to all recipients
as ordinary income.
Cash Received in Lieu of Fractional Shares of PSI Common Stock. PPY, PPY2
or PPY3 Shareholders that receive cash in lieu of a fractional share of PSI
Common Stock pursuant to the Mergers 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 PPY, PPY2 or PPY3 Common Stock is held
as a capital asset as the Effective Time.
Failure to Qualify for Reorganization Treatment. In the event that the
Mergers do not qualify as a reorganization as to PPY, PPY2 or PPY3, the Mergers
likely would be treated as a taxable sale by the respective corporation of its
assets and a contemporaneous liquidation. The respective corporation presumably
would not incur a federal income tax liability as a result of this deemed sale
because of the contemporaneous deemed liquidating distribution. The
shareholders of the respective corporation would recognize income or loss equal
to the difference between the tax basis of their PSI Common Stock and the sum of
the fair market value of the PSI Common Stock and the cash received in exchange
for their Common Stock, but some of the income could be ordinary income. The
shareholders of the respective corporation receiving PSI Common Stock would have
a tax basis in those shares equal to the fair market value of the shares at the
time of the Mergers, and the holding period would not include the period during
which their shares of Common Stock were held. PSI would receive a basis in the
properties acquired from the respective corporation equal to their fair market
value.
OPINION OF COUNSEL
Hogan & Hartson L.L.P., counsel to PPY, PPY2 and PPY3, has rendered an
opinion to PPY with respect to the PPY Merger, to PPY2 with respect to the PPY2
Merger and to PPY3 with respect to the PPY3 Merger to the effect that (i) for
federal income tax purposes, the respective Merger will constitute a
reorganization under Section 368(a) of the Code, (ii) PSI continues to qualify
as a REIT following the PSMI Merger so long as (A) PSI continues to meet the
stock ownership and gross income requirements applicable to REITs and (B) PSMI
at the time of the PSMI Merger was not considered to have any current or
accumulated earnings and profits for tax purposes and (iii) the discussion under
the heading "Certain Federal Income Tax Matters" fairly summarizes the federal
income tax considerations that are material to PPY, PPY2 and PPY3 Shareholders,
respectively, as a result of the respective Merger and the subsequent ownership
of PSI Common Stock (the "Opinion of Counsel"). Hogan & Hartson has not opined
that PSI continues to meet the stock ownership and gross income requirements
applicable to REITs following the PSMI Merger or that PSMI did not have current
or accumulated earnings and profits at the time of the PSMI Merger, due to the
numerous factual determinations and future events that bear on those
conclusions. The Opinion of Counsel is based upon certain extensive and
detailed representations as to factual and legal matters made by PSI, PPY, PPY2
and PPY3 that relate both to the qualification of PSI as a REIT and to the
qualification of the Mergers as reorganizations, and specific representations
from Hughes regarding the expected continued ownership of PSI Common Stock to be
received in each of the Mergers. In addition, as discussed above, the Opinion
of Counsel expressly assumes, based upon certain representations of the
management of PSI, PPY, PPY2 and PPY3, that the "continuity of interest"
requirement necessary for each of the Mergers to qualify as reorganizations will
be satisfied. See "The Mergers -- Continuity of Interest Assumption" and "The
Mergers -- Failure to Qualify for Reorganization Treatment." The Opinion of
Counsel also makes certain customary assumptions regarding the accuracy and
completeness of
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documents reviewed by counsel and representations relied upon by counsel and as
to the consummation of each of the Mergers in accordance with the terms of each
of the Merger Agreement. The Opinion of Counsel states that the conclusion set
forth therein could be adversely affected if any of these representations or
assumptions is incorrect or incomplete at the time that any of the Mergers 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 Mergers or any other transaction (including the tax consequences
of any of the Mergers as applied to specific PPY, PPY2 or PPY3 Shareholders (or
classes of PPY, PPY2 or PPY3 Shareholders); the tax consequences of any of the
Mergers to PSI, PPY, PPY2 or PPY3 (including whether any entity will recognize
any gain in any of the Mergers and PSI's adjusted tax basis in the assets of
PPY, PPY2 and PPY3 acquired in the Mergers); 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 any of the
Mergers and/or participants therein; and whether PPY, PPY2 or PPY3 Shareholders
who have provided or will provide services to PSI, PPY, PPY2 or PPY3 will
recognize compensation income, either as a result of the Mergers or otherwise).
GENERAL TAX TREATMENT OF PSI
If certain detailed conditions imposed by the Code and the related
regulations are met, an entity, such as PSI, 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 PSI of being treated as a
REIT for federal income tax purposes is that this enables PSI 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.
PSI 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. PSI believes that it has qualified during each of the past five
fiscal years, and currently qualifies, as a REIT. While PSI 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 PSI, no assurance
can be given by PSI that PSI will so qualify for any particular year.
The following is a very brief overview of certain of the technical
requirements that PSI 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). See "--
Consequences of the PSMI Merger on PSI's Qualification as a REIT -- Violation of
Ownership Limitations."
2. PSI'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.
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Rents received by PSI will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
of sales. PSI anticipates that none of its gross annual income will be
attributable to rents that are based in whole or in part on the income of any
person (excluding rents based on a percentage of receipts or sales, which, as
described above, are permitted). Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if PSI, or an owner
of 10% or more of PSI, directly or constructively owns 10% or more of such
tenant (a "Related Party Tenant"). PSI does not anticipate that it will receive
income from Related Party Tenants. Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." PSI does not anticipate deriving rent attributable to personal
property leased in connection with real property that exceeds 15% of the total
rents. Finally, for rents received to qualify as "rents from real property," PSI
generally must not operate or manage the property or furnish or render services
to tenants, other than through an "independent contractor" which is adequately
compensated and from whom PSI derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent the services provided by PSI
are "usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant." Any
services with respect to certain Properties that PSI believes may not be
provided by PSI directly without jeopardizing the qualification of rent as
"rents from real property" will be performed by "independent contractors."
See "-- Consequences of the PSMI Merger on PSI's Qualification as a REIT --
PSI's Assumption of Management Activities With Respect to PSI's Properties," "--
Consequences of the PSMI Merger on PSI's Qualification as a REIT --
Nonqualifying Income," and "-- Consequences of the PSMI Merger on PSI's
Qualification as a REIT -- Acquisition of Affiliated Partnership Interests in
the PSMI Merger" for a discussion of specific aspects of the PSMI Merger that
may impact upon PSI's ability to satisfy the 95% gross income test following the
PSMI Merger.
3. Generally, 75% by value of PSI's investments must be in real estate,
mortgages secured by real estate, cash, or government securities (including its
allocable share of real estate assets held by any partnerships in which PSI owns
an interest). Not more than 25% of PSI's total assets may be represented by
securities other than those in the 75% asset class. Of the investments included
in the 25% asset class, the value of any one issuer's securities owned by PSI
may not exceed 5% of the value of PSI's total assets, and PSI may not own more
than 10% of any one issuer's outstanding voting securities. The 5% test
generally must be met for any quarter in which PSI acquires securities of an
issuer. PSI believes that it satisfies these tests. In this regard, however,
the 10% voting stock prohibition precludes PSI from controlling the operations
of PSCP and the Lock/Box Company (in which PSI owns 95% of the equity in the
form of non-voting stock and the Hughes Family owns 5% of the equity but 100% of
the voting stock) or PS Clearing Company, Inc. ("PSCC") (in which PSI owns a
less than 10% equity interest) and may preclude PSI from exercising its rights
of first refusal with respect to the corporations owning the Canadian operations
and the reinsurance business.
4. PSI must distribute to its shareholders in each taxable year an amount
at least equal to 95% of PSI's "REIT Taxable Income" (which is generally
equivalent to net taxable ordinary income). Under certain circumstances, PSI can
rectify a failure to meet the 95% distribution test by paying dividends after
the close of a particular taxable year.
PSI in years prior to 1990 made distributions in excess of its REIT Taxable
Income. During 1990, PSI reduced its distributions to the PSI shareholders to
permit PSI to make an optional reduction in short-term borrowings (which
previously had been used to fund distributions to the PSI Shareholders). As a
result, distributions paid by PSI in 1990 were less than 95% of PSI's REIT
Taxable Income for 1990. PSI has satisfied the REIT distribution requirements
for 1990 through 1995 by attributing distributions in 1991 through 1996 to the
prior year's taxable income, and PSI expects to satisfy the distribution
requirement for 1996 by attributing distributions in 1997 to the 1996 taxable
income. PSI 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 PSI 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 PSI will be
required to attribute distributions to the prior year will depend on PSI's
operating results
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and the level of distributions as determined by PSI's Board of Directors.
Reliance on subsequent year distributions could cause PSI to be subject to
certain penalty taxes. In that regard, if PSI should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such calendar year, (ii) 95% of its REIT capital gain net income for such
calendar year, and (iii) any undistributed taxable income from prior periods,
PSI would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed during such calendar year
(not taking into account distributions made in subsequent years but attributed
to such calendar year). PSI intends to comply with this 85% distribution
requirement in an effort to minimize any excise tax. Any distributions required
to be made by PSI in order to eliminate any accumulated earnings and profits of
PSMI would not be counted in determining whether PSI satisfies the 95%
distribution test and could adversely impact upon PSI's ability to satisfy the
95% distribution test. See "-- Consequences of the PSMI Merger on PSI's
Qualification as a REIT -- Elimination of Any Accumulated Earnings and Profits
Attributable to Non-REIT Years."
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets of any partnership in
which it holds a partnership interest. See "-- Consequences of the PSMI Merger
on PSI's Qualification as a REIT -- Acquisition of Affiliated Partnership
Interests in the PSMI Merger."
Applicable Federal Income Tax. For years in which PSI qualifies as a REIT,
PSI generally will be taxable only on its undistributed income. Certain penalty
taxes can apply if PSI delays distributions until after the close of a taxable
year. Moreover, a confiscatory tax of 100% can apply to income derived by PSI
from sales of "dealer" property. If PSI 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 PSI's gross income (excluding capital
gain and certain other items). It should be noted that PSI is not required to
distribute its net capital gain. However, to the extent that PSI does not
declare a capital gain dividend, that gain will be taxable to PSI at normal
corporate rates, and PSI will be subject to a 4% non-deductible excise tax to
the extent that it does not distribute 95% of its capital gain. PSI also will
be subject to the minimum tax on tax preference items (excluding items
specifically allocable to its shareholders).
Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, PSI
will be subject to a corporate level tax if it disposes of any of the assets
acquired in the PSMI Merger at any time during the 10-year period beginning on
the closing date of the PSMI Merger (the "Restriction Period"). This tax would
be imposed on PSI at the top regular corporate rate (currently 35%) in effect at
the time of the disposition on the excess of (i) the lesser of (a) the fair
market value on the closing date of the assets disposed of and (b) the selling
price of such assets over (ii) PSI's adjusted basis in such assets at the time
of the PSMI Merger (such excess being referred to as the "Built-in Gain"). PSI
currently does not intend to dispose of any of the assets acquired in the PSMI
Merger during the Restriction Period, but there can be no assurance that one or
more such dispositions will not occur.
Termination of REIT Election. For any taxable year that PSI 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 PSI for distribution to
its shareholders. As a result, failure of PSI to qualify during any taxable year
as a REIT could have a material adverse effect upon PSI and its shareholders,
unless certain relief provisions are available.
PSI's election to be treated as a REIT will terminate automatically if PSI
fails to meet the qualification requirements described above. If a termination
(or a voluntary revocation) occurs, unless certain relief provisions apply, PSI
will not be eligible to elect REIT status again until the fifth taxable year
that begins after the first year for which PSI's election was terminated (or
revoked). If PSI loses its REIT status, but later qualifies and elects to be
taxed as a REIT again, PSI may face significant adverse tax consequences.
Immediately prior to the effectiveness of the election to return to REIT status,
PSI would be treated as if it disposed of all of its assets in a taxable
transaction, triggering taxable gain with respect to PSI's appreciated assets.
(PSI 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.) PSI would not
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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.
CONSEQUENCES OF THE PSMI MERGER ON PSI'S QUALIFICATION AS A REIT
In light of the unique federal income tax requirements applicable to REITs,
the PSMI Merger could have adverse consequences on PSI's continued qualification
as a REIT, as discussed in greater detail below. Hogan & Hartson L.L.P. is of
the opinion that PSI will continue to qualify as a REIT following the PSMI
Merger so long as (A) PSI has met at all times since the PSMI Merger and
continues to meet the stock ownership and gross income requirements applicable
to REITs and (B) either PSMI at the time of (and giving effect to) such merger
was not considered to have any current or accumulated earnings and profits for
tax purposes or PSI made distributions prior to the end of 1995 in an amount
sufficient to eliminate such earnings and profits. See "-- Nonqualifying
Income," "-- Violation of Ownership Requirements," and "-- Elimination of Any
Accumulated Earnings and Profits Attributable to Non-REIT Years." Hogan &
Hartson L.L.P., however, has not opined that PSI will continue to meet the stock
ownership and gross income requirements applicable to REITs following the PSMI
Merger or that PSMI did not have current or accumulated earnings and profits at
the time of the PSMI Merger, due to the numerous factual determinations and
future events that bear on those conclusions.
Nonqualifying Income. PSI must meet several annual gross income tests to
retain its REIT qualification. See "-- Tax Treatment of PSI -- Technical
Requirements for Taxation as a REIT." Under the 95% gross income test, PSI must
derive at least 95% of its total gross income from specified classes of income
related to real property, dividends, interest or gains from the sale or other
disposition of stock or other securities that do not constitute "dealer
property." Income related to real property includes: (i) proceeds from the
rental of mini-warehouse facilities; (ii) interest on obligations secured by
mortgages on real property; and (iii) gains from the sale or other disposition
of real property (other than real property held by PSI as a dealer).
After the merger with PSMI, PSI assumed and performs property management
activities for the various partnerships and REITs in which PSI has an interest
that own Properties, as well as for various other entities that own mini-
warehouse properties and/or business parks. PSI will receive management fees
from such partnerships, REITs, and other owners in exchange for the performance
of such management activities. The gross income received by PSI from these
property management activities with respect to Properties owned by other
entities (including the REITs in which PSI has an ownership interest) is treated
as income not qualifying under the 95% test ("Nonqualifying Income"). See "--
Acquisition of Affiliated Partnership Interests in the PSMI Merger."
In order to reduce the amount of Nonqualifying Income, in December 1995,
certain Properties pre-paid to PSI approximately $4.5 million of management fees
that PSI otherwise would have been expected to receive for 1996 discounted to
compensate for early payment. Pre-payment of management fees reduced the
percentage of Nonqualifying Income received by PSI in taxable years subsequent
to such prepayment. Hogan & Hartson L.L.P. is of the opinion that it is more
likely than not that the IRS would respect the inclusion of the prepaid
management fees in the gross income of PSI when they are received. Hogan &
Hartson's opinion is based on numerous cases where courts have upheld the IRS's
position that fees should be included in income when they are received, rather
than when the services to which such fees relate are performed. There are,
however, several contrary authorities where courts, over the IRS's objections,
have held that prepaid amounts are not included in income in advance of
performance. Because of these contrary authorities, there can be no assurance
that the IRS might not assert that such management fees should be included in
the gross income of PSI as the related management services are provided, rather
than being included in the gross income when they are received. If the IRS were
to successfully challenge the treatment of such management fees and the
inclusion of such fees in PSI's gross income resulted in it failing the 95% test
for a taxable year ending after the PSMI Merger, PSI's REIT status may terminate
for such year and future years unless it meets the "good cause" exception
described below.
PSI and the various other owners of mini-warehouses and business parks for
which PSI performs management activities (the "Owners") have entered into an
agreement (the "Administrative and Cost-Sharing Agreement") with PSCC pursuant
to which PSCC provides the Owners and PSI certain administrative and cost-
sharing services in connection with the operation of the Properties and the
performance of certain administrative functions. Such services include the
provisions of corporate office space and certain equipment, personnel required
for the operation and
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maintenance of the properties, and corporate or partnership administration.
Each of the Owners and PSI pay the PSCC directly for services rendered by PSCC
in connection with the Administrative and Cost Sharing Agreement. That payment
is separate from and in addition to the compensation paid to PSI under the
management agreement for the management of the Properties owned by the Owners.
PSI has received a private letter ruling from the IRS to the effect that the
reimbursements and other payments made to PSCC by the Owners will not be treated
as revenues of PSI for purposes of the 95% test.
If PSI fails to meet the 95% test during any taxable year, its REIT status
would terminate for that year and future years unless it qualifies for the "good
cause" exception. In order to qualify for the "good cause" exception, PSI would
have to satisfy each of the following: (i) it reported the source and nature of
each item of its gross income in its federal income tax return for such year;
(ii) the inclusion of any incorrect information in its return is not due to
fraud with intent to evade tax; and (iii) the failure to meet such test is due
to a reasonable cause and not to willful neglect. PSI intends to conduct its
operations and affairs so that it meets the 95% test for each taxable year. PSI
also intends to operate so that, in the event it were to fail to meet the 95%
test, it would satisfy the "reasonable cause" requirement of the "good cause"
exception because it exercised ordinary business care and prudence in attempting
to satisfy the 95% test (including by receiving opinions of counsel where
appropriate). There can be no assurance, however, that if PSI were unable to
satisfy the 95% test, the IRS would necessarily agree that PSI had operated in a
manner that qualifies for the "good cause" exception. Furthermore, even if
PSI's REIT status were not terminated because of the "good cause" exception, PSI
still would be subject to an excise tax on any excess nonqualifying income.
Generally, if PSI fails the 95% test but still retains its qualification as a
REIT under the "good cause" exception, it would be subject to a 100% excise tax
on the amount of the excess nonqualifying income multiplied by a fraction, the
numerator of which would be PSI's taxable income (computed without its
distribution deduction) and the denominator of which would be PSI's gross income
from all sources. This excise tax would have the general effect of causing PSI
to pay all net profits generated from this excess nonqualifying income to the
IRS.
Violation of Ownership Requirements. For PSI to qualify as a REIT under
the Code, no more than 50% in value of its outstanding stock may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. Following the PSMI Merger, the
value of the outstanding capital stock held by the Hughes Family was estimated
to be approximately 45%. Accordingly, no four individuals other than the Hughes
Family may own directly or constructively, in the aggregate, more than 5% of the
value of outstanding stock of PSI. In order to assist PSI in meeting these
ownership restrictions, the PSI Articles of Incorporation and Bylaws prohibit
the actual or constructive ownership of more than 2.0% of the outstanding shares
of all common stock of PSI or more than 9.9% of the outstanding shares of each
class or series of shares of preferred stock of PSI. (The PSI Articles of
Incorporation and Bylaws provide, however, that no person is deemed to exceed
this ownership limitation solely by reason of the beneficial ownership of shares
of any class of stock to the extent that such shares of stock were beneficially
owned by such person at the time of the PSMI Merger.) However, even with these
ownership limitations, there still could be a violation of the ownership
restrictions if four individuals unrelated to the Hughes Family were to own the
maximum amount of capital stock permitted under the PSI Articles of
Incorporation. Therefore, to further assist PSI in meeting the ownership
restrictions, the Hughes Family entered into an agreement with PSI for the
benefit of PSI and certain designated charitable beneficiaries restricting their
acquisition of additional shares of PSI's capital stock and providing that if,
at any time, for any reason, more than 50% in value of PSI's outstanding stock
otherwise would be considered owned by five or fewer individuals, then a number
of shares of PSI Common Stock owned by Wayne Hughes necessary to cure such
violation will automatically and irrevocably be transferred to a designated
charitable beneficiary. These provisions are modeled after certain arrangements
that the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as such arrangements
are enforceable as a matter of state law and the REIT seeks to enforce them as
and when necessary. There can be no assurance, however, that the IRS might not
seek to take a different position with respect to PSI (a private letter ruling
is legally binding only with respect to the taxpayer to whom it was issued) or
contend that PSI failed to enforce these various arrangements and, hence, there
can be no assurance that these arrangements will necessarily preserve PSI's REIT
status. No private letter ruling has been sought by PSI from the IRS on the
effect of these arrangements.
Elimination of Any Accumulated Earnings and Profits Attributable to Non-
REIT Years. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute any such
accumulated earnings and profits. In a
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corporate reorganization qualifying as a tax free statutory merger, the acquired
corporation's current and accumulated earnings and profits are carried over to
the surviving corporation. Under Treasury regulations, any earnings and profits
treated as having been acquired by a REIT through such a merger will be treated
as accumulated earnings and profits of a REIT attributable to non-REIT years.
Accordingly, any accumulated earnings and profits of PSMI and its predecessors
(including earnings and profits resulting from transactions undertaken in
contemplation of the PSMI Merger or from the PSMI Merger itself) carried over to
PSI in the PSMI Merger and PSI would have been required to distribute any such
accumulated earnings and profits prior to the close of 1995 (the year in which
the PSMI Merger occurred). Failure to do so would result in disqualification of
PSI as a REIT (unless the "deficiency dividend" procedures described below apply
and PSI complies with those procedures).
The amount of any accumulated earnings and profits of PSMI acquired by PSI
was based on the consolidated earnings and profits of PSMI (including each of
its predecessors) through and including the date of the PSMI Merger
("Consolidated Accumulated Earnings"). As a condition to the PSMI Merger, PSI
received a study prepared by PSMI of the earnings and profits of PSMI and its
subsidiaries that showed, taking into account projected income of PSMI and its
affiliates to and including the time of the PSMI Merger and distributions to the
PSMI shareholders made at or prior to the time of the PSMI Merger, PSMI had no
Consolidated Accumulated Earnings at the time of the PSMI Merger. The
determination of the accumulated earnings and profits acquired by PSI in the
PSMI Merger ("Acquired Earnings") depends upon a number of factual matters
related to the activities and operations of PSMI and its predecessors during
their entire corporate existence and is subject to review and challenge by the
IRS. There can be no assurance that the IRS will not examine the tax returns of
PSMI and its predecessors for years prior to and including the PSMI Merger and
propose adjustments to increase their taxable income. Because the earnings and
profits study used to calculate the amount of Acquired Earnings is based on
these returns, such adjustments could increase the amount of the Acquired
Earnings. In this regard, the IRS can consider all taxable years of PSMI and its
predecessors as open for review for purposes of determining earnings and
profits.
Although not free from doubt, it appears that pursuant to Treasury
regulations PSI may be able to use certain "deficiency dividend" procedures to
distribute any Acquired Earnings that were subsequently determined to exist as a
result of an IRS audit. In order to use this "deficiency dividend" procedure,
PSI would have to make an additional dividend distribution to its shareholders
(in addition to distributions made for purposes of satisfying the normal REIT
distribution requirements), in the form of cash, notes, other property, or stock
in a taxable stock dividend, within 90 days of the IRS determination. In
addition, PSI would have to pay to the IRS an interest charge on 50% of the
Acquired Earnings that were not distributed prior to December 31, 1995, from the
date on which its 1995 tax return was due to the date the IRS determination was
made. The statute and Treasury regulations related to the application of the
"earnings and profits distribution" requirement to a REIT that acquires a "non-
REIT" in a reorganization and the availability of the "deficiency dividend"
procedure in those circumstances are not entirely clear, and there can be no
assurance that the IRS would not take the position either that the "deficiency
dividend" procedure is not available (in which case, PSI would cease to qualify
as a REIT effective for its taxable year in which the PSMI Merger occurs) or,
alternatively, that even if the procedure is available, PSI cannot qualify as a
REIT for the taxable year in which the Merger occurs (but it could qualify as a
REIT for subsequent years).
Acquisition of Affiliated Partnership Interests in the PSMI Merger. In the
PSMI Merger, PSI acquired interests in various partnerships that own and operate
Properties. PSI, for purposes of satisfying its REIT asset and income tests,
will be treated as if it directly owns a proportionate share of each of the
assets of these partnerships. For these purposes, under current Treasury
regulations PSI's interest in each of the partnerships must be determined in
accordance with its "capital interest" in such partnership. The character of
the various assets in the hands of the partnership and the items of gross income
of the partnership will retain their same character in the hands of PSI for
these purposes. Accordingly, to the extent the partnership receives real estate
rentals and holds real property, a proportionate share of such qualified income
and assets will be treated as qualified rental income and real estate assets of
PSI for purposes of determining its REIT qualification. It is expected that
substantially all of the properties of the partnerships will constitute real
estate assets and generate qualified rental income for these REIT qualification
purposes.
The acquisition of these partnership interests in the PSMI Merger created
several issues regarding PSI's satisfaction of the 95% gross income test.
First, PSI earns property management fees from these partnerships. Existing
Treasury regulations do not address the treatment of management fees derived by
a REIT from a partnership in which the REIT holds a partnership interest, but
the IRS has issued a number of private letter rulings holding that
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the portion of the management fee that corresponds to the REIT interest in the
partnership in effect is disregarded in applying the 95% gross income test where
the REIT holds a "substantial" interest in the partnership. PSI disregards the
portion of management fees derived from partnerships in which it is a partner
that corresponds to its interest in these partnerships in determining the amount
of its Nonqualifying Income, and PSI's prepayment of management fees set forth
above was computed based upon this approach. There can be no assurance,
however, that the IRS would not take a contrary position with respect to PSI,
either rejecting the approach set forth in the private letter rulings mentioned
above or contending that PSI's situation is distinguishable from those addressed
in the private letter rulings (for example, because PSI does not have a
"substantial" interest in the partnerships).
Second, PSI acquired interests in certain of these partnerships that
entitles PSI to a percentage of profits (either from operations, or upon a sale,
or both) in excess of the percentage of total capital originally contributed to
the partnership with respect to such interest. Existing Treasury Regulations do
not specifically address this situation, and it is uncertain, based on existing
authority, how PSI's "capital interest" in these partnerships should be
determined. This determination is relevant because it affects both the
percentage of the gross rental income of the partnership that is considered
gross rental income (or qualifying income) to PSI and the percentage of the
management fees paid to PSI that are disregarded in determining PSI's
Nonqualifying Income. For example, if PSI takes the position that it has a 25%
"capital interest" in a partnership (because it would receive 25% of the
partnership's assets upon a sale and liquidation) but the IRS determines it only
has a 1% "capital interest" (because the original holder of PSI's interest only
contributed 1% of the total capital contributed to the partnership), PSI's share
of the qualifying income from the partnership would be reduced and the portion
of the management fee from the partnership that would be treated as
Nonqualifying Income would be increased, thereby adversely affecting PSI's
ability to satisfy the 95% gross income test. In determining its "capital
interest" in the various partnerships in which PSI acquired an interest in the
PSMI Merger, PSI determines the percentage of the partnership's assets that
would be distributed to it if those assets were sold and distributed among the
partners in accordance with the applicable provisions of the partnership
agreements. There can be no assurance, however, that the IRS will agree with
this methodology and not contend that another, perhaps less favorable, method
must be used for purposes of determining PSI "capital interests." If that were
to occur, it could adversely affect PSI's ability to satisfy the 95% gross
income test following the PSMI Merger.
TAXATION OF PSI SHAREHOLDERS
Distributions generally will be taxable to PSI Shareholders as ordinary
income to the extent of PSI's earnings and profits. For this purpose, earnings
and profits of PSI 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 PSI as capital gain dividends generally will be
taxed as long-term capital gain to shareholders, to the extent that the
distributions do not exceed PSI'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 PSI, whether characterized
as ordinary income or as capital gain, are not eligible for the 70% dividends
received deduction for corporations. If PSI 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
PSI.
PSI may distribute cash in excess of its net taxable income. Upon
distribution of such cash by PSI to shareholders (other than as a capital gain
dividend), if all of PSI'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 PSI may, upon the sale of the capital stock, realize a
higher taxable gain or a smaller loss because the basis of PSI 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 PSI and has held
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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.
If a shareholder is subject to "backup withholding," PSI 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 PSI that the shareholder is
subject to the rules or has furnished an incorrect taxpayer identification
number. The Treasury Department has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current clarification procedures
and forms and clarify and modify reliance standards. If finalized in their
current form, the proposed regulations would generally be effective for payments
made after December 31, 1997, subject to certain transition rules.
PSI 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 PSI does not qualify as a REIT, distributions by PSI
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 PSI'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 PSI 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 PSI. 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 PSI 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 PSI
Shareholders are expected to be foreign taxpayers, PSI 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 PSI 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.
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STATE AND LOCAL TAXES
The tax treatment of PSI, and PPY, PPY2 and PPY3 Shareholders, in states
having taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of PSI, and PPY, PPY2
and PPY3 Shareholders, is provided nor is any representation made as to the tax
status of PSI in such states. All investors should consult their own tax
advisors as to the treatment of PSI under the respective state tax laws
applicable to them.
LEGAL OPINIONS
David Goldberg, senior vice president and general counsel of PSI, will
deliver an opinion to the effect that the shares of PSI Common Stock to be
issued in the Mergers will be validly issued, fully paid and nonassessable. Mr.
Goldberg owns 72,815 shares of PSI Common Stock, 1,000 shares of PSI convertible
preferred stock and 600 shares of PSI Senior Preferred Stock and has options to
acquire an additional 142,500 shares of PSI Common Stock. Mr. Goldberg also owns
2,200 shares of PPY2 Common Stock. 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 PPY, PPY2 or PPY3 Shareholder as a result of the PPY, PPY2
and PPY3 Mergers, respectively, and the subsequent ownership of PSI Common
Stock, as well as to the effect that each of the Mergers will constitute a
reorganization under Section 368(a) of the Code (based on certain factual
assumptions and representations made by PSI, PPY, PPY2 and PPY3, and certain
shareholders of PPY, PPY2 and PPY3). Hogan & Hartson L.L.P. has performed
certain legal services on behalf of PSI, including the representation of PSI in
the PSMI Merger.
EXPERTS
The consolidated financial statements of PSI for the year ended December
31, 1995 appearing in PSI's Annual Report on Form 10-K, as amended by a Form 10-
K/A (Amendment No. 3) dated May 15, 1996, and the combined summary of historical
information relating to operating revenues and specified expenses -- certain
properties (the "Combined Summary") for the properties and periods indicated in
Note 1 to such Combined Summary, appearing in PSI's Current Report on Form 8-K
dated September 6, 1996, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports included in PSI's Annual Report on Form
10-K and PSI's Current Report on Form 8-K dated September 6, 1996 and
incorporated herein by reference. Such consolidated financial statements and
Combined Summary 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 PPY, PPY2 and PPY3 for the year ended December
31, 1995 appearing herein and in the Annual Reports on Form 10-K of PPY, PPY2
and PPY3 have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports included herein. Such financial statements are included
herein in reliance upon such reports 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 PSI, PPY, PPY2 and PPY3 since their
respective organization, will be in attendance at the special meetings of
shareholders of PPY, PPY2 and PPY3 with the opportunity to make a statement if
they desire to do so and to respond to any appropriate inquiries of such
shareholders or their representatives.
SHAREHOLDER PROPOSALS
Any proposal that a PPY, PPY2 or PPY3 Shareholder wishes to submit for
consideration for inclusion in the proxy statement for the 1996 annual meetings
of shareholders was required to have been received by PPY, PPY2 or PPY3 no later
than July 1, 1996. No such proposals were received.
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GLOSSARY
The following are definitions of certain terms used in this Combined Proxy
Statement and Prospectus:
"Mergers." The mergers of PPY, PPY2 and PPY3 with and into PSI.
"PPY." Partners Preferred Yield, Inc., a REIT organized as a California
corporation.
"PPY2." Partners Preferred Yield II, Inc., a REIT organized as a California
corporation.
"PPY3." Partners Preferred Yield III, Inc., a REIT organized as a
California corporation.
"PPY Common Stock." Shares of Common Stock Series A, par value $.01 per
share, of PPY.
"PPY2 Common Stock." Shares of Common Stock Series A, par value $.01 per
share, of PPY2.
"PPY3 Common Stock." Shares of Common Stock Series A, par value $.01 per
share, of PPY3.
"PPY Partnership." Partners Preferred Yield, Ltd., a California Limited
Partnership, the predecessor to PPY.
"PPY2 Partnership." Partners Preferred Yield II, Ltd., a California Limited
Partnership, the predecessor to PPY2.
"PPY3 Partnership." Partners Preferred Yield III, Ltd., a California
Limited Partnership, the predecessor to PPY3.
"PPY Shareholder." A holder of shares of PPY Common Stock.
"PPY2 Shareholder." A holder of shares of PPY2 Common Stock.
"PPY3 Shareholder." A holder of shares of PPY3 Common Stock.
"PSI." Public Storage, Inc., a REIT organized as a California corporation
(formerly Storage Equities, Inc.).
"PSI Common Stock." Shares of Common Stock, par value $.10 per share, of
PSI.
"PSI Shareholder." A holder of shares of PSI Common Stock.
"PSMI." Public Storage Management, Inc., a California corporation, which,
together with its affiliates, was merged into Storage Equities, Inc. on November
16, 1995.
"REIT." A real estate investment trust.
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Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as
of this 15th day of August, 1996, by and among PUBLIC STORAGE, INC., a
California corporation ("PSI"), PARTNERS PREFERRED YIELD, INC., a California
corporation ("PPY"), PARTNERS PREFERRED YIELD II, INC., a California corporation
("PPY2") and PARTNERS PREFERRED YIELD III, INC., a California corporation
("PPY3").
A. The parties intend that this Agreement shall constitute a Plan of
Reorganization for purposes of Section 368(a) of the Internal Revenue Code of
1986, as amended. The Plan of Reorganization provides for the mergers of PPY,
PPY2 and PPY3 with and into PSI in accordance with the applicable provisions of
the General Corporation Law of California (the "GCLC") and the Agreements of
Merger substantially in the form attached hereto as Exhibit A ("Merger
Agreements").
B. The Boards of Directors of PSI, PPY, PPY2 and PPY3 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), PPY, PPY2 and PPY3 will be merged with and into PSI (the "Mergers") in
accordance with the terms, conditions and provisions of this Agreement and the
Merger Agreements. The Mergers shall become effective at the time at which the
Merger Agreements, together with the requisite Officers' Certificates of PSI,
PPY, PPY2 and PPY3 are filed with the California Secretary of State in
accordance with the GCLC (the "Effective Time"). PSI, PPY, PPY2 and PPY3 are
sometimes collectively referred to herein as the "Constituent Corporations" and
PSI, as the surviving corporation of the Mergers, is sometimes referred to
herein as the "Surviving Corporation." The merger of PPY into PSI, the merger
of PPY2 into PSI and the merger of PPY3 into PSI are not conditioned on each
other.
2.2 EFFECT OF THE MERGER. At the Effective Time:
2.2.1 CONSTITUENT CORPORATIONS. The separate corporate existence
of PPY, PPY2 and PPY3 shall cease and the Surviving Corporation shall thereupon
succeed, without other transfer, to all the rights and property of PPY, PPY2 and
PPY3 and shall be subject to all the debts and liabilities of PPY, PPY2 and PPY3
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 PPY, PPY2 and PPY3 shall be limited to the property affected thereby
immediately prior to the Effective Time; and any action or proceeding pending by
or against PPY, PPY2 and PPY3 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 PSI, 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 PSI
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.
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2.3 CONVERSION OF COMMON STOCK SERIES A. The manner of converting the
outstanding shares of (i) Common Stock Series A ($.01 par value) of PPY (the
"PPY Shares"), (ii) Common Stock Series A ($.01 par value) of PPY2 (the "PPY2
Shares") and (iii) Common Stock Series A ($.01 par value) of PPY3 (the "PPY3
Shares") into cash and/or shares of Common Stock ($.10 par value) of PSI (the
"PSI Shares") shall be as follows:
2.3.1 CASH ELECTION. At the Effective Time, subject to Sections
2.6 and 6.8 hereof, each PPY Share, PPY2 Share and PPY3 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 $19, $20.39 and $20.47, respectively, 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.
2.3.2 SHARE EXCHANGE. At the Effective Time, subject to Sections
2.4, 2.5, 2.7 and 6.8 hereof, each PPY Share, PPY2 Share and PPY3 Share (other
than Cash Election Shares and PPY, PPY2 and PPY3 Shares owned by PSI) shall be
converted into that number of PSI Shares equal to, rounded to the nearest
thousandth, the quotient (the "Conversion Number") derived by dividing $19,
$20.39 and $20.47, respectively, by the average of the per share closing prices
on the New York Stock Exchange, Inc. (the "NYSE") of PSI Shares during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
shareholders of PPY, PPY2 and PPY3, respectively, provided for in Section 6.2
hereof. If, prior to the Effective Time, PSI should split or combine the PSI
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 PSI Shares and no certificates or script
therefor, or other evidence of ownership thereof, will be issued in the Mergers.
In lieu of any such fractional share interests, each holder of PPY, PPY2 and
PPY3 Shares who would otherwise be entitled to such fractional share will, upon
surrender of the certificate representing such PPY, PPY2 and PPY3 Shares,
receive a whole PSI Share if such fractional share to which such holder would
otherwise have been entitled is .5 of an PSI Share or more, and such fractional
share shall be disregarded if it represents less than .5 of an PSI 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 PSI Shares such holder is
entitled to receive in the Mergers. 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 PSI Shares at the
Effective Time by (ii) the fractional interest.
2.5 PROCEDURE FOR CASH ELECTION. At the time of the mailing of the
Combined Proxy Statement and Prospectus provided for in Section 6.5 hereof, PSI
will send to each holder of record of PPY, PPY2 and PPY3 Shares at the record
date for PPY, PPY2 and PPY3 meetings 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 PPY, PPY2 or PPY3 Shares. Any such election to
receive the cash payment contemplated by Section 2.3.1 hereof shall have been
properly made only if American Stock Transfer & Trust Company (the "Depositary")
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 PSI), as set forth in such Form of Election.
Any Form of Election may be revoked by the person submitting the same to the
Depositary only by written notice received by the Depositary 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 Depositary is notified in writing
by the parties hereto that the Mergers have 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 PPY, PPY2 and PPY3
Shares to which such Form of Election relates shall be promptly returned to the
person submitting the same to the Depositary. The Depositary 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 Depositary determines that any election to receive cash was not
properly or timely made, the PPY, PPY2 and PPY3 Shares covered thereby shall not
be treated as Cash Election Shares, and shall be converted in the Mergers as
provided in Section 2.3.2 hereof. The
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Depositary may, with the agreement of PSI, PPY, PPY2 and PPY3, 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 OF PPY SHARES. If the aggregate number of Cash
Election Shares and Dissenting Shares (as defined below) of PPY is 20% or less
than the number of PPY Shares outstanding as of the record date for the meeting
of shareholders of PPY referred to in Section 6.2, then each Cash Election Share
of PPY shall be converted in the Mergers into the right to receive the Cash
Election Price for PPY Shares.
2.6.2 NO PRORATION OF PPY2 SHARES. If the aggregate number of
Cash Election Shares and Dissenting Shares (as defined below) of PPY2 is 20% or
less than the number of PPY2 Shares outstanding as of the record date for the
meeting of shareholders of PPY2 referred to in Section 6.2, then each Cash
Election Share of PPY2 shall be converted in the Mergers into the right to
receive the Cash Election Price for PPY2 Shares.
2.6.3 NO PRORATION OF PPY3 SHARES. If the aggregate number of
Cash Election Shares and Dissenting Shares (as defined below) of PPY3 is 20% or
less than the number of PPY3 Shares outstanding as of the record date for the
meeting of shareholders of PPY3 referred to in Section 6.2, then each Cash
Election Share of PPY3 shall be converted in the Mergers into the right to
receive the Cash Election Price for PPY3 Shares.
2.6.4 PRORATION OF PPY SHARES. If the aggregate number of Cash
Election Shares and Dissenting Shares of PPY exceeds 20%, then each Cash
Election Share of PPY shall be converted in the Mergers into the right to
receive cash or into PSI Shares as follows: the number of Cash Election Shares
of PPY owned by a holder of PPY Shares that shall be converted into the right to
receive the Cash Election Price for PPY Shares shall equal the number obtained
by multiplying (i) (A) 20% of outstanding PPY Shares less (B) the number of
Dissenting Shares (as hereinafter defined) of PPY, 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
of PPY. The balance of such Cash Election Shares shall be converted into PSI
Shares in accordance with the provisions of Section 2.3.2 hereof.
Notwithstanding the foregoing, PSI, in its sole discretion, may allow Cash
Election Shares of PPY to receive the Cash Election Price for PPY Shares even if
the aggregate number of Cash Election Shares and Dissenting Shares of PPY
exceeds 20% (but not 50%) of the number of PPY Shares outstanding as of the
record date for the meeting of shareholders of PPY referred to in Section 6.2.
2.6.5 PRORATION OF PPY2 SHARES. If the aggregate number of Cash
Election Shares and Dissenting Shares of PPY2 exceeds 20%, then each Cash
Election Share of PPY2 shall be converted in the Mergers into the right to
receive cash or into PSI Shares as follows: the number of Cash Election Shares
of PPY2 owned by a holder of PPY2 Shares that shall be converted into the right
to receive the Cash Election Price for PPY2 Shares shall equal the number
obtained by multiplying (i) (A) 20% of outstanding PPY2 Shares less (B) the
number of Dissenting Shares (as hereinafter defined) of PPY2, 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 of PPY2. The balance of such Cash Election Shares shall be
converted into PSI Shares in accordance with the provisions of Section 2.3.2
hereof. Notwithstanding the foregoing, PSI, in its sole discretion, may allow
Cash Election Shares of PPY2 to receive the Cash Election Price for PPY2 Shares
even if the aggregate number of Cash Election Shares and Dissenting Shares of
PPY2 exceeds 20% (but not 50%) of the number of PPY2 Shares outstanding as of
the record date for the meeting of shareholders of PPY2 referred to in Section
6.2.
2.6.6 PRORATION OF PPY3 SHARES. If the aggregate number of Cash
Election Shares and Dissenting Shares of PPY3 exceeds 20%, then each Cash
Election Share of PPY3 shall be converted in the Mergers into the right to
receive cash or into PSI Shares as follows: the number of Cash Election Shares
of PPY3 owned by a holder of PPY3 Shares that shall be converted into the right
to receive the Cash Election Price for PPY3 Shares shall equal the number
obtained by multiplying (i) (A) 20% of outstanding PPY3 Shares less (B) the
number of Dissenting Shares (as hereinafter defined) of PPY3, 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 of PPY3. The balance of such Cash Election Shares shall be
converted into PSI Shares in accordance with the provisions
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of Section 2.3.2 hereof. Notwithstanding the foregoing, PSI, in its sole
discretion, may allow Cash Election Shares of PPY3 to receive the Cash Election
Price for PPY3 Shares even if the aggregate number of Cash Election Shares and
Dissenting Shares of PPY3 exceeds 20% (but not 50%) of the number of PPY3 Shares
outstanding as of the record date for the meeting of shareholders of PPY3
referred to in Section 6.2.
2.7 DISSENTING SHARES. PPY, PPY2 and PPY3 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 PSI 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 PPY, PPY2 or PPY3 Shares pursuant to these provisions of the GCLC
shall receive payment therefor from the Surviving Corporation in accordance
therewith. If any holder of PPY, PPY2 or PPY3 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 PPY, PPY2 or PPY3 Shares, such
PPY, PPY2 or PPY3 Shares shall automatically be converted into the right to
receive PSI Shares pursuant to Section 2.3.2 hereof.
2.8 PSI SHARES UNAFFECTED. The Mergers shall effect no change in any
of the outstanding PSI Shares and no outstanding PSI Shares shall be converted
or exchanged as a result of the Mergers, 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 PPY, PPY2 and PPY3 Shares owned by PSI 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 PPY, PPY2 and PPY3 Shares
which were converted into PSI Shares pursuant hereto, upon surrender of such
certificate to The 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 PSI Shares
into which the PPY, PPY2 and PPY3 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 PPY, PPY2 and PPY3 Shares of record at the Effective Time whose stock
shall have been converted into PSI Shares, advising such holder of the
effectiveness of the Mergers and the procedure for surrendering to the Exchange
Agent certificates evidencing PPY, PPY2 and PPY3 Shares in exchange for
certificates evidencing PSI 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 PPY, PPY2 or PPY3 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 PSI Shares into which the PPY, PPY2 or PPY3
Shares evidenced thereby were converted. However, until such outstanding
certificates formerly evidencing PPY, PPY2 or PPY3 Shares are so surrendered, no
dividend payable to holders of record of PSI Shares shall be paid to the holders
of such outstanding certificates in respect of PPY, PPY2 or PPY3 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 PSI 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 PPY, PPY2 and PPY3 Shares on the records of
PPY, PPY2 and PPY3, respectively, and, if certificates formerly evidencing such
shares are presented to the Surviving Corporation, they shall be cancelled and
exchanged for certificates evidencing PSI Shares and cash in lieu of fractional
share interests as herein provided.
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2.13 CONVERSION OF COMMON STOCK SERIES B, C AND D. At the Effective
Time, subject to Section 6.8 hereof, each share of (i) Common Stock Series B, C
and D ($.01 par value) of PPY, (ii) Common Stock Series B, C and D ($.01 par
value) of PPY2 and (iii) Common Stock Series B, C and D ($.01 par value) of PPY3
(in each case, other than shares owned by PSI) shall be converted into that
number of PSI Shares equal to, rounded to the nearest thousandth, the quotient
derived by dividing $11.66, $12.26 and $12.30, respectively, by the average per
share closing prices on the NYSE of PSI Shares during the 20 consecutive trading
days ending on the fifth trading day prior to the meeting of shareholders of
PPY, PPY2 and PPY3, respectively, provided for in Section 6.2 hereof. If, prior
to the Effective Time, PSI should split or combine the PSI Shares, or pay a
stock dividend, such conversion number will be appropriately adjusted to reflect
such action. At the Effective Time, any Common Stock Series B, C and D of PPY,
PPY2 and PPY3 owned by PSI shall be cancelled and retired and no shares shall be
issuable with respect thereto.
3. CLOSING.
3.1 TIME AND PLACE OF CLOSING. If this Agreement is approved by the
shareholders of PPY, PPY2 or PPY3, a meeting (the "Closing") shall take place as
promptly as practicable thereafter at which the applicable parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as PSI may designate. The date of the
Closing shall be referred to as the "Closing Date."
3.2 EXECUTION AND FILING OF MERGER AGREEMENT. At or before the Closing
and after shareholder approval of PPY, PPY2 or PPY3, the applicable parties
shall execute and deliver the Merger Agreements, together with the requisite
Officers' Certificates, for filing with the California Secretary of State. The
Merger Agreements, 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 PPY, PPY2 AND PPY3.
4.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PPY. PPY represents,
warrants and agrees with PSI that:
4.1.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of PPY, (i) the execution, delivery and performance of this
Agreement by PPY has been duly authorized and approved by all necessary
corporate action of PPY, and (ii) PPY has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.1.2 ORGANIZATION AND RELATED MATTERS. PPY 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 PPY. PPY has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
4.1.3 CAPITAL STOCK. The authorized capital stock of PPY consists
solely of (i) 4,456,328 shares of Common Stock Series A ($.01 par value),
3,077,028 of which were issued and outstanding as of July 31, 1996, (ii) 420,875
shares of Common Stock Series B ($.01 par value), all of which were issued and
outstanding as of July 31, 1996, (iii) 247,574 shares of Common Stock Series C
($.01 par value), all of which were issued and outstanding as of July 31, 1996
and (iv) 163,036 shares of Common Stock Series D ($.01 par value), all of which
were issued and outstanding as of July 31, 1996. All of the issued and
outstanding shares of Common Stock Series A, B, C and D of PPY have been duly
and validly authorized and issued, and are fully paid and nonassessable. There
are no options or agreements to which PPY is a party or by which it is bound
calling for or requiring the issuance of any of PPY's capital stock, except that
the shares of Common Stock Series B and C are convertible into shares of Common
Stock Series A in accordance with PPY's Articles of Incorporation.
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4.1.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of
the Mergers and of this Agreement by the shareholders of PPY, neither the
execution and delivery of this Agreement nor the consummation by PPY 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(s)
and Officers' Certificates pursuant to the GCLC and appropriate documents with
the relevant authorities of other states in which PPY is authorized to do
business, (D) in connection with any state or local tax which is attributable to
the beneficial ownership of PPY'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 PPY
or adversely affect the ability of PPY 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 PPY 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
PPY or adversely affect the ability of PPY to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.1.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PPY or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PPY or adversely affect the ability of PPY to consummate the
transactions contemplated hereby.
4.1.5 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 PPY, threatened against
PPY or involving any of its properties or assets.
4.1.6 SEC REPORTS. Since January 1, 1993, PPY 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 "PPY SEC Reports"). None
of the PPY 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.
4.1.7 FINANCIAL STATEMENTS. The financial statements included in
the PPY 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 PPY as
of their respective dates, and the results of operations of PPY for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
4.1.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1,
1996, the business of PPY 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.
4.1.9 S-4 REGISTRATION STATEMENT AND COMBINED PROXY STATEMENT AND
PROSPECTUS. None of the information supplied or to be supplied by PPY for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Combined 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
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necessary in order to make the statements therein not misleading, or (ii) in the
case of the Combined Proxy Statement and Prospectus, at the time of the mailing
of the Combined Proxy Statement and Prospectus and at the time of the meetings
of the shareholders of PPY, PPY2 and PPY3, 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.
4.1.10 INSURANCE. All material insurance of PPY is currently in
full force and effect and PPY has reported all claims and occurrences to the
extent required by such insurance.
4.1.11 DISCLOSURE. The representations and warranties by PPY 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.
4.2 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PPY2. PPY2
represents, warrants and agrees with PSI that:
4.2.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of PPY2, (i) the execution, delivery and performance of this
Agreement by PPY2 has been duly authorized and approved by all necessary
corporate action of PPY2, and (ii) PPY2 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.2.2 ORGANIZATION AND RELATED MATTERS. PPY2 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 PPY2. PPY2 has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
4.2.3 CAPITAL STOCK. The authorized capital stock of PPY2
consists solely of (i) 4,619,515 shares of Common Stock Series A ($.01 par
value), 3,130,103 of which were issued and outstanding as of July 31, 1996, (ii)
420,875 shares of Common Stock Series B ($.01 par value), all of which were
issued and outstanding as of July 31, 1996, (iii) 247,574 shares of Common Stock
Series C ($.01 par value), all of which were issued and outstanding as of July
31, 1996 and (iv) 163,036 shares of Common Stock Series D ($.01 par value), all
of which were issued and outstanding as of July 31, 1996. All of the issued and
outstanding shares of Common Stock Series A, B, C and D of PPY2 have been duly
and validly authorized and issued, and are fully paid and nonassessable. There
are no options or agreements to which PPY2 is a party or by which it is bound
calling for or requiring the issuance of any of PPY2's capital stock, except
that the shares of Common Stock Series B and C are convertible into shares of
Common Stock Series A in accordance with PPY2's Articles of Incorporation.
4.2.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of
the Mergers and of this Agreement by the shareholders of PPY2, neither the
execution and delivery of this Agreement nor the consummation by PPY2 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(s)
and Officers' Certificates pursuant to the GCLC and appropriate documents with
the relevant authorities of other states in which PPY2 is authorized to do
business, (D) in connection with any state or local tax which is attributable to
the beneficial ownership of PPY2'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 PPY2
or adversely affect the ability of PPY2 to consummate the transactions
contemplated hereby;
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(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 PPY2 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 PPY2 or adversely
affect the ability of PPY2 to consummate the transactions contemplated hereby;
or (iv) assuming the consents, approvals, authorizations or permits and filings
or notifications referred to in this Section 4.2.4 are duly and timely obtained
or made, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to PPY2 or its properties or assets, except for violations
which would not in the aggregate have a material adverse effect on PPY2 or
adversely affect the ability of PPY2 to consummate the transactions contemplated
hereby.
4.2.5 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 PPY2, threatened against
PPY2 or involving any of its properties or assets.
4.2.6 SEC REPORTS. Since January 1, 1993, PPY2 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 "PPY2 SEC Reports"). None of the PPY2 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.
4.2.7 FINANCIAL STATEMENTS. The financial statements included in
the PPY2 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 PPY2 as of their respective dates, and the results of operations of PPY2 for
the periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
4.2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1,
1996, the business of PPY2 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.
4.2.9 S-4 REGISTRATION STATEMENT AND COMBINED PROXY STATEMENT AND
PROSPECTUS. None of the information supplied or to be supplied by PPY2 for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Combined 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 Combined Proxy Statement and Prospectus, at the time of the
mailing of the Combined Proxy Statement and Prospectus and at the time of the
meetings of the shareholders of PPY, PPY2 and PPY3, 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.
4.2.10 INSURANCE. All material insurance of PPY2 is currently in
full force and effect and PPY2 has reported all claims and occurrences to the
extent required by such insurance.
4.2.11 DISCLOSURE. The representations and warranties by PPY2 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.
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4.3 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PPY3. PPY3
represents, warrants and agrees with PSI that:
4.3.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of PPY3, (i) the execution, delivery and performance of this
Agreement by PPY3 has been duly authorized and approved by all necessary
corporate action of PPY3, and (ii) PPY3 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.3.2 ORGANIZATION AND RELATED MATTERS. PPY3 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 PPY3. PPY3 has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
4.3.3 CAPITAL STOCK. The authorized capital stock of PPY3
consists solely of (i) 1,851,696 shares of Common Stock Series A ($.01 par
value), 1,313,384 of which were issued and outstanding as of July 31, 1996, (ii)
168,709 shares of Common Stock Series B ($.01 par value), all of which were
issued and outstanding as of July 31, 1996, (iii) 99,241 shares of Common Stock
Series C ($.01 par value), all of which were issued and outstanding as of July
31, 1996 and (iv) 65,354 shares of Common Stock Series D ($.01 par value), all
of which were issued and outstanding as of July 31, 1996. All of the issued and
outstanding shares of Common Stock Series A, B, C and D of PPY3 have been duly
and validly authorized and issued, and are fully paid and nonassessable. There
are no options or agreements to which PPY3 is a party or by which it is bound
calling for or requiring the issuance of any of PPY3's capital stock, except
that the shares of Common Stock Series B and C are convertible into shares of
Common Stock Series A in accordance with PPY3's Articles of Incorporation.
4.3.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of
the Mergers and of this Agreement by the shareholders of PPY3, neither the
execution and delivery of this Agreement nor the consummation by PPY3 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(s)
and Officers' Certificates pursuant to the GCLC and appropriate documents with
the relevant authorities of other states in which PPY3 is authorized to do
business, (D) in connection with any state or local tax which is attributable to
the beneficial ownership of PPY3'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 PPY3
or adversely affect the ability of PPY3 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 PPY3 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
PPY3 or adversely affect the ability of PPY3 to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.2.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PPY3 or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PPY3 or adversely affect the ability of PPY3 to consummate the
transactions contemplated hereby.
4.3.5 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 PPY3, threatened against
PPY3 or involving any of its properties or assets.
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4.3.6 SEC REPORTS. Since January 1, 1993, PPY3 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 "PPY3 SEC Reports"). None of the PPY3 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.
4.3.7 FINANCIAL STATEMENTS. The financial statements included in
the PPY3 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 PPY3 as of their respective dates, and the results of operations of PPY3 for
the periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
4.3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1,
1996, the business of PPY3 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.
4.3.9 S-4 REGISTRATION STATEMENT AND COMBINED PROXY STATEMENT AND
PROSPECTUS. None of the information supplied or to be supplied by PPY3 for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Combined 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 Combined Proxy Statement and Prospectus, at the time of the
mailing of the Combined Proxy Statement and Prospectus and at the time of the
meetings of the shareholders of PPY, PPY3 and PPY3, 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.
4.3.10 INSURANCE. All material insurance of PPY3 is currently in
full force and effect and PPY3 has reported all claims and occurrences to the
extent required by such insurance.
4.3.11 DISCLOSURE. The representations and warranties by PPY3 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 PSI. PSI hereby
represents, warrants and agrees with PPY, PPY2 and PPY3 that:
5.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement by PSI have been duly authorized and approved by all necessary
corporate action of PSI, and PSI 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. PSI 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
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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 PSI.
5.3 CAPITAL STOCK. The authorized capital stock of PSI consists solely
of (i) 200,000,000 shares of Common Stock ($.10 par value), 77,013,724 of which
were issued and outstanding as of July 31, 1996, (ii) 7,000,000 shares of Class
B Common Stock ($.10 par value), all of which were issued and outstanding as of
July 31, 1996 and (iii) 50,000,000 shares of Preferred Stock ($.10 par value),
13,447,180 of which were issued and outstanding as of July 31, 1996. All of the
issued and outstanding shares of Common Stock and Preferred Stock of PSI have
been duly and validly authorized and issued, and are fully paid and
nonassessable. The issuance of the PSI Shares in the Mergers has been duly and
validly authorized and, when issued and delivered as provided in this Agreement,
the PSI Shares will have been duly and validly issued, fully paid and
nonassessable; and the shareholders of PSI have no preemptive rights with
respect to any shares of capital stock of PSI.
5.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement nor the consummation by PSI 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 Agreements and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which PSI is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of the real property of PPY, PPY2 and PPY3, (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
PSI or adversely affect the ability of PSI 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 PSI 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
PSI or adversely affect the ability of PSI 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 PSI or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSI or adversely affect the ability of PSI 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 PSI, threatened against PSI or
involving any of its properties or assets.
5.6 SEC REPORTS. Since January 1, 1993, PSI 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 "PSI SEC Reports"). None of the PSI 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 PSI'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 PSI as
of their respective dates, and the results of operations of PSI for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
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5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1995, the
business of PSI 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 COMBINED PROXY STATEMENT AND
PROSPECTUS. None of the information supplied or to be supplied by PSI for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Combined 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 Combined Proxy Statement and Prospectus, at the time of the
mailing of the Combined Proxy Statement and Prospectus and at the time of the
meetings of the shareholders of PPY, PPY2 and PPY3, 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 PSI is currently in full
force and effect and PSI has reported all claims and occurrences to the extent
required by such insurance.
5.11 DISCLOSURE. The representations and warranties by PSI 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 PSI,
PPY, PPY2 and PPY3 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.
PPY, PPY2 and PPY3 will not issue any capital stock or debt securities
convertible into capital stock. PSI, PPY, PPY2 and PPY3 will promptly notify
the others 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. PPY, PPY2 and PPY3 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 (i) in the case of PPY, the affirmative vote of a majority
of the outstanding shares of Common Stock Series A, B, C and D of PPY, counted
together as a single class with the shares of Common Stock Series B, C and D
voted with the holders of a majority of the unaffiliated shares of Common Stock
Series A; (ii) in the case of PPY2, the affirmative vote of a majority of the
outstanding shares of Common Stock Series A, B, C and D of PPY2, counted
together as a single class with the shares of Common Stock Series B, C and D
voted with the holders of a majority of the unaffiliated shares of Common Stock
Series A; and (iii) in the case of PPY3, the affirmative vote of a majority of
the outstanding shares of Common Stock Series A, B, C and D of PPY3, counted
together as a single class with the shares of Common Stock Series B, C and D
voted with the holders of a majority of the unaffiliated shares of Common Stock
Series A.
6.3 TAX REPORTING. Each of PSI, PPY, PPY2 and PPY3 agrees to report
the Mergers 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. PPY, PPY2 and PPY3 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 PPY, PPY2 or PPY3, or any purchase of all or any
significant portion of either of their
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assets, or any equity interest in either of them, 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 respective Board of Directors on behalf of PPY, PPY2 or PPY3
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 of PPY, PPY2 or PPY3 to breach their fiduciary duty to the
shareholders of the respective corporation under applicable law as advised by
counsel. PPY, PPY2 and PPY3 will notify PSI 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 PPY,
PPY2 or PPY3, and will keep PSI informed of the status and terms of any such
proposals and any such negotiations or discussions.
6.5 REGISTRATION AND PROXY STATEMENTS. PPY, PPY2 and PPY3 will
promptly prepare and file with the SEC a combined preliminary proxy statement in
connection with the vote of shareholders of PPY, PPY2 and PPY3 with respect to
the Mergers. PSI 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 combined proxy statement/prospectus, in connection with the
registration under the Securities Act of 1933, as amended (the "Securities Act")
of the PSI Shares to be issued to holders of PPY, PPY2 and PPY3 Shares in the
Mergers (such combined 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 PPY, PPY2 and PPY3, being herein called the "Combined
Proxy Statement and Prospectus"). PSI, PPY, PPY2 and PPY3 will use their 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 PPY, PPY2 and PPY3 will each
use its best efforts to cause the Combined Proxy Statement and Prospectus to be
mailed to its respective shareholders at the earliest practicable date. PPY,
PPY2 and PPY3 agree that if at any time prior to the Effective Time any event
with respect to PPY, PPY2 and PPY3, respectively, should occur which is required
to be described in an amendment of, or a supplement to, the Combined 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 PPY, PPY2 and
PPY3 and (ii) the Combined Proxy Statement and Prospectus will (with respect to
PPY, PPY2 and PPY3) comply as to form in all material respects with the
requirements of the federal securities laws. PSI agrees that (i) if at any time
prior to the Effective Time any event with respect to PSI should occur which is
required to be described in an amendment of, or a supplement to, the Combined
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 PPY,
PPY2 and PPY3 and (ii) the Combined Proxy Statement and Prospectus will (with
respect to PSI) comply as to form in all material respects with the requirements
of the federal securities laws.
6.6 BEST EFFORTS. Each of PSI, PPY, PPY2 and PPY3 shall: (i) promptly
make its respective filings and thereafter make any other required submissions
under all applicable laws with respect to the Mergers 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 PSI SHARES. PSI will use its best
efforts to register the PSI Shares under the applicable provisions of the
Securities Act and to cause the PSI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 DISTRIBUTIONS.
6.8.1 PPY DISTRIBUTIONS. PPY 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
$.27 per share, (ii) 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 PPY (as defined below) allocable to the respective
shareholders as of the Effective Time exceeds $19.00 per share in the case of
the PPY Shares and $11.66 per share in the case of the PPY Common
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Stock Series B, C and D and (iii) pre-Mergers cash distributions required to
satisfy PPY's REIT distribution requirements (the number of PSI Shares issued in
the Mergers and the amount receivable upon Cash Elections would be reduced on a
pro rata basis in an aggregate amount equal to such additional distributions).
For this purpose, the Net Asset Value of PPY is the sum of (a) the fair market
value of PPY's real estate assets as determined by appraisal by Nicholson-
Douglas Realty Consultants, Inc. as of June 30, 1996, and (b) the book value of
PPY's non-real estate assets as of the date of determination, and less (c) PPY's
liabilities as of the date of determination. The determination of book value
and liabilities shall be from PPY's financial statements prepared in accordance
with generally accepted accounting principles on a basis consistent with prior
periods.
6.8.2 PPY2 DISTRIBUTIONS. PPY2 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) 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 PPY2 (as defined below) allocable to the respective
shareholders as of the Effective Time exceeds $20.39 per share in the case of
the PPY2 Shares and $12.26 per share in the case of the PPY2 Common Stock Series
B, C and D and (iii) pre-Mergers cash distributions required to satisfy PPY2's
REIT distribution requirements (the number of PSI Shares issued in the Mergers
and the amount receivable upon Cash Elections would be reduced on a pro rata
basis in an aggregate amount equal to such additional distributions). For this
purpose, the Net Asset Value of PPY2 is the sum of (a) the fair market value of
PPY2's real estate assets as determined by appraisal by Nicholson-Douglas Realty
Consultants, Inc. as of June 30, 1996, and (b) the book value of PPY2's non-real
estate assets as of the date of determination, and less (c) PPY2's liabilities
as of the date of determination. The determination of book value and liabilities
shall be from PPY2's financial statements prepared in accordance with generally
accepted accounting principles on a basis consistent with prior periods.
6.8.3 PPY3 DISTRIBUTIONS. PPY3 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
$.34 per share, (ii) 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 PPY3 (as defined below) allocable to the respective
shareholders as of the Effective Time exceeds $20.47 per share in the case of
the PPY3 Shares and $12.30 per share in the case of the PPY3 Common Stock Series
B, C and D and (iii) pre-Mergers cash distributions required to satisfy PPY3's
REIT distribution requirements (the number of PSI Shares issued in the Mergers
and the amount receivable upon Cash Elections would be reduced on a pro rata
basis in an aggregate amount equal to such additional distributions). For this
purpose, the Net Asset Value of PPY3 is the sum of (a) the fair market value of
PPY3's real estate assets as determined by appraisal by Nicholson-Douglas Realty
Consultants, Inc. as of June 30, 1996, and (b) the book value of PPY3's non-real
estate assets as of the date of determination, and less (c) PPY3's liabilities
as of the date of determination. The determination of book value and liabilities
shall be from PPY3's financial statements prepared in accordance with generally
accepted accounting principles on a basis consistent with prior periods.
7. CONDITIONS.
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 PPY, PPY2 AND PPY3 SHAREHOLDER APPROVAL. This Agreement and
the transactions contemplated hereby shall have been duly approved by the
shareholders of PPY, PPY2 and PPY3 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
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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 PSI, PPY, PPY2 or PPY3.
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 PSI Shares shall have been received.
7.1.5 LISTING OF PSI SHARES ON NYSE. The PSI Shares shall have
been approved for listing on the NYSE upon official notice of issuance.
7.1.6 FAIRNESS OPINION. The Boards of Directors of PPY, PPY2 and
PPY3 shall have received the opinion of Robert A. Stanger & Co., Inc. in form
and substance satisfactory to them to the effect that the consideration to be
received by the shareholders of PPY, PPY2 and PPY3 in the Mergers is fair to
such shareholders from a financial point of view, and such opinion shall not
have been withdrawn or revoked.
7.1.7 TAX OPINION. The Boards of Directors of PSI, PPY, PPY2 and
PPY3 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 PSI. The obligations of PSI 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 PSI to the extent permitted by applicable law:
7.2.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PPY, PPY2 and PPY3 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 PPY, PPY2 and PPY3 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. PSI shall have received such
certificates of officers of PPY, PPY2 and PPY3 as PSI may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to it of the Chief Executive Officer and the Chief Financial Officer of PPY,
PPY2 and PPY3, to the effect that, to the best of their knowledge, all
representations and warranties of PPY, PPY2 and PPY3 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 PPY, PPY2 and PPY3 have performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by them at or prior to the Closing.
7.2.3 TITLE TO PROPERTIES; ENVIRONMENTAL AUDITS. PSI 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 PPY, PPY2 and PPY3.
7.2.4 TRADING PRICE OF PSI SHARES. The average of the per share
closing prices of the PSI Shares on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the meeting of shareholders of
PPY, PPY2 and PPY3 provided for in Section 6.2 hereof (the "Average PSI Share
Price") shall be not less than $20.
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7.2.5 DISSENTING SHARES. The number of Dissenting Shares shall be
less than 5% of the outstanding PPY Shares in the case of PPY, less than 5% of
the outstanding PPY2 Shares in the case of PPY2 and less than 5% of the
outstanding PPY3 Shares in the case of PPY3.
7.3 CONDITIONS TO OBLIGATIONS OF PPY, PPY2 AND PPY3. The obligations
of PPY, PPY2 and PPY3 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 PPY, PPY2 and
PPY3 to the extent permitted by applicable law.
7.3.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSI 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 PSI 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. PPY, PPY2 and PPY3 shall have
received such certificates of officers of PSI as PPY, PPY2 and PPY3 may
reasonably request in connection with the Closing, including upon request a
certificate satisfactory to them of the Chief Executive Officer and the Chief
Financial Officer of PSI, to the effect that, to the best of their knowledge,
all representations and warranties of PSI 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 PSI 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.
7.4 SEPARATE MERGERS. The merger of PPY into PSI, the merger of PPY2
into PSI and the merger of PPY3 into PSI are not conditioned on the others. If
the conditions to one of the Mergers are satisfied or waived, such merger will
be consummated on the terms provided in this Agreement, notwithstanding that the
conditions to the other Merger have not been satisfied or waived.
8. TERMINATION.
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and the Mergers may be abandoned at any time prior to the Effective Time, before
or after shareholder approval, by the mutual written consent of PSI, PPY, PPY2
or PPY3.
8.2 TERMINATION BY PSI, PPY, PPY2 OR PPY3. This Agreement may be
terminated and the Mergers may be abandoned by action of the Board of Directors
of PSI, PPY, PPY2 or PPY3 if (i) the Mergers shall not have been consummated by
June 30, 1997 (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 Mergers 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 Mergers and such
order, decree, ruling or other action shall have become final and nonappealable;
or (iii) (A) the shareholders of PPY, in the case of the merger of PPY into PSI,
or (B) the shareholders of PPY2, in the case of the merger of PPY2 into PSI, or
(C) the shareholders of PPY3, in the case of the merger of PPY3 into PSI, shall
have failed to approve this Agreement and the transactions contemplated hereby
at their respective meetings of shareholders.
8.3 TERMINATION BY PSI. This Agreement may be terminated by PSI, and
the Mergers may be abandoned at any time prior to the Effective Time, as to the
defaulting party if (i) PPY, PPY2 or PPY3 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 such party at or prior to
such date of termination, which failure to comply has not been cured within five
business days following notice to such party of such failure to comply, or (ii)
any representation or warranty of PPY, PPY2 or PPY3 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
A-16
<PAGE>
following notice to such party 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 PPY, PPY2 OR PPY3. This Agreement may be terminated
by PPY, PPY2 or PPY3 and the Mergers may be abandoned at any time prior to the
Effective Time, before or after shareholder approval, if (i) PSI 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
PSI at or prior to such date of termination, which failure to comply has not
been cured within five business days following notice to PSI of such failure to
comply, or (ii) any representation or warranty of PSI 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 PSI 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 Mergers 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 Mergers are 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 Mergers are not consummated, each of PSI, PPY, PPY2
and PPY3 shall pay its own expenses, except that any expenses incurred in
connection with the printing of the S-4 Registration Statement and the Combined
Proxy Statement and Prospectus, the real estate appraisals and environmental
audits of the properties of PPY, PPY2 and PPY3 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 shall be paid 50% by PSI and the
balance by PPY, PPY2 and PPY3 in equal shares.
9.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
respective representations and warranties of PSI, PPY, PPY2 and PPY3 contained
herein or in any certificate or document delivered pursuant hereto shall expire
with and be terminated and extinguished by the effectiveness of the Mergers 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 Mergers
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 Mergers 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
A-17
<PAGE>
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."
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 PSI:
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PPY:
Partners Preferred Yield, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: B. Wayne Hughes
Chief Executive Officer
If to PPY2:
Partners Preferred Yield II, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: B. Wayne Hughes
Chief Executive Officer
If to PPY3:
Partners Preferred Yield III, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
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.
A-18
<PAGE>
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 PPY, PPY2 or PPY3, the officers of any Constituent Corporation are
fully authorized in the name of PPY or PPY2 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.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
---------------------
Harvey Lenkin
President
PARTNERS PREFERRED YIELD, INC.
By: /s/ B. WAYNE HUGHES
---------------------
B. Wayne Hughes
Chief Executive Officer
PARTNERS PREFERRED YIELD II, INC.
By: /s/ B. WAYNE HUGHES
---------------------
B. Wayne Hughes
Chief Executive Officer
PARTNERS PREFERRED YIELD III, INC.
By: /s/ B. WAYNE HUGHES
---------------------
B. Wayne Hughes
Chief Executive Officer
A-19
<PAGE>
Exhibit A to
Appendix A
----------
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this
_____ day of _______________, 1996, by and between PUBLIC STORAGE, INC., a
California corporation ("PSI"), and [PARTNERS PREFERRED YIELD, INC., a
California corporation ("PPY"), PARTNERS PREFERRED YIELD II, INC., a California
corporation ("PPY2") or PARTNERS PREFERRED YIELD III, INC. a California
corporation ("PPY3")], with reference to the following:
A. PSI was incorporated in 1980 under the laws of California, and on
the date hereof its authorized capital stock consists of 200,000,000 shares of
Common Stock, $.10 par value (the "PSI Shares"), ___________ of which are issued
and outstanding, 7,000,000 shares of Class B Common Stock, _________ of which
are issued and outstanding and 50,000,000 shares of Preferred Stock ($.01 par
value), ___________ of which are issued and outstanding.
B. __________ was incorporated in 1991 under the laws of California,
and on the date hereof has outstanding __________ shares of Common Stock Series
A, $.01 par value (the "_____ Shares"), _________ shares of Common Stock Series
B, _________ shares of Common Stock Series C and _________ shares of Common
Stock Series D.
C. PSI, PPY, PPY2 and PPY3 have entered into an Agreement and Plan
of Reorganization dated as of _______________, 1996 (the "Plan"), setting forth
certain representations, warranties, conditions and agreements pertaining to the
Merger (as defined below).
D. The Boards of Directors of PSI and __________ 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),
__________ will be merged with and into PSI (the "Merger") and PSI shall be the
surviving corporation. PSI and __________ are sometimes collectively referred
to herein as the "Constituent Corporations" and PSI, 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 PSI and __________, 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 __________ shall
cease and the Surviving Corporation shall thereupon succeed, without other
transfer, to all the rights and property of __________ and shall be subject to
all the debts and liabilities of __________ 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 __________ shall
be limited to the property affected thereby immediately prior to the Effective
Time; and any action or proceeding pending by or against __________ may be
prosecuted to judgment, which shall bind the Surviving Corporation, or the
Surviving Corporation may be proceeded against or substituted in its place.
E.A-1
<PAGE>
(b) The Articles of Incorporation and the Bylaws of PSI, 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.
(c) The directors of PSI shall continue as 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 __________ SHARES. The manner of converting
the outstanding __________ Shares into cash and/or PSI Shares shall be as
follows:
(a) At the Effective Time, subject to Section 2.6 of the
Plan, each __________ 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 __________ Share (other than Cash Election Shares and
__________ Shares owned by PSI) shall be converted into ______ PSI Shares.
2.2 NO FRACTIONAL SHARES. Notwithstanding any other term or
provision of this Agreement or the Plan, no fractional PSI 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 __________ Shares who would otherwise be entitled to such fractional
share will, upon surrender of the certificate representing such __________
shares, receive a whole PSI Share if such fractional share to which such holder
would otherwise have been entitled is .5 of an PSI Share or more, and such
fractional share shall be disregarded if it represents less than .5 of an PSI
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 PSI 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 PSI Shares at the Effective Time by (ii) the fractional interest.
2.3 DISSENTING SHARES. __________ 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 PSI 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 __________
Shares pursuant to these provisions of the GCLC shall receive payment therefor
from the Surviving Corporation in accordance therewith. If any holder of
__________ 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 __________ Shares, such __________ Shares shall
automatically be converted into the right to receive PSI Shares pursuant to
Section 2.1(b) hereof.
2.4 PSI SHARES UNAFFECTED. The Merger shall effect no change in
any of the outstanding PSI Shares and no outstanding PSI 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.
E.A-2
<PAGE>
2.5 CANCELLATION OF SHARES HELD OR OWNED BY PARTIES. At the
Effective Time, any __________ Shares owned by PSI 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 __________ Shares
which were converted into PSI 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 PSI Shares
into which the __________ 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
__________ Shares of record at the Effective Time whose stock shall have been
converted into PSI Shares, advising such holder of the effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent certificates
evidencing __________ Shares in exchange for certificates evidencing PSI 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 __________ 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 PSI Shares into which the __________ Shares
evidenced thereby were converted. However, until such outstanding certificates
formerly evidencing __________ Shares are so surrendered, no dividend payable to
holders of record of PSI Shares shall be paid to the holders of such outstanding
certificates in respect of __________ 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 PSI
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 __________ Shares on the records of
__________ and, if certificates formerly evidencing such shares are presented to
the Surviving Corporation, they shall be cancelled and exchanged for
certificates evidencing PSI Shares and cash in lieu of fractional share
interests as herein provided.
2.9 CONVERSION OF COMMON STOCK SERIES B, C AND D. At the
Effective Time, each share of Common Stock Series B (other than shares owned by
PSI) shall be converted into ______ PSI Shares and each share of Common Stock
Series C and D (other than shares owned by PSI) shall be converted into ______
PSI Shares.
ARTICLE III
-----------
3.1 HEADINGS. The descriptive headings contained in the
Sections of this Agreement are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
3.2 PARTIES IN INTEREST. This Agreement, and the rights,
interests and obligations created by this Agreement, shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 FURTHER ACTION. If at any time after the Effective Time,
the Surviving Corporation shall determine that any assignments, transfers, deeds
or other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of __________, the officers of either Constituent Corporation are fully
authorized in the name of __________ 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.
E.A-3
<PAGE>
3.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
3.6 ABANDONMENT OF MERGER. The Constituent Corporations have
the power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PUBLIC STORAGE, INC.
By: ________________________________
Harvey Lenkin
President
By: ________________________________
Obren B. Gerich
Senior Vice President
[PARTNERS PREFERRED YIELD, INC.
PARTNERS PREFERRED YIELD II, INC.
or
PARTNERS PREFERRED YIELD III, INC.]
By: ________________________________
B. Wayne Hughes
Chairman of the Board and
Chief Executive Officer
By: ________________________________
Obren B. Gerich
Secretary
E.A-4
<PAGE>
APPENDIX B-1
NICHOLSON- 555 Industrial Drive
DOUGLAS Suite 207
REALTY Hartland, Wisconson 53029
CONSULTANTS, INC. Phone (414) 369-5400 Fax (414) 369-5401
- --------------------------------------------------------------------------------
August 14, 1996
PARTNERS PREFERRED YIELD, INC.
and PUBLIC STORAGE, INC.
Glendale, California
Subject: Partners Preferred Yield, Inc.: A Nineteen Property Portfolio
25101 8401 Lansdowne Ave Upper Darby PA
25102 2025 Chemical Rd Plymouth Meeting PA
25103 1251 Byberry Rd Philadelphia PA
25104 5080 W State Rd 7 Fort Lauderdale FL
25105 9600 E Costilla Englewood CO
25106 460 Beaver Ruin Rd Lilburn GA
25107 7640 Fair Oaks Blvd Carmichael CA
25108 2542 SE 105th Ave Portland OR
25109 1775 Industrial Way Napa CA
25110 11901 W 44th Ave Wheatridge CO
25111 6601 W Charleston Blvd Las Vegas NV
25112 3550 S Arvill Las Vegas NV
25113 1030 N Mansfield Ave Los Angeles CA
25114 24455 Schoenherr Rd Warren MI
25115 1621 NE 71st (Halsey) Ave Portland OR
25116 15244 Pacific Hyway S Seattle WA
25117 2040 S 25th Ave Broadview IL
25118 141 W State St Winter Springs FL
25119 13611 W 15th St Tampa FL
We have completed a limited appraisal of the real estate identified above
and submit our findings in this Restricted Appraisal Report. We understand
that our valuation opinion will be utilized in conjunction with the
proposed merger of Partners Preferred Yield, Inc., into Public Storage,
Inc., and may be included or referred to in solicitation materials filed
with the Securities and Exchange Commission and distributed to shareholders
of Partners Preferred Yield, Inc., and Public Storage, Inc.
This report is a Restricted Appraisal Report which is intended to comply
with the reporting requirements set forth under Standards Rule 2-2(c) of
the Uniform Standards of Professional Appraisal Practice for a Restricted
Appraisal Report. As such, it does not include discussions of the data,
reasoning, and analyses that were used in the appraisal process to develop
the appraiser's opinion of value. Supporting documentation concerning the
data, reasoning, and analyses is retained in the appraiser's file. The
depth of discussion contained in this report is specific to the needs of
the client and for the intended use stated above. The appraiser is not
responsible for unauthorized use of this report.
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 2
- --------------------------------------------------------------------------------
Furthermore, as agreed, this report is the result of a limited appraisal
process in that certain allowable departures from specific guidelines of
the Uniform Standards of Appraisal Practice were invoked. The valuation
analysis has considered all appropriate approaches to value: the Cost,
Income Capitalization and Sales Comparison approaches. Our appraisal is
limited in that we physically inspected the subject properties, conducted
some investigative market due diligence, and have relied primarily on the
Income Capitalization Approach to value; the results were then compared to
the indicated value by the Sales Comparison Approach which used a
regression analysis of sales of self-storage facilities located throughout
the nation. The Cost Approach was not considered appropriate since today's
investors do not rely upon the Cost Approach in making investment
decisions. Given the income-producing nature of the subject properties, the
Income Capitalization Approach is considered the most applicable approach
to value. Utilizing this methodology, in our opinion, we have performed all
actions necessary to ensure a fair valuation of the portfolio.
The general analytical process that was undertaken included a review of
each property's unit mix, rental rates and historical financial statements.
Following these reviews, a stabilized level of operating performance was
projected for each property. The value estimate by the Income
Capitalization Approach was then made using direct capitalization and/or a
discounted cash flow analysis. As additional support for the indicated
value for the self-storage properties, we prepared a regression analysis on
sales of self-storage properties that have occurred over the last several
years. Based upon a correlation of these methodologies, we arrived at an
opinion of value for the portfolio of properties. Lastly, as a
reasonableness check, the resultant property and portfolio level
capitalization rates were compared to reported capitalization rates of
recent and pending transactions of self-storage property portfolios, some
of which involved Public Storage, Inc., as a party to the transaction.
Historical operating statements, unit mix, net rentable area, rental rates,
rent rolls, lease summaries and other property-specific data for the
properties appraised were furnished by Public Storage, Inc., These
financial operating statements and other information have been accepted as
correctly representing operations and conditions of the subject properties.
Assets included within the scope of our valuation include land, land
improvements, building improvements, and all fixed service equipment.
Assets excluded are furniture, fixtures, machinery or equipment, personal
property, supplies, materials on hand, inventories, company records, and
any current or intangible assets that may exist.
We have made no investigations of, nor assume any responsibility for the
existence or impact of any hazardous substance, which may or may not be
present on the properties, in the development of our limited appraisal
opinion.
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 3
- --------------------------------------------------------------------------------
Market value is defined as:
"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:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of 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."
Fee Simple Interest (Estate) is defined as:
"Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat."
The market value estimate set forth herein assumes that the portfolio of
properties would be disposed of in an orderly manner, allowing sufficient
time for exposure on the open market.
Based upon the analyses as described, it is our opinion, as of June 30,
1996, that the market value of the fee simple interest in the Partners
Preferred Yield, Inc., nineteen property portfolio, is:
SIXTY EIGHT MILLION TWO HUNDRED AND FIFTY THOUSAND DOLLARS
($68,250,000)
Our compensation was not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, the
occurrence of a subsequent event, or the approval of a loan.
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 4
- --------------------------------------------------------------------------------
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that they have the professional qualifications
and competency necessary to complete this appraisal assignment in an
appropriate manner.
No investigation was made of the title to, or any liabilities against the
property appraised.
Respectfully submitted,
Nicholson-Douglas Realty Consultants, Inc.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
Professional Assistance By:
Michael J. Tompkins
Ann M. Donohoo
attachments
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 5
- --------------------------------------------------------------------------------
EXHIBIT A
ASSUMPTIONS AND LIMITING CONDITIONS
As agreed upon with the clients prior to the preparation of this appraisal,
this is a Limited Appraisal; it invokes the Departure Provision of the
Uniform Standards of Professional Appraisal Practice. The intended user of
this report is warned that the reliability of the value conclusion provided
may be impacted to the degree there is a departure from specific guidelines
of USPAP. Given 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.
This is a Restricted Report which is intended to comply with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards
of Professional Appraisal Practice for a Restricted Appraisal Report. As
such, it does not include discussion of the data, reasoning, and analyses
that were used in the appraisal process to develop the appraiser's opinion
of value. Supporting documentation concerning the data, reasoning, and
analyses is retained in the appraiser's file. The information contained in
this report is specific to the needs of the client and for the intended use
stated in this report. The appraiser is not responsible for unauthorized
use of the report.
No responsibility is assumed for matters legal in nature. No investigation
has been made of the title to or any liabilities against the property
appraised. The appraisal presumes, unless otherwise noted, that the owner's
claim is valid, the property rights are good and marketable, and there are
no encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true
and accurate. Although gathered from reliable sources, no guarantee is made
nor liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating
this analysis.
No soil analysis or geological studies were ordered or made in conjunction
with this report, nor were any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other
chemicals, toxic wastes, or other potentially hazardous materials could, if
present, adversely affect the value of the property. Unless otherwise
stated in this report, the existence of hazardous substance, which may or
may not be present on or in the property, was not considered by the
appraiser in the development of the conclusion of value. The stated value
estimate is predicated on the assumption that there is no material on or in
the property that would cause such a loss in value. No responsibility is
assumed for any such conditions, and the client has been advised that the
appraiser is not qualified to detect such substances, quantify the impact
on values, or develop the remediation cost.
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 6
- --------------------------------------------------------------------------------
Assumptions and Limiting Conditions, page 2
No environmental impact study has been ordered or made. Full compliance
with applicable federal, state, and local environmental regulations and
laws is assumed unless otherwise stated, defined, and considered in the
report. It is also assumed that all required licenses, consents, or other
legislative or administrative authority from any local, state, or national
government or private entity organization either have been or can be
obtained or renewed for any use which the report covers.
It is assumed that all applicable zoning and use regulations and
restrictions have been complied with unless a nonconformity has been
stated, defined, and considered in the appraisal report. Further, it is
assumed that the utilization of the land and improvements is within the
boundaries of the property described and that no encroachment or trespass
exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is
set forth in this report. Unless otherwise noted, this date represents the
last date of our physical inspection of the property. The value opinion
herein rendered is based on the status of the national business economy and
the purchasing power of the U.S. dollar as of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this appraisal report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and
distribution of each appraisal report signed by them.
Except as specifically presented in the letter of transmittal, possession
of this report or any copy thereof does not carry with it the right of
publication and no portion of this report (especially any conclusion of
value, the identity of the appraiser or the firm with which he/she is
connected, or any reference to the Appraisal Institute or the designations
awarded by this organization) shall be disseminated to the public through
prospectus, advertising, public relations, news, or any other means of
communication without the written consent and approval of Nicholson-Douglas
Realty Consultants, Inc.
<PAGE>
NDRC Parnters Preferred Yield, Inc.
Page 7
- --------------------------------------------------------------------------------
EXHIBIT B
Appraisal Certification
We certify that, to the best of our knowledge and belief:
. the statements of fact contained in this report are true and
accurate.
. the reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and conclusions.
. we have no present or prospective interest in the properties that are
the subject of this report, and we have no personal interest or bias
with respect to the parties involved.
. our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of
the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
. this appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
. our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the requirements of the
Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute and in conformance with
the Uniform Standards of Professional Appraisal Practice.
. we certify that the use of this report is subject to the requirements
of the Appraisal Institute relating to review by its duly authorized
individuals.
. we have not personally inspected each of the properties that are the
subject of this report, however, employees of Nicholson-Douglas
Realty Consultants, Inc. have inspected each of the subject
properties.
. unless noted in this report, no one else has provided significant
professional assistance to the persons signing this report.
. I, Lawrence R. Nicholson, MAI, certify that as of the date of this
report, I have completed the requirements under the continuing
education program of the Appraisal Institute.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
<PAGE>
APPENDIX B-2
NICHOLSON- 555 Industrial Drive
DOUGLAS Suite 207
REALTY Hartland, Wisconsin 53029
CONSULTANTS, INC. Phone (414) 396-5400 Fax (414) 369-5401
- --------------------------------------------------------------------------------
August 14, 1996
PARTNERS PREFERRED YIELD II, INC.
and PUBLIC STORAGE, INC.
Glendale, California
Subject: Partners Preferred Yield II, Inc.: A Twenty-Four Property
Portfolio
25201 850 S Dixie Highway Pompano Beach FL
25202 11240 Mastin St Overland Park KS
25203 3125 Dickerson Pike Nashville TN
25204 1546 N Gallatin Rd Madison TN
25205 1804 R. St SE Auburn WA
25206 1293 W 84th Ave Federal Heights CO
25207 4343 Covington Highway Decatur GA
25208 4554 Jonesboro Road Forest Park GA
25209 5503 W Australian Ave Mangonia Park FL
25210 15146 E Whittier Blvd Whittier CA
25211 2700 Pacific Hywy S Kent WA
25212 710 SE 8th St Topeka KS
25213 5005 E Evans Ave Denver CO
25214 525 California Ave Pittsburgh CA
25215 5850 NW 9th Ft Lauderdale FL
25216 6255 Oxford Philadelphia PA
25217 7412 Lemmon Ave Dallas TX
25218 2370 Colorado Blvd Los Angeles CA
25219 4849 W 115th St Alsip IL
25220 3800 Jog Road Green Acres FL
25221 1600 W Sample Road Pompano Beach FL
25222 1431 Ivy Hill Rd Wyndmoor PA
25223 1155 Belvedere Road W Palm Beach FL
25224 10636 SE 174th St Renton WA
We have completed a limited appraisal of the real estate identified above
and submit our findings in this Restricted Appraisal Report. We understand
that our valuation opinion will be utilized in conjunction with the
proposed merger of Partners Preferred Yield II, Inc., into Public Storage,
Inc., and may be included or referred to in solicitation materials filed
with the Securities and Exchange Commission and distributed to shareholders
of Partners Preferred Yield II, Inc., and Public Storage, Inc.
This report is a Restricted Appraisal Report which is intended to comply
with the reporting requirements set forth under Standards Rule 2-2(c) of
the Uniform Standards of Professional Appraisal Practice for a Restricted
Appraisal Report. As such, it does not include discussions of the data,
reasoning, and analyses that were used in the appraisal process to develop
the appraiser's opinion of value. Supporting documentation concerning the
data, reasoning, and analyses is retained in the appraiser's file. The
depth of discussion contained in this report is specific to the needs of
the client and for the intended use stated above. The appraiser is not
responsible for unauthorized use of this report.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 2
- --------------------------------------------------------------------------------
Furthermore, as agreed, this report is the result of a limited appraisal
process in that certain allowable departures from specific guidelines of
the Uniform Standards of Appraisal Practice were invoked. The valuation
analysis has considered all appropriate approaches to value: the Cost,
Income Capitalization and Sales Comparison approaches. Our appraisal is
limited in that we physically inspected the subject properties, conducted
some investigative market due diligence, and have relied primarily on the
Income Capitalization Approach to value; the results were then compared to
the indicated value by the Sales Comparison Approach which used a
regression analysis of sales of self-storage facilities located throughout
the nation. The Cost Approach was not considered appropriate since today's
investors do not rely upon the Cost Approach in making investment
decisions. Given the income-producing nature of the subject properties,
the Income Capitalization Approach is considered the most applicable
approach to value. Utilizing this methodology, in our opinion, we have
performed all actions necessary to ensure a fair valuation of the
portfolio.
The general analytical process that was undertaken included a review of
each property's unit mix, rental rates, historical financial statements,
and in the case of one property encumbered by a long-term land lease, the
lease terms. Following these reviews, a stabilized level of operating
performance was projected for each property. The value estimate by the
Income Capitalization Approach was then made using direct capitalization
and/or a discounted cash flow analysis. As additional support for the
indicated value for the self-storage properties, we prepared a regression
analysis on sales of self-storage properties that have occurred over the
last several years. Based upon a correlation of these methodologies, we
arrived at an opinion of value for the portfolio of properties. Lastly, as
a reasonableness check, the resultant property and portfolio level
capitalization rates were compared to reported capitalization rates of
recent and pending transactions of self-storage property portfolios, some
of which involved Public Storage, Inc., as a party to the transaction.
Historical operating statements, unit mix, net rentable area, rental rates,
rent rolls, lease summaries and other property-specific data for the
properties appraised were furnished by Public Storage, Inc. These
financial operating statements and other information have been accepted as
correctly representing operations and conditions of the subject properties.
Assets included within the scope of our valuation include land, land
improvements, building improvements, and all fixed service equipment. In
the instance of property number 25215, we have appraised the value of the
leasehold estate; the property is encumbered by a long-term land lease.
Assets excluded are furniture, fixtures, machinery or equipment, personal
property, supplies, materials on hand, inventories, company records, and
any current or intangible assets that may exist.
We have made no investigations of, nor assume any responsibility for the
existence or impact of any hazardous substance, which may or may not be
present on the properties, in the development of our limited appraisal
opinion.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 3
- --------------------------------------------------------------------------------
Market value is defined as:
"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:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of 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."
Fee Simple Interest (Estate) is defined as:
"Absolute ownership unencumbered by any other interest or estate,
subject only to the limitations imposed by the governmental powers of
taxation, eminent domain, police power, and escheat."
Leasehold Estate is defined as:
"The right to use and occupy real estate for a stated term and under
certain conditions; conveyed by a lease."
The market value estimate set forth herein assumes that the portfolio of
properties would be disposed of in an orderly manner, allowing sufficient
time for exposure on the open market.
Based upon the analyses as described, it is our opinion, as of June 30,
1996, that the market value of the fee simple interest and the leasehold
interest, as outlined, in the Partners Preferred Yield II, Inc., twenty-
four property portfolio, is:
SEVENTY TWO MILLION FIVE HUNDRED THOUSAND DOLLARS
($72,500,000)
Our compensation was not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, the
occurrence of a subsequent event, or the approval of a loan.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 4
- --------------------------------------------------------------------------------
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that they have the professional qualifications
and competency necessary to complete this appraisal assignment in an
appropriate manner.
No investigation was made of the title to, or any liabilities against the
property appraised.
Respectfully submitted,
Nicholson-Douglas Realty Consultants, Inc.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
Professional Assistance By:
Michael J. Tompkins
Ann M. Donohoo
attachments
96031.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 5
- --------------------------------------------------------------------------------
EXHIBIT A
ASSUMPTIONS AND LIMITING CONDITIONS
As agreed upon with the clients prior to the preparation of this appraisal,
this is a Limited Appraisal; it invokes the Departure Provision of the
Uniform Standards of Professional Appraisal Practice. The intended user of
this report is warned that the reliability of the value conclusion provided
may be impacted to the degree there is a departure from specific guidelines
of USPAP. Given 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.
This is a Restricted Report which is intended to comply with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards
of Professional Appraisal Practice for a Restricted Appraisal Report. As
such, it does not include discussion of the data, reasoning, and analyses
that were used in the appraisal process to develop the appraiser's opinion
of value. Supporting documentation concerning the data, reasoning, and
analyses is retained in the appraiser's file. The information contained in
this report is specific to the needs of the client and for the intended use
stated in this report. The appraiser is not responsible for unauthorized
use of the report.
No responsibility is assumed for matters legal in nature. No investigation
has been made of the title to or any liabilities against the property
appraised. The appraisal presumes, unless otherwise noted, that the
owner's claim is valid, the property rights are good and marketable, and
there are no encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true
and accurate. Although gathered from reliable sources, no guarantee is
made nor liability assumed for the accuracy of any data, opinions, or
estimates identified as being furnished by others which have been used in
formulating this analysis.
No soil analysis or geological studies were ordered or made in conjunction
with this report, nor were any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other
chemicals, toxic wastes, or other potentially hazardous materials could, if
present, adversely affect the value of the property. Unless otherwise
stated in this report, the existence of hazardous substance, which may or
may not be present on or in the property, was not considered by the
appraiser in the development of the conclusion of value. The stated value
estimate is predicated on the assumption that there is no material on or in
the property that would cause such a loss in value. No responsibility is
assumed for any such conditions, and the client has been advised that the
appraiser is not qualified to detect such substances, quantify the impact
on values, or develop the remediation cost.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 6
- --------------------------------------------------------------------------------
Assumptions and Limiting Conditions, page 2
No environmental impact study has been ordered or made. Full compliance
with applicable federal, state, and local environmental regulations and
laws is assumed unless otherwise stated, defined, and considered in the
report. It is also assumed that all required licenses, consents, or other
legislative or administrative authority from any local, state, or national
government or private entity organization either have been or can be
obtained or renewed for any use which the report covers.
It is assumed that all applicable zoning and use regulations and
restrictions have been complied with unless a nonconformity has been
stated, defined, and considered in the appraisal report. Further, it is
assumed that the utilization of the land and improvements is within the
boundaries of the property described and that no encroachment or trespass
exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is
set forth in this report. Unless otherwise noted, this date represents the
last date of our physical inspection of the property. The value opinion
herein rendered is based on the status of the national business economy and
the purchasing power of the U.S. dollar as of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this appraisal report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and
distribution of each appraisal report signed by them.
Except as specifically presented in the letter of transmittal, possession
of this report or any copy thereof does not carry with it the right of
publication and no portion of this report (especially any conclusion of
value, the identity of the appraiser or the firm with which he/she is
connected, or any reference to the Appraisal Institute or the designations
awarded by this organization) shall be disseminated to the public through
prospectus, advertising, public relations, news, or any other means of
communication without the written consent and approval of Nicholson-Douglas
Realty Consultants, Inc.
<PAGE>
NDRC Partners Preferred Yield, II, Inc.
Page 7
- --------------------------------------------------------------------------------
EXHIBIT B
Appraisal Certification
We certify that, to the best of our knowledge and belief:
. the statements of fact contained in this report are true and
accurate.
. the reported analyses, opinions, and conclusions are limited only
by the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and
conclusions.
. we have no present or prospective interest in the properties that
are the subject of this report, and we have no personal interest
or bias with respect to the parties involved.
. our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause
of the client, the amount of the value estimate, the attainment
of a stipulated result, or the occurrence of a subsequent event.
. this appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
. our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the requirements of
the Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute and in conformance
with the Uniform Standards of Professional Appraisal Practice.
. we certify that the use of this report is subject to the
requirements of the Appraisal Institute relating to review by its
duly authorized individuals.
. we have not personally inspected each of the properties that are
the subject of this report, however, employees of Nicholson-
Douglas Realty Consultants, Inc. have inspected each of the
subject properties.
. unless noted in this report, no one else has provided significant
professional assistance to the persons signing this report.
. I, Lawrence R. Nicholson, MAI, certify that as of the date of
this report, I have completed the requirements under the
continuing education program of the Appraisal Institute.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
<PAGE>
APPENDIX B-3
NDRC NICHOLSON- 555 Industrial Drive
DOUGLAS Suite 207
REALTY Hartland, Wisconsin 53029
CONSULTANTS, INC. Phone (414) 369-5400 Fax (414) 369-5401
- --------------------------------------------------------------------------------
August 14, 1996
PARTNERS PREFERRED YIELD III, INC.
and PUBLIC STORAGE, INC.
Glendale, California
Subject: Partners Preferred Yield III, Inc.: A Nine Property Portfolio
25305 3300 Northgate Blvd Sacramento CA
25306 11236 19th Ave Phoenix AZ
25308 7000 S Cicero Ave Bedford Park IL
25309 2701 Lake Worth Rd Lake Worth FL
25310 903 E Algonquin Rd Arlington Hts IL
25311 20065 15th Ave NW Seattle WA
25312 100 Spring Street Southington CT
25315 515 Broad St Clifton NJ
26001 669 Glenwood Ave Hillside NJ
We have completed a limited appraisal of the real estate identified above
and submit our findings in this Restricted Appraisal Report. We understand
that our valuation opinion will be utilized in conjunction with the
proposed merger of Partners Preferred Yield III, Inc., into Public Storage,
Inc., and may be included or referred to in solicitation materials filed
with the Securities and Exchange Commission and distributed to shareholders
of Partners Preferred Yield III, Inc., and Public Storage, Inc.
This report is a Restricted Appraisal Report which is intended to comply
with the reporting requirements set forth under Standards Rule 2-2(c) of
the Uniform Standards of Professional Appraisal Practice for a Restricted
Appraisal Report. As such, it does not include discussions of the data,
reasoning, and analyses that were used in the appraisal process to develop
the appraiser's opinion of value. Supporting documentation concerning the
data, reasoning, and analyses is retained in the appraiser's file. The
depth of discussion contained in this report is specific to the needs of
the client and for the intended use stated above. The appraiser is not
responsible for unauthorized use of this report.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 2
- --------------------------------------------------------------------------------
Furthermore, as agreed, this report is the result of a limited appraisal
process in that certain allowable departures from specific guidelines of
the Uniform Standards of Appraisal Practice were invoked. The valuation
analysis has considered all appropriate approaches to value: the Cost,
Income Capitalization and Sales Comparison approaches. Our appraisal is
limited in that we physically inspected the subject properties, conducted
some investigative market due diligence, and have relied primarily on the
Income Capitalization Approach to value; the results were then compared to
the indicated value by the Sales Comparison Approach which used a
regression analysis of sales of self-storage facilities located throughout
the nation. The Cost Approach was not considered appropriate since today's
investors do not rely upon the Cost Approach in making investment
decisions. Given the income-producing nature of the subject properties,
the income capitalization approach is considered the most applicable
approach to value. Utilizing this methodology, in our opinion, we have
performed all actions necessary to ensure a fair valuation of the
portfolio.
The general analytical process that was undertaken included a review of
each property's unit mix, rental rates, historical financial statements,
and in the case of two properties encumbered by a long-term land leases,
the lease terms. Following these reviews, a stabilized level of operating
performance was projected for each property. The value estimate by the
Income Capitalization Approach was then made using direct capitalization
and/or a discounted cash flow analysis. As additional support for the
indicated value for the self-storage properties, we prepared a regression
analysis on sales of self-storage properties that have occurred over the
last several years. Based upon a correlation of these methodologies, we
arrived at an opinion of value for the portfolio of properties. Lastly, as
a reasonableness check, the resultant property and portfolio level
capitalization rates were compared to reported capitalization rates of
recent and pending transactions of self-storage property portfolios, some
of which involved Public Storage, Inc., as a party to the transaction.
Historical operating statements, unit mix, net rentable area, rental rates,
rent rolls, lease summaries and other property-specific data for the
properties appraised were furnished by Public Storage, Inc. These
financial operating statements and other information have been accepted as
correctly representing operations and conditions of the subject properties.
Assets included within the scope of our valuation include land, land
improvements, building improvements, and all fixed service equipment. In
the instance of property number 25315, we have appraised the value of the
leasehold estate; the property is encumbered by a land lease. The value
indication for property numbered 26001, represents the partial interest
value of the leasehold estate; the property is encumbered by a land lease.
Assets excluded are furniture, fixtures, machinery or equipment, personal
property, supplies, materials on hand, inventories, company records, and
any current or intangible assets that may exist.
We have made no investigations of, nor assume any responsibility for the
existence or impact of any hazardous substance, which may or may not be
present on the properties, in the development of our limited appraisal
opinion.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 3
Market value is defined as:
"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:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of 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."
Fee Simple Interest (Estate) is defined as:
"Absolute ownership unencumbered by any other interest or estate,
subject only to the limitations imposed by the governmental powers of
taxation, eminent domain, police power, and escheat."
Leasehold Estate is defined as:
"The right to use and occupy real estate for a stated term and under
certain conditions; conveyed by a lease."
The market value estimate set forth herein assumes that the portfolio of
properties would be disposed of in an orderly manner, allowing sufficient
time for exposure on the open market.
Based upon the analyses as described, it is our opinion, as of June 30,
1996, that the market value of the fee simple and leasehold interests, in
the Partners Preferred Yield III, Inc., nine property portfolio, is:
THIRTY MILLION DOLLARS
($30,000,000)
Our compensation was not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, the
occurrence of a subsequent event, or the approval of a loan.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 4
- --------------------------------------------------------------------------------
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that they have the professional qualifications
and competency necessary to complete this appraisal assignment in an
appropriate manner.
No investigation was made of the title to, or any liabilities against the
property appraised.
Respectfully submitted,
Nicholson-Douglas Realty Consultants, Inc.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
Professional Assistance By:
Michael J. Tompkins
Ann M. Donohoo
attachments
96032.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 5
- --------------------------------------------------------------------------------
EXHIBIT A
ASSUMPTIONS AND LIMITING CONDITIONS
As agreed upon with the clients prior to the preparation of this appraisal,
this is a Limited Appraisal; it invokes the Departure Provision of the
Uniform Standards of Professional Appraisal Practice. The intended user of
this report is warned that the reliability of the value conclusion provided
may be impacted to the degree there is a departure from specific guidelines
of USPAP. Given 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.
This is a Restricted Report which is intended to comply with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards
of Professional Appraisal Practice for a Restricted Appraisal Report. As
such, it does not include discussion of the data, reasoning, and analyses
that were used in the appraisal process to develop the appraiser's opinion
of value. Supporting documentation concerning the data, reasoning, and
analyses is retained in the appraiser's file. The information contained in
this report is specific to the needs of the client and for the intended use
stated in this report. The appraiser is not responsible for unauthorized
use of the report.
No responsibility is assumed for matters legal in nature. No investigation
has been made of the title to or any liabilities against the property
appraised. The appraisal presumes, unless otherwise noted, that the
owner's claim is valid, the property rights are good and marketable, and
there are no encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true
and accurate. Although gathered from reliable sources, no guarantee is
made nor liability assumed for the accuracy of any data, opinions, or
estimates identified as being furnished by others which have been used in
formulating this analysis.
No soil analysis or geological studies were ordered or made in conjunction
with this report, nor were any water, oil, gas, coal, or other subsurface
mineral and use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other
chemicals, toxic wastes, or other potentially hazardous materials could, if
present, adversely affect the value of the property. Unless otherwise
stated in this report, the existence of hazardous substance, which may or
may not be present on or in the property, was not considered by the
appraiser in the development of the conclusion of value. The stated value
estimate is predicated on the assumption that there is no material on or in
the property that would cause such a loss in value. No responsibility is
assumed for any such conditions, and the client has been advised that the
appraiser is not qualified to detect such substances, quantify the impact
on values, or develop the remediation cost.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 6
- --------------------------------------------------------------------------------
ASSUMPTIONS AND LIMITING CONDITIONS, PAGE 2
No environmental impact study has been ordered or made. Full compliance
with applicable federal, state, and local environmental regulations and
laws is assumed unless otherwise stated, defined, and considered in the
report. It is also assumed that all required licenses, consents, or other
legislative or administrative authority from any local, state, or national
government or private entity organization either have been or can be
obtained or renewed for any use which the report covers.
It is assumed that all applicable zoning and use regulations and
restrictions have been complied with unless a nonconformity has been
stated, defined, and considered in the appraisal report. Further, it is
assumed that the utilization of the land and improvements is within the
boundaries of the property described and that no encroachment or trespass
exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is
set forth in this report. Unless otherwise noted, this date represents the
last date of our physical inspection of the property. The value opinion
herein rendered is based on the status of the national business economy and
the purchasing power of the U.S. dollar as of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this appraisal report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and
distribution of each appraisal report signed by them.
Except as specifically presented in the letter of transmittal, possession
of this report or any copy thereof does not carry with it the right of
publication and no portion of this report (especially any conclusion of
value, the identity of the appraiser or the firm with which he/she is
connected, or any reference to the Appraisal Institute or the designations
awarded by this organization) shall be disseminated to the public through
prospectus, advertising, public relations, news, or any other means of
communication without the written consent and approval of Nicholson-Douglas
Realty Consultants, Inc.
<PAGE>
NDRC Partners Preferred Yield III, Inc.
Page 7
- --------------------------------------------------------------------------------
EXHIBIT B
Appraisal Certification
We certify that, to the best of our knowledge and belief:
. the statements of fact contained in this report are true and
accurate.
. the reported analyses, opinions, and conclusions are limited only
by the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and
conclusions.
. we have no present or prospective interest in the properties that
are the subject of this report, and we have no personal interest
or bias with respect to the parties involved.
. our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause
of the client, the amount of the value estimate, the attainment
of a stipulated result, or the occurrence of a subsequent event.
. this appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
. our analyses, opinions, and conclusions were developed, and this
report has been prepared, in conformity with the requirements of
the Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute and in conformance
with the Uniform Standards of Professional Appraisal Practice.
. we certify that the use of this report is subject to the
requirements of the Appraisal Institute relating to review by its
duly authorized individuals.
. we have not personally inspected each of the properties that are
the subject of this report, however, employees of Nicholson-
Douglas Realty Consultants, Inc. have inspected each of the
subject properties.
. unless noted in this report, no one else has provided significant
professional assistance to the persons signing this report.
. I, Lawrence R. Nicholson, MAI, certify that as of the date of
this report, I have completed the requirements under the
continuing education program of the Appraisal Institute.
/s/ LAWRENCE R. NICHOLSON /s/ DUNCAN O. DOUGLAS
Lawrence R. Nicholson, MAI Duncan O. Douglas
<PAGE>
APPENDIX C-1
- -------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC. (908) 389-3600
FINANCIAL AND MANAGEMENT CONSULTANTS FAX: (908) 389-1751
(908) 544-0779
================================================================================
The Special Committee of
The Board of Directors of
Partners Preferred Yield, Inc.
701 Western Avenue, Suite 200
Glendale, CA 91201
Gentlemen:
We have been advised that Partners Preferred Yield, Inc. ("PPY") is
entering into a transaction (the "Transaction") in which PPY will be merged with
Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the shareholders of PPY will be asked to
approve the merger of PPY into PSI and the conversion of outstanding shares of
PPY Common Stock Series A, other than shares held by Series A shareholders of
PPY who have properly exercised dissenters rights under California law
("Dissenting Shares"), Series B, Series C and Series D into newly issued shares
of PSI Common Stock or, at the option of the PPY shareholders with respect to up
to 20% of the outstanding PPY Common Stock Series A less any Dissenting Shares,
cash (collectively, the "Consideration"). We have been further advised that each
share of PPY Common Stock Series A, other than Dissenting Shares held by PPY
shareholders, will be converted into $19.00 (the net asset value per Series A
share of PPY Common Stock based on an independent appraisal of PPY's properties)
in cash or shares of PSI Common Stock with an equivalent market value based on
average closing prices on the New York Stock Exchange of PSI Common Stock during
the twenty consecutive trading days ending on the fifth trading day prior to the
special meeting of the shareholders of PPY. We also have been advised that (i)
additional distributions will be made to the shareholders of PPY prior to the
consummation of the Transaction to the extent required to cause PPY's net asset
value as of the date of the Transaction to be substantially equivalent to the
estimate of PPY's net asset value as of December 31, 1996 contained in the
Combined Proxy Statement and Prospectus filed with the Securities and Exchange
Commission dated October 15, 1996 and (ii) if additional cash distributions are
required to satisfy PPY's REIT distribution requirements and are paid to PPY
shareholders prior to the consummation of the Transaction, the Consideration
would be reduced to reflect such additional cash distributions, but in no event
will the sum of the Consideration and any required REIT distribution be less
than $19.00 per share of PPY Common Stock Series A.
PPY 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 PPY (excluding PSI or its
affiliates), from a financial point of view, of the Consideration to be received
in the Transaction.
1
<PAGE>
ROBERT A. STANGER & CO. INC.
In the course of our review to render this opinion, we have, among other
things:
. Reviewed the Combined Proxy Statement and Prospectus related to the
Transaction and filed with the Securities and Exchange Commission (the
"SEC") on October 15, 1996;
. Reviewed PPY's and PSI's annual reports to shareholders filed with the
SEC on Form 10-K for the three fiscal years ending December 31, 1993,
1994 and 1995, and PPY's and PSI's quarterly reports filed with the
SEC on Form 10-Q for the quarter ending June 30, 1996, which report
PPY's management and PSI's management have indicated to be the most
current financial statement available;
. Reviewed PSI pro forma financial statements and pro forma schedules
prepared by PPY's management and PSI's management;
. Reviewed the MAI-certified portfolio appraisal of the properties owned
by PPY dated June 30, 1996 performed by Nicholson-Douglas Realty
Consultants, Inc. (the "Appraisal"), and discussed with management of
PPY and the appraiser the methodologies and procedures employed in
preparing the Appraisal;
. Reviewed information regarding purchases and sales of self-storage
properties by PSI or any affiliated entities during the prior 24-month
period and other information available relating to acquisition
criteria for self-storage properties;
. Reviewed internal financial analyses and forecasts prepared by PPY,
and based in part on the Appraisal, of the current net liquidation
value per common share of PPY's assets and projections of cash flow
from operations, dividend distributions and going-concern values for
PPY, and the calculation of the allocation of such values among the
holders of PPY Common Stock Series A, Series B, Series C and Series D;
. Discussed with members of senior management of PPY and PSI conditions
in self-storage property markets, conditions in the market for
sales/acquisitions of properties similar to those owned by PPY,
current and expected operations and performance, financial condition
and future prospects of PPY and PSI;
. Reviewed historical market prices, trading volume and dividends for
PPY and PSI Common Stock; and
. Conducted other studies, analyses, inquiries and investigations as we
deemed appropriate.
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
2
<PAGE>
ROBERT A. STANGER & CO. INC.
the Combined Proxy Statement and Prospectus or that was furnished or otherwise
communicated to us by PPY and PSI. We have not performed an independent
appraisal of the assets and liabilities of PPY or PSI and have relied upon and
assumed the accuracy of the Appraisal performed by Nicholson-Douglas Realty
Consultants, Inc. We have also relied on the assurance of PPY and PSI that any
pro forma financial statements, projections, budgets, estimates of environmental
liability, or value estimates contained in the Combined Proxy Statement and
Prospectus or otherwise provided to us, were reasonably prepared on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that the allocation of
Consideration between the Series A, Series B, Series C and Series D shareholders
has been determined by PPY in accordance with the provisions of the Articles of
Incorporation of PPY; that no material changes have occurred in the appraised
value of the properties 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 PPY and PSI 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 PPY or PSI 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, alternatives to the Transaction, or tax
factors resulting from the Transaction, the PSMI Merger or relating to PSI's
continued qualification as a REIT. 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 PPY 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 PPY 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,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
October 15, 1996
3
<PAGE>
APPENDIX C-2
- --------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC. (908) 389-3600
FINANCIAL AND MANAGEMENT CONSULTANTS FAX: (908) 389-1751
(908) 544-0779
================================================================================
The Special Committee of
The Board of Directors of
Partners Preferred Yield II, Inc.
701 Western Avenue, Suite 200
Glendale, CA 91201
Gentlemen:
We have been advised that Partners Preferred Yield II, Inc. ("PPYII") is
entering into a transaction (the "Transaction") in which PPYII will be merged
with Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the shareholders of PPYII will be asked to
approve the merger of PPYII into PSI and the conversion of outstanding shares of
PPYII Common Stock Series A, other than shares held by Series A shareholders of
PPYII who have properly exercised dissenters rights under California law
("Dissenting Shares"), Series B, Series C and Series D into newly issued shares
of PSI Common Stock or, at the option of the PPYII shareholders with respect to
up to 20% of the outstanding PPYII Common Stock Series A less any Dissenting
Shares, cash (collectively, the "Consideration"). We have been further advised
that each share of PPYII Common Stock Series A, other than Dissenting Shares
held by PPYII shareholders, will be converted into $20.39 (the net asset value
per Series A share of PPYII Common Stock based on an independent appraisal of
PPYII's properties) in cash or shares of PSI Common Stock with an equivalent
market value based on average closing prices on the New York Stock Exchange of
PSI Common Stock during the twenty consecutive trading days ending on the fifth
trading day prior to the special meeting of the shareholders of PPYII. We also
have been advised that (i) additional distributions will be made to the
shareholders of PPYII prior to the consummation of the Transaction to the extent
required to cause PPYII's net asset value as of the date of the Transaction to
be substantially equivalent to the estimate of PPYII's net asset value as of
December 31, 1996 contained in the Combined Proxy Statement and Prospectus filed
with the Securities and Exchange Commission dated October 15, 1996 and (ii) if
additional cash distributions are required to satisfy PPYII's REIT distribution
requirements and are paid to PPYII shareholders prior to the consummation of the
Transaction, the Consideration would be reduced to reflect such additional cash
distributions, but in no event will the sum of the Consideration and any
required REIT distribution be less than $20.39 per share of PPYII Common Stock
Series A.
PPYII 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 PPYII (excluding PSI or its
affiliates), from a financial point of view, of the Consideration to be received
in the Transaction.
1
<PAGE>
In the course of our review to render this opinion, we have, among other
things:
. Reviewed the Combined Proxy Statement and Prospectus related to the
Transaction and filed with the Securities and Exchange Commission (the
"SEC") on October 15, 1996;
. Reviewed PPYII's and PSI's annual reports to shareholders filed with
the SEC on Form 10-K for the three fiscal years ending December 31,
1993, 1994 and 1995, and PPYII's and PSI's quarterly reports filed
with the SEC on Form 10-Q for the quarter ending June 30, 1996, which
report PPYII's management and PSI's management have indicated to be
the most current financial statement available;
. Reviewed PSI pro forma financial statements and pro forma schedules
prepared by PPYII's management and PSI's management;
. Reviewed the MAI-certified portfolio appraisal of the properties owned
by PPYII dated June 30, 1996 performed by Nicholson-Douglas Realty
Consultants, Inc. (the "Appraisal"), and discussed with management of
PPYII and the appraiser the methodologies and procedures employed in
preparing the Appraisal;
. Reviewed information regarding purchases and sales of self-storage
properties by PSI or any affiliated entities during the prior 24-month
period and other information available relating to acquisition
criteria for self-storage properties;
. Reviewed internal financial analyses and forecasts prepared by PPYII,
and based in part on the Appraisal, of the current net liquidation
value per common share of PPYII's assets and projections of cash flow
from operations, dividend distributions and going-concern values for
PPYII, and the calculation of the allocation of such values among the
holders of PPYII Common Stock Series A, Series B, Series C and Series
D;
. Discussed with members of senior management of PPYII and PSI
conditions in self-storage property markets, conditions in the market
for sales/acquisitions of properties similar to those owned by PPYII,
current and expected operations and performance, financial condition
and future prospects of PPYII and PSI;
. Reviewed historical market prices, trading volume and dividends for
PPYII and PSI Common Stock; and
. Conducted other studies, analyses, inquiries and investigations as we
deemed appropriate.
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
2
<PAGE>
the Combined Proxy Statement and Prospectus or that was furnished or otherwise
communicated to us by PPYII and PSI. We have not performed an independent
appraisal of the assets and liabilities of PPYII or PSI and have relied upon and
assumed the accuracy of the Appraisal performed by Nicholson-Douglas Realty
Consultants, Inc. We have also relied on the assurance of PPYII and PSI that any
pro forma financial statements, projections, budgets, estimates of environmental
liability, or value estimates contained in the Combined Proxy Statement and
Prospectus or otherwise provided to us, were reasonably prepared on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that the allocation of
Consideration between the Series A, Series B, Series C and Series D shareholders
has been determined by PPYII in accordance with the provisions of the Articles
of Incorporation of PPYII; that no material changes have occurred in the
appraised value of the properties 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 PPYII and PSI 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 PPYII or PSI 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, alternatives to the Transaction, or tax
factors resulting from the Transaction, the PSMI Merger or relating to PSI's
continued qualification as a REIT. 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 PPYII 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 PPYII 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,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
October 15, 1996
3
<PAGE>
APPENDIX C-3
- --------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC. (908) 389-3600
FINANCIAL AND MANAGEMENT CONSULTANTS FAX: (908) 389-1751
(908) 544-0779
================================================================================
The Special Committee of
The Board of Directors of
Partners Preferred Yield III, Inc.
701 Western Avenue, Suite 200
Glendale, CA 91201
Gentlemen:
We have been advised that Partners Preferred Yield III, Inc. ("PPYIII") is
entering into a transaction (the "Transaction") in which PPYIII will be merged
with Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the shareholders of PPYIII will be asked
to approve the merger of PPYIII into PSI and the conversion of outstanding
shares of PPYIII Common Stock Series A, other than shares held by Series A
shareholders of PPYIII who have properly exercised dissenters rights under
California law ("Dissenting Shares"), Series B, Series C and Series D into newly
issued shares of PSI Common Stock or, at the option of the PPYIII shareholders
with respect to up to 20% of the outstanding PPYIII Common Stock Series A less
any Dissenting Shares, cash (collectively, the "Consideration"). We have been
further advised that each share of PPYIII Common Stock Series A, other than
Dissenting Shares held by PPYIII shareholders, will be converted into $20.47
(the net asset value per Series A share of PPYIII Common Stock based on an
independent appraisal of PPYIII's properties) in cash or shares of PSI Common
Stock with an equivalent market value based on average closing prices on the New
York Stock Exchange of PSI Common Stock during the twenty consecutive trading
days ending on the fifth trading day prior to the special meeting of the
shareholders of PPYIII. We also have been advised that (i) additional
distributions will be made to the shareholders of PPYIII prior to the
consummation of the Transaction to the extent required to cause PPYIII's net
asset value as of the date of the Transaction to be substantially equivalent to
the estimate of PPYIII's net asset value as of December 31, 1996 contained in
the Combined Proxy Statement and Prospectus filed with the Securities and
Exchange Commission dated October 15, 1996 and (ii) if additional cash
distributions are required to satisfy PPYIII's REIT distribution requirements
and are paid to PPYIII shareholders prior to the consummation of the
Transaction, the Consideration would be reduced to reflect such additional cash
distributions, but in no event will the sum of the Consideration and any
required REIT distribution be less than $20.47 per share of PPYIII Common Stock
Series A.
PPYIII 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 PPYIII (excluding PSI or its
affiliates), from a financial point of view, of the Consideration to be received
in the Transaction.
1
<PAGE>
In the course of our review to render this opinion, we have, among other
things:
. Reviewed the Combined Proxy Statement and Prospectus related to the
Transaction and filed with the Securities and Exchange Commission (the
"SEC") on October 15, 1996;
. Reviewed PPYIII's and PSI's annual reports to shareholders filed with
the SEC on Form 10-K for the three fiscal years ending December 31,
1993, 1994 and 1995, and PPYIII's and PSI's quarterly reports filed
with the SEC on Form 10-Q for the quarter ending June 30, 1996, which
report PPYIII's management and PSI's management have indicated to be
the most current financial statement available;
. Reviewed PSI pro forma financial statements and pro forma schedules
prepared by PPYIII's management and PSI's management;
. Reviewed the MAI-certified portfolio appraisal of the properties owned
by PPYIII dated June 30, 1996 performed by Nicholson-Douglas Realty
Consultants, Inc. (the "Appraisal"), and discussed with management of
PPYIII and the appraiser the methodologies and procedures employed in
preparing the Appraisal;
. Reviewed information regarding purchases and sales of self-storage
properties by PSI or any affiliated entities during the prior 24-month
period and other information available relating to acquisition
criteria for self-storage properties;
. Reviewed internal financial analyses and forecasts prepared by PPYIII,
and based in part on the Appraisal, of the current net liquidation
value per common share of PPYIII's assets and projections of cash flow
from operations, dividend distributions and going-concern values for
PPYIII, and the calculation of the allocation of such values among the
holders of PPYIII Common Stock Series A, Series B, Series C and Series
D;
. Discussed with members of senior management of PPYIII and PSI
conditions in self-storage property markets, conditions in the market
for sales/acquisitions of properties similar to those owned by PPYIII,
current and expected operations and performance, financial condition
and future prospects of PPYIII and PSI;
. Reviewed historical market prices, trading volume and dividends for
PPYIII and PSI Common Stock; and
. Conducted other studies, analyses, inquiries and investigations as we
deemed appropriate.
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
2
<PAGE>
the Combined Proxy Statement and Prospectus or that was furnished or otherwise
communicated to us by PPYIII and PSI. We have not performed an independent
appraisal of the assets and liabilities of PPYIII or PSI and have relied upon
and assumed the accuracy of the Appraisal performed by Nicholson-Douglas Realty
Consultants, Inc. We have also relied on the assurance of PPYIII and PSI that
any pro forma financial statements, projections, budgets, estimates of
environmental liability, or value estimates contained in the Combined Proxy
Statement and Prospectus or otherwise provided to us, were reasonably prepared
on bases consistent with actual historical experience and reflect the best
currently available estimates and good faith judgments; that the allocation of
Consideration between the Series A, Series B, Series C and Series D shareholders
has been determined by PPYIII in accordance with the provisions of the Articles
of Incorporation of PPYIII; that no material changes have occurred in the
appraised value of the properties 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 PPYIII and PSI 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 PPYIII or PSI 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, alternatives to the Transaction, or tax
factors resulting from the Transaction, the PSMI Merger or relating to PSI's
continued qualification as a REIT. 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 PPYIII 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 PPYIII 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,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
October 15, 1996
3
<PAGE>
APPENDIX D
GENERAL CORPORATION LAW OF CALIFORNIA
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (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.
D-1
<PAGE>
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
(S) 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
D-2
<PAGE>
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT -- PAYMENT 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
D-3
<PAGE>
the court for the shares is more than 125 percent of the price offered by the
corporation under subdivision (a) of Section 1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
D-4
<PAGE>
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for the
shareholder's shares pursuant to this chapter. The court in any action
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.
D-5
<PAGE>
Appendix E-1
PROPOSED AMENDMENT TO PPY'S BYLAWS
Add a new subsection (f) to Article IX, Section 8 of the Bylaws of PPY 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 except as permitted in
Section 2(d) of Article X. 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, and provided further that there
is no difference in interest rates of any loans secured by the property at
the time acquired by PSI or its affiliates and the time acquired by the
corporation, nor any other benefit to PSI or its affiliates arising out of
such transaction other than the compensation permitted in these bylaws.
(b) The corporation shall not sell or lease property to PSI or its
affiliates, other than as permitted in Section 2(d) of Article X, 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, (iii) neither PSI nor its affiliates receive any
property management fees in connection with such leases and (iv) the
corporation recoups any profit in connection with subleases or assignments
of 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 or
Section 2(d) of Article X, 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 Public Storage, 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 E-2
PROPOSED AMENDMENT TO PPY2'S BYLAWS
Add a new subsection (f) to Article IX, Section 8 of the Bylaws of PPY2 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 except as permitted in
Section 2(d) of Article X. 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, and provided further that there
is no difference in interest rates of any loans secured by the property at
the time acquired by PSI or its affiliates and the time acquired by the
corporation, nor any other benefit to PSI or its affiliates arising out of
such transaction other than the compensation permitted in these bylaws.
(b) The corporation shall not sell or lease property to PSI or its
affiliates, other than as permitted in Section 2(d) of Article X, 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, (iii) neither PSI nor its affiliates receive any
property management fees in connection with such leases and (iv) the
corporation recoups any profit in connection with subleases or assignments
of 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 or
Section 2(d) of Article X, 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 Public Storage, 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 E-3
PROPOSED AMENDMENT TO PPY3'S BYLAWS
Add a new subsection (f) to Article IX, Section 8 of the Bylaws of PPY3 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 except as permitted in
Section 2(d) of Article X. 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, and provided further that there
is no difference in interest rates of any loans secured by the property at
the time acquired by PSI or its affiliates and the time acquired by the
corporation, nor any other benefit to PSI or its affiliates arising out of
such transaction other than the compensation permitted in these bylaws.
(b) The corporation shall not sell or lease property to PSI or its
affiliates, other than as permitted in Section 2(d) of Article X, 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, (iii) neither PSI nor its affiliates receive any
property management fees in connection with such leases and (iv) the
corporation recoups any profit in connection with subleases or assignments
of 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 or
Section 2(d) of Article X, 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 Public Storage, 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 F-1
PARTNERS PREFERRED YIELD, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Report of independent auditors F1 - 1
Balance sheets at December 31, 1995 and 1994 F1 - 2
For the years ended December 31, 1995, 1994 and 1993:
Statements of income F1 - 3
Statements of shareholders equity F1 - 4
Statements of cash flows F1 - 5
Notes to financial statements F1 - 6 - F1 - 10
Condensed balance sheets at June 30, 1996 and December 31, 1995 F1 - 11
Condensed statements of income for the three
and six months ended June 30, 1996 and 1995 F1 - 12
Condensed statement of shareholders equity for the
six months ended June 30, 1996 F1 - 13
Condensed statements of cash flows for the
six months ended June 30, 1996 and 1995 F1 - 14
Notes to condensed financial statements F1 - 15
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Partners Preferred Yield, Inc.
We have audited the accompanying balance sheets of Partners Preferred Yield,
Inc. as of December 31, 1995 and 1994, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Partners Preferred Yield, Inc.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 27, 1996
Los Angeles, California
F1-1
<PAGE>
PARTNERS PREFERRED YIELD, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 890,000 $ 1,927,000
Rent and other receivables 50,000 44,000
Real estate facilities at cost:
Buildings and equipment 45,138,000 44,910,000
Land 14,361,000 14,361,000
------------ ------------
59,499,000 59,271,000
Less accumulated depreciation (14,097,000) (12,151,000)
------------ ------------
45,402,000 47,120,000
------------ ------------
Other assets 464,000 108,000
------------ ------------
Total assets $ 46,806,000 $ 49,199,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 634,000 $ 380,000
Dividends payable 1,508,000 1,679,000
Advance payments from renters 328,000 332,000
Shareholders' equity:
Series A common, $.01 par value,
4,456,328 shares authorized,
3,170,528 shares issued and
outstanding (3,309,328 shares
issued and outstanding in 1994) 32,000 33,000
Convertible Series B common, $.01 par
value, 420,875 shares authorized,
issued and outstanding 4,000 4,000
Convertible Series C common, $.01 par
value, 247,574 shares authorized
issued and outstanding 2,000 2,000
Series D common, $.01 par value,
163,036 shares authorized,
issued and outstanding 2,000 2,000
Paid-in-capital 61,997,000 64,002,000
Cumulative income 19,679,000 15,664,000
Cumulative distributions (37,380,000) (32,899,000)
------------ ------------
Total shareholders' equity 44,336,000 46,808,000
------------ ------------
Total liabilities and shareholders' equity $ 46,806,000 $ 49,199,000
============ ============
</TABLE>
See accompanying notes.
F1-2
<PAGE>
PARTNERS PREFERRED YIELD, INC.
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Rental income $9,641,000 $9,335,000 $8,560,000
Interest income 45,000 35,000 37,000
---------- ---------- ----------
9,686,000 9,370,000 8,597,000
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 2,662,000 2,560,000 2,648,000
Management fees paid to
affiliate 578,000 560,000 513,000
Depreciation and amortization 1,946,000 1,900,000 1,840,000
Administrative 303,000 311,000 367,000
Environmental cost 182,000 - -
Interest expense paid to affiliate - 4,000 -
---------- ---------- ----------
5,671,000 5,335,000 5,368,000
---------- ---------- ----------
NET INCOME $4,015,000 $4,035,000 $3,229,000
========== ========== ==========
Primary earnings per share-Series A $1.08 $1.08 $0.93
===== ===== =====
Fully diluted earnings per share-Series A $1.02 $1.00 $0.78
===== ===== =====
Dividends declared per share:
Series A $1.23 $1.18 $0.99
===== ===== =====
Series B $1.23 $1.05 $ -
===== ===== =====
Weighted average Common shares outstanding:
Primary- Series A 3,239,045 3,335,720 3,480,189
========== ========== ==========
Fully diluted- Series A 3,907,494 4,004,169 4,148,638
========== ========== ==========
</TABLE>
See accompanying notes.
F1-3
<PAGE>
PARTNERS PREFERRED YIELD, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1995
<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 31, 1992 3,602,179 $36,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
Net income
Repurchase of shares (252,551) (3,000)
Cash distributions declared:
$0.99 per share - Series A
------------------------------------------------------------------------------------------
Balances at December 31, 1993 3,349,628 33,000 420,875 4,000 247,574 2,000 163,036 2,000
Net income
Repurchase of shares (40,300) -
Cash distributions declared:
$1.18 per share - Series A
$1.05 per share - Series B
------------------------------------------------------------------------------------------
Balances at December 31, 1994 3,309,328 33,000 420,875 4,000 247,574 2,000 163,036 2,000
Net income
Repurchase of shares (138,800) (1,000)
Cash distributions declared:
$1.23 per share - Series A
$1.23 per share - Series B
------------------------------------------------------------------------------------------
Balances at December 31, 1995 3,170,528 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
==========================================================================================
<CAPTION>
Cumulative Total
Paid-in net Cumulative shareholders'
Capital income distributions equity
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 $67,874,000 $ 8,400,000 ($25,101,000) $51,217,000
Net income 3,229,000 3,229,000
Repurchase of shares (3,335,000) (3,338,000)
Cash distributions declared:
$0.99 per share - Series A (3,426,000) (3,426,000)
----------------------------------------------------------------
Balances at December 31, 1993 64,539,000 11,629,000 (28,527,000) 47,682,000
Net income 4,035,000 4,035,000
Repurchase of shares (537,000) (537,000)
Cash distributions declared:
$1.18 per share - Series A (3,929,000) (3,929,000)
$1.05 per share - Series B (443,000) (443,000)
----------------------------------------------------------------
Balances at December 31, 1994 64,002,000 15,664,000 (32,899,000) 46,808,000
Net income 4,015,000 4,015,000
Repurchase of shares (2,005,000) (2,006,000)
Cash distributions declared:
$1.23 per share - Series A (3,963,000) (3,963,000)
$1.23 per share - Series B (518,000) (518,000)
----------------------------------------------------------------
Balances at December 31, 1995 $61,997,000 $19,679,000 ($37,380,000) $44,336,000
================================================================
</TABLE>
See accompanying notes.
F1-4
<PAGE>
PARTNERS PREFERRED YIELD, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,015,000 $ 4,035,000 $ 3,229,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,946,000 1,900,000 1,840,000
(Increase) decrease in rent and
other receivables (6,000) 72,000 (26,000)
Increase in other assets (356,000) (8,000) (80,000)
Increase (decrease) in accounts payable 254,000 (143,000) 4,000
Decrease in advance payments from renters (4,000) (32,000) (14,000)
----------- ----------- -----------
Total adjustments 1,834,000 1,789,000 1,724,000
----------- ----------- -----------
Net cash provided by operating activities 5,849,000 5,824,000 4,953,000
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from rental guarantees - - 271,000
Additions to real estate facilities (228,000) (235,000) (289,000)
----------- ----------- -----------
Net cash used in investing activities (228,000) (235,000) (18,000)
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (4,652,000) (3,599,000) (3,385,000)
Advances from affiliate 55,000 685,000 -
Repayment of advances from affiliate (55,000) (685,000) -
Purchase of Company Series A
common stock (2,006,000) (537,000) (3,338,000)
----------- ----------- -----------
Net cash used in financing activities (6,658,000) (4,136,000) (6,723,000)
----------- ----------- -----------
Net (decrease) increase in
cash and cash equivalents (1,037,000) 1,453,000 (1,788,000)
Cash and cash equivalents at
the beginning of the year 1,927,000 474,000 2,262,000
----------- ----------- -----------
Cash and cash equivalents at
the end of the year $ 890,000 $ 1,927,000 $ 474,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F1-5
<PAGE>
PARTNERS PREFERRED YIELD, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS
Partners Preferred Yield, 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 Partners Preferred Yield, Ltd. (the Partnership) in a
reorganization transaction which was effective October 21, 1991 (the
Reorganization).
The Company owns and operates self-storage facilities.
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 1999, 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.
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, 1995 and 1994 to develop mini-warehouse
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.
At December 31, 1995, the basis of real estate facilities for Federal
income tax purposes (after adjustment for accumulated depreciation of
$16,275,000) is $48,901,000.
Revenue Recognition:
Property rents are recognized as earned.
Net Income Per Share:
Net income per share is based on net income attributable to each series
of common shares and the weighted average number of such shares outstanding
during the periods presented.
F1-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net income per share is presented on a primary and fully diluted basis.
Primary earnings per share represents the Series A shareholders rights to
distributions out of the respective periods net income, which is calculated
by dividing net income after reduction for distributions to the Convertible
Series B shareholders (Series C shareholders are not entitled to cash
distributions) by the weighted average number of outstanding Series A shares
(Note 4). Primary earnings per share for the twelve months ended December
31, 1995 and 1994 reflect dividends to the Series B shareholders totaling
$518,000 and $443,000, respectively. Fully diluted earnings per share
assumes conversion of the Convertible Series B and Series C shares into
Series A shares. Series D shares are only entitled to a portion of
distributions from sales and refinancings and therefore, are not included in
the weighted average number of shares.
Environmental Cost:
Substantially all of the Company's facilities were acquired prior to
the time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995, the
Company completed environmental assessments of its properties to evaluate the
environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Company has expensed, as of
December 31, 1995, an estimated $182,000 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware of
any environmental contamination of any of its property sites which
individually or in the aggregate would be material to the Company's overall
business, financial condition, or results of operations.
3. RELATED PARTY TRANSACTIONS
In 1995, there were a series of mergers among Pubic Storage Management,
Inc. (which was the Company's mini-warehouse operator), Public Storage, Inc.
and their affiliates (collectively, PSMI), culminating in the November 16,
1995 merger (the PSMI merger) of PSMI into Storage Equities, Inc. (SEI). In
the PSMI merger, Storage Equities, Inc.'s name was changed to Public
Storage, Inc. (PSI). B. Wayne Hughes and members of his family (the Hughes
Family) are the major shareholders of PSI.
The Company has a Management Agreement with PSI (as successor-in-
interest to PSMI). Under the terms of the agreement, PSI operates the mini-
warehouse facilities for a fee equal to 6% 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.
In August 1995, the Management Agreement with PSMI was amended to
provide that upon demand from PSI or PSMI made prior to December 15, 1995,
the Company agreed to prepay (within 15 days after such demand) up to 12
months of management fees (based on the management fees for the comparable
period during the calendar year immediately preceding such prepayment)
discounted at the rate of 14% per year to compensate for early payment. In
November 1995, the Company prepaid, to PSI, 8 months of 1996 management fees
at a cost of $351,000. The amount is included in other assets in the
Balance Sheet at December 31, 1995 and will be amortized as management fee
expense in 1996.
F1-7
<PAGE>
3. RELATED PARTY TRANSACTIONS (CONTINUED)
In January 1994, the Company borrowed $685,000 from an affiliate for
working capital purposes. The advance, which was repaid in April 1994, bore
interest at the prime rate plus .25%. Interest expense of $4,000 was charged
to income in 1994 with respect to this advance.
In May 1995, the Company borrowed $55,000 from an affiliate for working
capital purposes. The advance was repaid in May 1995.
4. SHAREHOLDERS' EQUITY
The Series B shares and Series C shares will convert automatically into
Series A shares on a share-for-share basis (the Conversion) when (A)
Investor Distributions (as defined below) equal (B) Remaining Investors
Capital (as defined below). The term Investors Distributions means the sum
of (1) all cumulative dividends and other distributions from all sources to
the holders of the Series A shares issued to the limited partners in the
Reorganization and (2) the cumulative Partnership distributions from all
sources with respect to all units. The term Remaining Investors Capital
means the product of (1) $20 multiplied by (2) the number of the then-
outstanding Limited Partners Original Series A shares, and the term Limited
Partners Original Series A shares means the 3,750,000 Series A shares issued
in the Reorganization to the Limited Partners (not including the 1% Series A
shares issued to the General Partners).
The Series B shares (prior to the Conversion) are not entitled to
participate in distributions attributable to the sale or financing of the
properties or the liquidation of the Company, but begin to participate in
other distributions on the same basis as the Series A shares (the
Participation) when Investor Distributions equal Remaining Investors Capital
minus $37,500,000 (50% of the limited partners' original capital
contribution). The Series C shares (prior to Conversion) are not entitled
to participate in any distributions, including liquidating distributions.
After the Conversion, the Series D shares will be entitled to participate in
any distributions attributable to the sale or financing of the properties or
the liquidation of the Company on the same basis as the Series A shares, but
will not participate in other distributions.
Through December 31, 1995, the Company has made and declared cumulative
Investor Distributions of $36,098,000. In connection with the payment of
the Company's dividend payable to shareholders of record on March 31, 1994,
the requirements for Participation occurred, and the Series B shares began
participating in distributions as described above. As of December 31, 1995,
the Conversion of Series B shares and Series C shares will occur when
$26,707,000 in additional Investor Distributions have been made.
Assuming liquidation of the Company at its net book value at December
31, 1995 and 1994, each Series of common shares would receive the following
as a liquidating distribution:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Series A $40,673,000 $44,117,000
Convertible Series B 1,854,000 1,362,000
Convertible Series C 1,091,000 801,000
Series D 718,000 528,000
----------- -----------
Total $44,336,000 $46,808,000
=========== ===========
</TABLE>
The Series A shares, Convertible Series B shares, Convertible Series C
shares and Series D shares have equal voting rights. The holders of the
Convertible Series B shares, Convertible Series C shares and Series D shares
have agreed to vote along with the majority of the unaffiliated Series A
shareholders on matters other than control of the Company and its business.
F1-8
<PAGE>
4. SHAREHOLDERS' EQUITY (CONTINUED)
The Company's Board of Directors has authorized the Company to purchase
up to 800,000 shares of the Company's Series A common stock. As of December
31, 1995, the Company had purchased and retired 617,351 shares of Series A
common stock, of which 138,800 and 40,300 were purchased and retired in 1995
and 1994, respectively.
For Federal income tax purposes, all distributions declared by the
Board of Directors in 1995, 1994 and 1993 were ordinary income.
5. NOTE PAYABLE TO BANK
In November 1995, the Company's Board of Directors authorized the
Company to obtain an unsecured revolving credit facility with a bank for
borrowings up to $2,500,000 for working capital purposes, including the
repurchase of the Company's stock.
In December 1995, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,500,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on
the credit facility, at the Company's option, bear interest at either the
banks prime rate plus .25% or the LIBOR rate plus 2.25%. Interest is
payable monthly beginning in February 1996. On December 31, 1999, all
unpaid principal and accrued interest is due and payable.
At December 31, 1995, there was no outstanding balance on the credit
facility. In January 1996, the Company borrowed $1,000,000 on its line of
credit facility.
Under covenants of the credit facility, the Company is (1) required to
maintain a ratio of liabilities to assets (as defined) for each fiscal
quarter of not more than .3 to 1.0, (2) required to maintain a debt coverage
ratio (as defined) for each fiscal quarter of not less than 8 times the debt
service, (3) required to maintain a fixed charge coverage ratio (as defined)
for each fiscal quarter of not less than 1.0 to 1.0 and (4) required to
maintain a minimum shareholders equity (as defined) for each fiscal quarter
of $40 million.
6. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------
March 1995 June 1995 Sept 1995 Dec. 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $2,333,000 $2,416,000 $2,495,000 $2,442,000
---------- ---------- ---------- ----------
Expenses 1,353,000 1,353,000 1,332,000 1,633,000
---------- ---------- ---------- ----------
Net income $ 980,000 $1,063,000 $1,163,000 $ 809,000
========== ========== ========== ==========
Primary earnings per share- Series A $0.26 $0.29 $0.33 $0.20
===== ===== ===== =====
Fully diluted earnings per share-Series A $0.25 $0.27 $0.30 $0.20
===== ===== ===== =====
</TABLE>
F1-9
<PAGE>
6. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------
March 1994 June 1994 Sept 1994 Dec. 1994
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $2,237,000 $2,343,000 $2,412,000 $2,378,000
---------- ---------- ---------- ----------
Expenses 1,295,000 1,338,000 1,331,000 1,371,000
---------- ---------- ---------- ----------
Net income $ 942,000 $1,005,000 $1,081,000 $1,007,000
========== ========== ========== ==========
Primary earnings per share- Series A $0.27 $0.27 $0.29 $0.25
===== ===== ===== =====
Fully diluted earnings per share- Series A $0.23 $0.25 $0.27 $0.25
===== ===== ===== =====
</TABLE>
F1-10
<PAGE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,090,000 $ 890,000
Rent and other receivables 81,000 50,000
Real estate facilities at cost:
Buildings and equipment 45,425,000 45,138,000
Land 14,361,000 14,361,000
------------ ------------
59,786,000 59,499,000
Less accumulated depreciation (15,098,000) (14,097,000)
------------ ------------
44,688,000 45,402,000
------------ ------------
Other assets 212,000 464,000
------------ ------------
Total assets $ 46,071,000 $ 46,806,000
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
-----------------------------------
Accounts payable $ 649,000 $ 634,000
Dividends payable 947,000 1,508,000
Advance payments from renters 380,000 328,000
Note payable 1,000,000 -
Shareholders equity:
Series A common, $.01 par value,
4,456,328 shares authorized,
3,086,428 shares issued and
outstanding (3,170,528 shares
issued and outstanding in 1995) 31,000 32,000
Convertible Series B common, $.01 par
value, 420,875 shares authorized,
issued and outstanding 4,000 4,000
Convertible Series C common, $.01 par
value, 247,574 shares authorized,
issued and outstanding 2,000 2,000
Series D common, $.01 par value,
163,036 shares authorized, issued
and outstanding 2,000 2,000
Paid-in-capital 60,678,000 61,997,000
Cumulative income 21,652,000 19,679,000
Cumulative distributions (39,274,000) (37,380,000)
------------ ------------
Total shareholders equity 43,095,000 44,336,000
------------ ------------
Total liabilities and shareholders $ 46,071,000 $ 46,806,000
equity ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F1-11
<PAGE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $2,510,000 $2,409,000 $4,898,000 $4,731,000
Interest income 3,000 7,000 8,000 18,000
---------- ---------- ---------- ----------
2,513,000 2,416,000 4,906,000 4,749,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 734,000 656,000 1,491,000 1,308,000
Management fees
paid to affiliate 131,000 145,000 262,000 284,000
Depreciation 504,000 484,000 1,001,000 967,000
Administrative 62,000 68,000 138,000 147,000
Interest expense 22,000 - 41,000 -
---------- ---------- ---------- ----------
1,453,000 1,353,000 2,933,000 2,706,000
---------- ---------- ---------- ----------
NET INCOME $1,060,000 $1,063,000 $1,973,000 $2,043,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $ 0.30 $ 0.29 $ 0.56 $ 0.55
========== ========== ========== ==========
Fully diluted - Series A $ 0.28 $ 0.27 $ 0.52 $ 0.52
========== ========== ========== ==========
Dividends declared per share:
Series A $ 0.27 $ 0.27 $ 0.54 $ 0.54
========== ========== ========== ==========
Series B $ 0.27 $ 0.27 $ 0.54 $ 0.54
========== ========== ========== ==========
Weighted average common
shares outstanding:
Primary - Series A 3,086,428 3,238,661 3,102,278 3,263,428
========== ========== ========== ==========
Fully diluted - Series A 3,754,877 3,907,110 3,770,727 3,931,877
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F1-12
<PAGE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
(UNAUDITED)
<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 31, 1995 3,170,528 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
Net income - - - - - - - -
Repurchase of shares (84,100) (1,000) - - - - - -
Cash distributions declared:
$.54 per share - Series A - - - - - - - -
$.54 per share - Series B - - - - - - - -
--------- ------- ------- ------ ------- ------ ------- ------
Balances at June 30, 1996 3,086,428 $31,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
========= ======= ======= ====== ======= ====== ======= ======
<CAPTION>
Cumulative Total
Paid-in Net Cumulative Shareholders
Capital Income Distributions Equity
------------ --------- ------------- ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $61,997,000 $19,679,000 ($37,380,000) $44,336,000
Net income - 1,973,000 - 1,973,000
Repurchase of shares (1,319,000) - - (1,320,000)
Cash distributions declared:
$.54 per share - Series A - - (1,666,000) (1,666,000)
$.54 per share - Series B - - (228,000) (228,000)
----------- ----------- ------------ -----------
Balances at June 30, 1996 $60,678,000 $21,652,000 ($39,274,000) $43,095,000
=========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
F1-13
<PAGE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,973,000 $ 2,043,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,001,000 967,000
Increase in rent and other receivables (31,000) (1,000)
Increase in other assets (10,000) (1,000)
Amortization of prepaid management fees 262,000 -
Increase in accounts payable 15,000 17,000
Increase in advance payments from renters 52,000 19,000
----------- -----------
Total adjustments 1,289,000 1,001,000
----------- -----------
Net cash provided by operating activities 3,262,000 3,044,000
----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (287,000) (27,000)
----------- -----------
Net cash used in investing activities (287,000) (27,000)
----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (2,455,000) (2,678,000)
Advances from affiliate - 55,000
Repayment of advances from affiliate - (55,000)
Proceeds from note payable to Bank 1,000,000 -
Purchase of Company Series A common stock (1,320,000) (978,000)
----------- -----------
Net cash used in financing activities (2,775,000) (3,656,000)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 200,000 (639,000)
Cash and cash equivalents at
the beginning of the period 890,000 1,927,000
----------- -----------
Cash and cash equivalents at
the end of the period $ 1,090,000 $ 1,288,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F1-14
<PAGE>
PARTNERS PREFERRED YIELD, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes
appearing in the Company's Form 10-K for the year ended December 31, 1995.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Company's financial position at
June 30, 1996 and December 31, 1995, the results of its operations for the
three and six months ended June 30, 1996 and 1995 and its cash flows for
the six months then ended.
3. The results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results expected for the full year.
4. In 1995, the Company prepaid eight months of 1996 management fees at a
total cost of $351,000. The Company expensed $262,000 of the 1996 prepaid
management fees for the six months ended June 30, 1996. The balance of
prepaid management fees, $89,000, is included in other assets in the
Balance Sheet at June 30, 1996.
5. In December 1995, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,500,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on
the credit facility, at the Company's option, bear interest at either the
banks prime rate plus .25% (8.50% at June 30, 1996) or the banks LIBOR rate
plus 2.25% (7.80% at June 30, 1996). Interest is payable monthly. On
December 31, 1999, all unpaid principal and accrued interest is due and
payable. During the first quarter of 1996, the Company borrowed $1,000,000
on its line of credit facility. During the second quarter of 1996, the
Company borrowed and repaid an additional $450,000 on its line of credit
facility. At June 30, 1996, the outstanding balance on the credit facility
was $1,000,000. The Company is subject to certain covenants including cash
flow coverages and dividend restrictions. As of June 30, 1996, the Company
was in compliance with the covenants of the credit facility.
F1-15
<PAGE>
Appendix F-2
PARTNERS PREFERRED YIELD II, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Report of independent auditors F2 - 1
Balance sheets at December 31, 1995 and 1994 F2 - 2
For the years ended December 31, 1995, 1994 and 1993:
Statements of income F2 - 3
Statements of shareholders equity F2 - 4
Statements of cash flows F2 - 5
Notes to financial statements F2 - 6 - F2 - 10
Condensed balance sheets at June 30, 1996 and December 31, 1995 F2 - 11
Condensed statements of income for the three
and six months ended June 30, 1996 and 1995 F2 - 12
Condensed statement of shareholders equity for the
six months ended June 30, 1996 F2 - 13
Condensed statements of cash flows for the
six months ended June 30, 1996 and 1995 F2 - 14
Notes to condensed financial statements F2 - 15
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Partners Preferred Yield II, Inc.
We have audited the accompanying balance sheets of Partners Preferred Yield II,
Inc. as of December 31, 1995 and 1994, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Partners Preferred Yield II,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 27, 1996
Los Angeles, California
F2-1
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 936,000 $ 905,000
Rent and other receivables 64,000 62,000
Other assets 702,000 325,000
Real estate facilities at cost:
Building, land improvements and equipment 46,345,000 46,076,000
Land 15,060,000 15,060,000
------------ ------------
61,405,000 61,136,000
Less accumulated depreciation (13,373,000) (11,375,000)
------------ ------------
48,032,000 49,761,000
------------ ------------
Total assets $ 49,734,000 $ 51,053,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 548,000 $ 495,000
Dividends payable 1,404,000 1,512,000
Advance payments from renters 386,000 382,000
Shareholders' equity:
Series A common, $.01 par value,
4,619,515 shares authorized,
3,172,303 shares issued and
outstanding (3,243,103 shares
issued and outstanding in 1994) 32,000 32,000
Convertible Series B common,
$.01 par value, 420,875 shares
authorized, issued and outstanding 4,000 4,000
Convertible Series C common,
$.01 par value, 247,574 shares
authorized, issued and outstanding 2,000 2,000
Series D common, $.01 par value,
163,036 shares authorized, issued
and outstanding 2,000 2,000
Paid-in-capital 61,965,000 63,024,000
Cumulative income 20,669,000 16,384,000
Cumulative distributions (35,278,000) (30,784,000)
------------ ------------
Total shareholders' equity 47,396,000 48,664,000
------------ ------------
Total liabilities and shareholders' equity $ 49,734,000 $ 51,053,000
============ ============
</TABLE>
See accompanying notes.
F2-2
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income $10,498,000 $9,870,000 $9,294,000
Interest income 37,000 24,000 24,000
----------- ---------- ---------
10,535,000 9,894,000 9,318,000
----------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 3,273,000 3,174,000 2,956,000
Management fees paid to affiliate 630,000 592,000 558,000
Depreciation and amortization 1,998,000 1,940,000 1,986,000
Interest expense paid to affiliate 6,000 12,000 -
Environmental cost 38,000 - -
Administrative 305,000 322,000 359,000
----------- ---------- ----------
6,250,000 6,040,000 5,859,000
----------- ---------- ----------
NET INCOME $4,285,000 $3,854,000 $3,459,000
========== ========== ==========
Primary earnings per share-Series A $ 1.17 $ 1.08 $ 1.01
========== ========== ==========
Fully diluted earnings per share-Series A $ 1.11 $ 0.97 $ 0.84
========== ========== ==========
Dividends declared per share:
Series A $ 1.23 $ 1.17 $ 1.13
========== ========== ==========
Series B $ 1.23 $ 0.67 $ -
========== ========== ==========
Series C $ - $ - $ -
========== ========== ==========
Series D $ - $ - $ -
========== ========== ==========
Weighted average Common shares outstanding:
Primary-Series A 3,226,378 3,305,495 3,427,568
========== ========== ==========
Fully diluted-Series A 3,894,827 3,973,944 4,096,017
========== ========== ==========
</TABLE>
See accompanying notes.
F2-3
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1995
<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 31, 1992 3,641,279 $37,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
Net income
Repurchase of shares (311,776) (4,000)
Cash distributions declared:
$1.13 per share - Series A
---------------------------------------------------------------------------------------------
Balances at December 31, 1993 3,329,503 33,000 420,875 4,000 247,574 2,000 163,036 2,000
Net income
Repurchase of shares (86,400) (1,000)
Cash distributions declared:
$1.17 per share - Series A
$0.67 per share - Series B
---------------------------------------------------------------------------------------------
Balances at December 31, 1994 3,243,103 32,000 420,875 4,000 247,574 2,000 163,036 2,000
Net income
Repurchase of shares (70,800) -
Cash distributions declared:
$1.23 per share - Series A
$1.23 per share - Series B
---------------------------------------------------------------------------------------------
Balances at December 31, 1995 3,172,303 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
=============================================================================================
<CAPTION>
Cumulative Total
Paid-in net Cumulative shareholders'
Capital Income distributions equity
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 $68,185,000 $ 9,071,000 ($22,804,000) $54,497,000
Net income 3,459,000 3,459,000
Repurchase of shares (3,983,000) (3,987,000)
Cash distributions declared:
$1.13 per share - Series A (3,838,000) (3,838,000)
-------------------------------------------------------------
Balances at December 31, 1993 64,202,000 12,530,000 (26,642,000) 50,131,000
Net income 3,854,000 3,854,000
Repurchase of shares (1,178,000) (1,179,000)
Cash distributions declared:
$1.17 per share - Series A (3,860,000) (3,860,000)
$0.67 per share - Series B (282,000) (282,000)
-------------------------------------------------------------
Balances at December 31, 1994 63,024,000 16,384,000 (30,784,000) 48,664,000
Net income 4,285,000 4,285,000
Repurchase of shares (1,059,000) (1,059,000)
Cash distributions declared:
$1.23 per share - Series A (3,976,000) (3,976,000)
$1.23 per share - Series B (518,000) (518,000)
-------------------------------------------------------------
Balances at December 31, 1995 $61,965,000 $20,669,000 ($35,278,000) $47,396,000
=============================================================
</TABLE>
See accompanying notes.
F2-4
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,285,000 $ 3,854,000 $ 3,459,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,998,000 1,940,000 1,986,000
(Increase) decrease in rent and
other receivables (2,000) 6,000 (11,000)
Increase in other assets (377,000) (3,000) (87,000)
Increase (decrease) in accounts payable 53,000 (9,000) (95,000)
Increase (decrease) in advance
payments from renters 4,000 (81,000) 34,000
----------- ----------- -----------
Total adjustments 1,676,000 1,853,000 1,827,000
----------- ----------- -----------
Net cash provided by operating activities 5,961,000 5,707,000 5,286,000
----------- ----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (269,000) (296,000) (226,000)
----------- ----------- -----------
Net cash used in investing activities (269,000) (296,000) (226,000)
----------- ----------- -----------
Cash flows from financing activities:
Advances from affiliate 700,000 910,000 -
Repayment of advances from affiliate (700,000) (910,000) -
Distributions paid to shareholders (4,602,000) (4,153,000) (3,044,000)
Purchase of Company Series A
common stock (1,059,000) (1,179,000) (3,987,000)
----------- ----------- -----------
Net cash used in financing activities (5,661,000) (5,332,000) (7,031,000)
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 31,000 79,000 (1,971,000)
Cash and cash equivalents at
the beginning of the year 905,000 826,000 2,797,000
----------- ----------- -----------
Cash and cash equivalents at
the end of the year $ 936,000 $ 905,000 $ 826,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F2-5
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS
Partners Preferred Yield II, 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 Partners Preferred Yield II, Ltd. The term "Company" as used
herein means the Partnership with respect to all matters prior to November
8, 1991 (the "Reorganization").
The Company owns and operates self-storage facilities.
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 1999, 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. During 1995 and 1994 the Company paid
$6,000 and $12,000 in interest cost.
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, 1995 and 1994 to develop mini-warehouse
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.
At December 31, 1995, the basis of real estate facilities for Federal
income tax purposes (after adjustment for accumulated depreciation of
$14,964,000) is $50,949,000.
Revenue Recognition:
Property rents are recognized as earned.
F2-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share:
Net income per share is based on net income attributable to each series
of common shares and the weighted average number of such shares outstanding
during the periods presented.
Net income per share is presented on a primary and fully diluted basis.
Primary earnings per share represents the Series A shareholders rights to
distributions out of the respective periods net income, which is calculated
by dividing net income after reduction for distributions to the Convertible
Series B shareholders (Series C shareholders are not entitled to cash
distributions) by the weighted average number of outstanding Series A shares
(Note 4). Primary earnings per share for the twelve months ended December
31, 1995 and 1994 reflect dividends to the Series B shareholders totaling
$518,000 and $282,000, respectively. Fully diluted earnings per share
assumes conversion of the Convertible Series B and Series C shares into
Series A shares. Series D shares are only entitled to a portion of
distributions from sales and refinancings and therefore, are not included in
the weighted average number of shares.
Environmental Cost:
Substantially all of the Companys facilities were acquired prior to the
time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995,
the Company completed environmental assessments of its properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. These assessments were performed by an
independent environmental consulting firm. Based on the assessments, the
Company has expensed, as of December 31, 1995, an estimated $38,000 for
known environmental remediation requirements. Although there can be no
assurance, the Company is not aware of any environmental contamination of
any of its property sites which individually or in the aggregate would be
material to the Companys overall business, financial condition, or results
of operations.
3. RELATED PARTY TRANSACTIONS
In 1995, there were a series of mergers among Pubic Storage Management,
Inc. (which was the Companys mini-warehouse operator), Public Storage, Inc.
and their affiliates (collectively, PSMI), culminating in the November 16,
1995 merger (the "PSMI merger") of PSMI into Storage Equities, Inc. (SEI).
In the PSMI merger, Storage Equities, Inc.s name was changed to Public
Storage, Inc. (PSI). B. Wayne Hughes and members of his family (the Hughes
Family) are the major shareholders of PSI.
The Company has a Management Agreement with PSI (as successor-in-
interest to PSMI). Under the terms of the agreement, PSI operates the mini-
warehouse facilities for a fee equal to 6% 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.
F2-7
<PAGE>
3. RELATED PARTY TRANSACTIONS (CONTINUED)
In August 1995, the Management Agreement with PSMI was amended to
provide that upon demand from PSI or PSMI made prior to December 15, 1995,
the Company agreed to prepay (within 15 days after such demand) up to 12
months of management fees (based on the management fees for the comparable
period during the calendar year immediately preceding such prepayment)
discounted at the rate of 14% per year to compensate for early payment. In
November 1995, the Company prepaid, to PSI, 8 months of 1996 management fees
at a cost of $370,000. The amount is included in other assets in the Balance
Sheet at December 31, 1995 and will be amortized as management fee expense
in 1996.
In January 1994, the Company borrowed $910,000 from an affiliate for
working capital purposes. The advance, which was repaid in 1994, bore
interest at the prime rate plus .25%. Interest expense of $12,000 was
charged to income in 1994 with respect to this advance.
In January and April 1995, the Company borrowed $700,000 from an
affiliate for working capital purposes. The advance was repaid in May 1995.
This advance bore interest at the prime interest rate plus .25%. Interest
expense of $6,000 was charged to income for the year ended December 31, 1995
with respect to this advance.
4. SHAREHOLDERS' EQUITY
The Series B shares and Series C shares will convert automatically into
Series A shares on a share-for-share basis (the Conversion) when (A)
Investor Distributions (as defined below) equal (B) Remaining Investors
Capital (as defined below). The term Investors Distributions means the sum
of (1) all cumulative dividends and other distributions from all sources to
the holders of the Series A shares issued to the limited partners in the
Reorganization and (2) the cumulative Partnership distributions from all
sources with respect to all units. The term Remaining Investors Capital
means the product of (1) $20 multiplied by (2) the number of the then-
outstanding Limited Partners Original Series A shares, and the term Limited
Partners Original Series A shares means the 3,750,000 Series A shares issued
in the Reorganization to the Limited Partners (not including the 1% Series A
shares issued to the General Partners).
The Series B shares (prior to the Conversion) are not entitled to
participate in distributions attributable to the sale or financing of the
properties or the liquidation of the Company, but begin to participate in
other distributions on the same basis as the Series A shares (the
Participation) when Investor Distributions equal Remaining Investors Capital
minus $37,500,000 (50% of the limited partners' original capital
contribution). The Series C shares (prior to Conversion) are not entitled to
participate in any distributions, including liquidating distributions. After
the Conversion, the Series D shares will be entitled to participate in any
distributions attributable to the sale or financing of the properties or the
liquidation of the Company on the same basis as the Series A shares, but
will not participate in other distributions.
Through December 31, 1995, the Company has made and declared cumulative
Investor Distributions of $34,167,000. In connection with the payment of the
Companys dividend payable to shareholders of record on September 30, 1994,
the requirements for Participation occurred, and the Series B shares began
participating in distributions as described above. As of December 31, 1995,
the Conversion of Series B shares and Series C shares will occur when
$28,673,000 in additional Investor Distributions have been made.
F2-8
<PAGE>
4. SHAREHOLDERS' EQUITY (CONTINUED)
Assuming liquidation of the Company at its net book value at December
31, 1995 and 1994, each Series of common shares would receive the following
as a liquidating distribution:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Series A $43,508,000 $45,673,000
Convertible Series B 1,968,000 1,514,000
Convertible Series C 1,158,000 890,000
Series D 762,000 587,000
----------- -----------
Total $47,396,000 $48,664,000
=========== ===========
</TABLE>
The Series A shares, Convertible Series B shares, Convertible Series C
shares and Series D shares have equal voting rights. The holders of the
Convertible Series B shares, Convertible Series C shares and Series D shares
have agreed to vote along with the majority of the unaffiliated Series A
shareholders on matters other than control of the Company and its business.
The Company's Board of Directors has authorized the Company to purchase
up to 800,000 shares of the Company's Series A common stock. As of December
31, 1995, the Company had purchased and retired 615,576 shares of Series A
common stock, of which 70,800 and 86,400 were purchased and retired in 1995
and 1994, respectively.
For Federal income tax purposes, all distributions declared by the
Board of Directors in 1995, 1994 and 1993 were ordinary income.
5. SUBSEQUENT EVENT
In November 1995, the Companys Board of Directors authorized the
Company to obtain an unsecured revolving credit facility with a bank for
borrowings up to $2,500,000 for working capital purposes, including the
repurchase of the Companys stock.
In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,000,000 for working capital
purposes and to repurchase the Companys stock. Outstanding borrowings on the
credit facility, at the Companys option, bear interest at either the banks
Prime Rate or the banks LIBOR Rate plus 2.25%. Interest is payable monthly
beginning in March 1996. On January 31, 1999, all unpaid principal and
accrued interest is due and payable.
Under covenants of the credit facility, (1) the Company is required to
maintain a cash flow ratio, as defined, of more than 3.0 to 1.0, (2) the
Companys total debt may not exceed 15% of its net worth as defined (3)
Advances from affiliates may not exceed $500,000.
F2-9
<PAGE>
6. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------
March 1995 June 1995 Sept 1995 Dec. 1995
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $2,531,000 $2,630,000 $2,704,000 $2,670,000
Expenses 1,531,000 1,528,000 1,562,000 1,629,000
---------- ---------- ---------- ----------
Net income $1,000,000 $1,102,000 $1,142,000 $1,041,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $ 0.27 $ 0.30 $ 0.32 $ 0.28
========== ========== ========== ==========
Fully Diluted - Series A $ 0.26 $ 0.28 $ 0.29 $ 0.28
========== ========== ========== ==========
<CAPTION>
Three months ended
---------------------------------------------------
March 1994 June 1994 Sept 1994 Dec. 1994
---------- ---------- ---------- ----------
Revenues $2,364,000 $2,473,000 $2,531,000 $2,526,000
Expenses 1,471,000 1,452,000 1,539,000 1,578,000
---------- ---------- ---------- ----------
Net Income $ 893,000 $1,021,000 $ 992,000 $ 948,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $ 0.27 $ 0.31 $ 0.26 $ 0.24
========== ========== ========== ==========
Fully diluted - Series A $ 0.22 $ 0.26 $ 0.25 $ 0.24
========== ========== ========== ==========
</TABLE>
F2-10
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,500,000 $ 936,000
Rent and other receivables 68,000 64,000
Prepaid expenses 440,000 702,000
Real estate facilities at cost:
Building, land improvements and equipment 46,445,000 46,345,000
Land 15,060,000 15,060,000
------------ ------------
61,505,000 61,405,000
Less accumulated depreciation (14,390,000) (13,373,000)
------------ ------------
47,115,000 48,032,000
------------ ------------
Total assets $ 49,123,000 $ 49,734,000
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
-----------------------------------
Accounts payable $ 528,000 $ 548,000
Dividends payable 997,000 1,404,000
Advance payments from renters 422,000 386,000
Shareholders equity:
Series A common, $.01 par value,
4,619,515 shares authorized,
3,138,603 shares issued and
outstanding (3,172,303 shares
issued and outstanding in 1995) 31,000 32,000
Convertible Series B common, $.01 par
value, 420,875 shares authorized,
issued and outstanding 4,000 4,000
Convertible Series C common, $.01 par
value, 247,574 shares authorized,
issued and outstanding 2,000 2,000
Series D common, $.01 par value,
163,036 shares authorized, issued
and outstanding 2,000 2,000
Paid-in-capital 61,447,000 61,965,000
Cumulative income 22,962,000 20,669,000
Cumulative distributions (37,272,000) (35,278,000)
------------ ------------
Total shareholders equity 47,176,000 47,396,000
------------ ------------
Total liabilities and shareholders equity $ 49,123,000 $ 49,734,000
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F2-11
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $2,741,000 $2,624,000 $5,407,000 $5,151,000
Interest income 8,000 6,000 12,000 10,000
---------- ---------- ---------- ----------
2,749,000 2,630,000 5,419,000 5,161,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 847,000 804,000 1,682,000 1,601,000
---------- ---------- ---------- ----------
Management fees 139,000 157,000 278,000 309,000
paid to an affiliate ---------- ---------- ---------- ----------
Depreciation 510,000 499,000 1,017,000 994,000
---------- ---------- ---------- ----------
Interest expense 5,000 1,000 12,000 6,000
---------- ---------- ---------- ----------
Administrative 65,000 67,000 137,000 149,000
---------- ---------- ---------- ----------
1,566,000 1,528,000 3,126,000 3,059,000
---------- ---------- ---------- ----------
NET INCOME $1,183,000 $1,102,000 $2,293,000 $2,102,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $ 0.33 $ 0.30 $ 0.65 $ 0.57
========== ========== ========== ==========
Fully diluted - Series A $ 0.31 $ 0.28 $ 0.60 $ 0.54
========== ========== ========== ==========
Dividends declared per share:
Series A $ 0.28 $ 0.28 $ 0.56 $ 0.56
========== ========== ========== ==========
Series B $ 0.28 $ 0.28 $ 0.56 $ 0.56
========== ========== ========== ==========
Weighted average common
shares outstanding:
Primary - Series A 3,138,603 3,237,303 3,142,236 3,237,303
========== ========== ========== ==========
Fully diluted - Series A 3,807,052 3,905,752 3,810,685 3,905,752
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F2-12
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
(UNAUDITED)
<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 31, 1995 3,172,303 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
Net income - - - - - - - -
Repurchase of shares (33,700) (1,000) - - - - - -
Cash distributions declared:
$.56 per share - Series A - - - - - - - -
$.56 per share - Series B - - - - - - - -
--------- ------- ------- ------ ------- ------ ------- ------
Balances at June 30, 1996 3,138,603 $31,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
========= ======= ======= ====== ======= ====== ======= ======
<CAPTION>
Cumulative Total
Paid-in net Cumulative shareholders'
Capital Income distributions equity
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at
December 31, 1995 $61,965,000 $20,669,000 $(35,278,000) $47,396,000
Net income - 2,293,000 - 2,293,000
Repurchase of shares (518,000) - - (519,000)
Cash distributions declared:
$.56 per share - Series A - - (1,758,000) (1,758,000)
$.56 per share - Series B - - (236,000) (236,000)
----------- ----------- ------------- -----------
Balances at June 30, 1996 $61,447,000 $22,962,000 ($37,272,000) $47,176,000
=========== =========== ============= ===========
</TABLE>
See accompanying notes to condensed financial statements.
F2-13
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,293,000 $ 2,102,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,017,000 994,000
Increase in rent and other
receivables (4,000) -
Amortization of prepaid expenses 278,000 -
Increase in prepaid expenses (16,000) (2,000)
(Decrease) increase in accounts
payable (20,000) 9,000
Increase in advance payments
from renters 36,000 24,000
----------- -----------
Total adjustments 1,291,000 1,025,000
----------- -----------
Net cash provided by
operating activities 3,584,000 3,127,000
----------- -----------
Cash flows from investing activities:
Additions to real estate
facilities (100,000) (133,000)
----------- -----------
Net cash used in investing
activities (100,000) (133,000)
----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (2,401,000) (2,556,000)
Advances from affiliate - 700,000
Repayment of advances from
affiliate - (700,000)
Purchase of Company Series A
common stock (519,000) (79,000)
----------- -----------
Net cash used in financing
activities (2,920,000) (2,635,000)
----------- -----------
Net increase in cash
and cash equivalents 564,000 359,000
Cash and cash equivalents at
the beginning of the period 936,000 905,000
----------- -----------
Cash and cash equivalents at
the end of the period $ 1,500,000 $ 1,264,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F2-14
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures contained
herein are adequate to make the information presented not misleading. These
unaudited condensed financial statements should be read in conjunction with
the financial statements and related notes appearing in the Companys Form
10-K for the year ended December 31, 1995.
2. In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments, consisting of only normal accruals,
necessary to present fairly the Companys financial position at June 30, 1996
and December 31, 1995, the results of its operations for the three and six
months ended June 30, 1996 and 1995 and its cash flows for the six months
then ended.
3. The results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results expected for the full year.
4. In 1995, the Company prepaid eight months of 1996 management fees at a total
cost of $370,000. The Company expensed $278,000 of the 1996 prepaid
management fees for the six months ended June 30, 1996. The balance of
prepaid management fees, $92,000, is included in prepaid expenses in the
Balance Sheet at June 30, 1996.
5. In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,000,000 for working capital
purposes and to repurchase the Companys stock. Outstanding borrowings on the
credit facility, at the Companys option, bear interest at either the banks
Prime Rate or the banks LIBOR Rate plus 2.25%. Interest is payable monthly
and on January 31, 1999, all unpaid principal and accrued interest is due
and payable. During the six months ended June 30, 1996, the Company borrowed
and repaid $300,000 on its credit facility. At June 30, 1996, there was no
outstanding balance on the credit facility. As of June 30, 1996, the Company
was in compliance with the covenants of the credit facility.
F2-15
<PAGE>
Appendix F-3
PARTNERS PREFERRED YIELD III, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Reference
---------
<S> <C>
Report of independent auditors F3 - 1
Balance sheets at December 31, 1995 and 1994 F3 - 2
For the years ended December 31, 1995, 1994 and 1993:
Statements of income F3 - 3
Statements of shareholders equity F3 - 4
Statements of cash flows F3 - 5
Notes to financial statements F3 - 6 - F3 - 10
Condensed balance sheets at June 30, 1996 and December 31, 1995 F3 - 11
Condensed statements of income for the three
and six months ended June 30, 1996 and 1995 F3 - 12
Condensed statement of shareholders equity for the
six months ended June 30, 1996 F3 - 13
Condensed statements of cash flows for the
six months ended June 30, 1996 and 1995 F3 - 14
Notes to condensed financial statements F3 - 15
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Partners Preferred Yield III, Inc.
We have audited the accompanying balance sheets of Partners Preferred Yield III,
Inc. as of December 31, 1995 and 1994, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Partners Preferred Yield III,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 27, 1996
Los Angeles, California
F3-1
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash and cash equivalents $ 775,000 $ 579,000
Marketable securities of affiliate
at market value (cost of $173,000) 222,000 169,000
Rent and other receivables 28,000 24,000
Other assets 225,000 47,000
Real estate facilities at cost:
Building, land improvements and equipment 19,091,000 18,983,000
Land 4,870,000 4,870,000
------------ ------------
23,961,000 23,853,000
Less accumulated depreciation (4,888,000) (4,027,000)
------------ ------------
19,073,000 19,826,000
------------ ------------
Total assets $ 20,323,000 $ 20,645,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 565,000 $ 359,000
Dividends payable 611,000 707,000
Advance payments from renters 162,000 175,000
Shareholders' equity:
Series A common, $.01 par value,
1,851,696 shares authorized,
1,321,984 shares issued and outstanding
(1,333,584 shares issued and outstanding in 1994) 13,000 13,000
Convertible Series B common,
$.01 par value, 168,709 shares
authorized, issued and outstanding 2,000 2,000
Convertible Series C common,
$.01 par value, 99,241 shares
authorized, issued and outstanding 1,000 1,000
Series D common, $.01 par value,
65,354 shares authorized, issued
and outstanding 1,000 1,000
Paid-in-capital 25,012,000 25,206,000
Cumulative income 8,389,000 6,524,000
Unrealized gain (loss)
in marketable securities 49,000 (4,000)
Cumulative distributions (14,482,000) (12,339,000)
------------ ------------
Total shareholders' equity 18,985,000 19,404,000
------------ ------------
Total liabilities and shareholders' equity $ 20,323,000 $ 20,645,000
============ ============
</TABLE>
See accompanying notes.
F3-2
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
---------- ---------- ----------
REVENUES:
Rental income $4,930,000 $4,677,000 $4,366,000
Interest income and other
income
(including dividends from
marketable
securities of affiliate in 32,000 31,000 47,000
1995 and 1994) ---------- ---------- ----------
4,962,000 4,708,000 4,413,000
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 1,724,000 1,552,000 1,509,000
Management fees paid to 297,000 281,000 262,000
affiliate
Depreciation and amortization 861,000 830,000 806,000
Environmental cost 91,000 - -
Administrative 124,000 128,000 140,000
---------- ---------- ----------
3,097,000 2,791,000 2,717,000
---------- ---------- ----------
NET INCOME $1,865,000 $1,917,000 $1,696,000
========== ========== ==========
Primary earnings per $ 1.22 $ 1.33 $ 1.15
share-Series A ========== ========== ==========
Fully diluted earnings per $ 1.15 $ 1.16 $ 0.97
share-Series A ========== ========== ==========
Dividends declared per share:
Series A $ 1.43 $ 1.41 $ 1.30
========== ========== ==========
Series B $ 1.43 $ 0.47 $ -
========== ========== ==========
Series C $ - $ - $ -
========== ========== ==========
Series D $ - $ - $ -
========== ========== ==========
Weighted average Common
shares outstanding:
Primary-Series A 1,330,559 1,382,826 1,479,967
========== ========== ==========
Fully diluted-Series A 1,598,509 1,650,776 1,747,917
========== ========== ==========
</TABLE>
See accompanying notes.
F3-3
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1995
<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 31, 1992 1,481,884 $15,000 168,709 $2,000 99,241 $1,000 65,354 $1,000
Net income
Repurchase of shares (11,100) -
Cash distributions declared:
$1.30 per share - Series A ----------------------------------------------------------------------------------------------------
Balances at December 31, 1993 1,470,780 15,000 168,709 2,000 99,241 1,000 65,354 1,000
Net income
Repurchase of shares (137,200) (2,000)
Unrealized loss in
marketable securities
Cash distributions declared:
$1.41 per share - Series A
$0.47 per share - Series B
----------------------------------------------------------------------------------------------------
Balances at December 31, 1994 1,333,584 13,000 168,709 2,000 99,241 1,000 65,354 1,000
Net income
Repurchase of shares (11,600) -
Unrealized gain in
marketable securities
Cash distributions declared:
$1.43 per share - Series A
$1.43 per share - Series B
----------------------------------------------------------------------------------------------------
Balances at December 31, 1995 1,321,984 $13,000 168,709 $2,000 99,241 $1,000 65,354 $1,000
====================================================================================================
<CAPTION>
Unrealized
Cumulative gain (loss) Total
Paid-in net Cumulative in marketable shareholders'
Capital income distributions securities equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $27,447,000 $2,911,000 $ (8,399,000) $ - $21,978,000
Net income 1,696,000 1,696,000
Repurchase of shares (178,000) (178,000)
Cash distributions declared:
$1.30 per share - Series A (1,923,000) (1,923,000)
------------------------------------------------------------------------------------------------------
Balances at December 31, 1993 27,269,000 4,607,000 (10,322,000) - 21,573,000
Net income 1,917,000 1,917,000
Repurchase of shares (2,063,000) (2,065,000)
Unrealized loss in
marketable securities (4,000) (4,000)
Cash distributions declared:
$1.41 per share - Series A (1,938,000) (1,938,000)
$0.47 per share - Series B (79,000) (79,000)
----------------------------------------------------------------------------------------------------
Balances at December 31, 1994 25,206,000 6,524,000 (12,339,000) (4,000) 19,404,000
Net income 1,865,000 1,865,000
Repurchase of shares (194,000) (194,000)
Unrealized gain in
marketable securities 53,000 53,000
Cash distributions declared:
$1.43 per share - Series A (1,902,000) (1,902,000)
$1.43 per share - Series B (241,000) (241,000)
----------------------------------------------------------------------------------------------------
Balances at December 31, 1995 $25,012,000 $8,389,000 $(14,482,000) $49,000 $18,985,000
====================================================================================================
</TABLE>
See accompanying notes.
F3-4
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,865,000 $ 1,917,000 $ 1,696,000
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 861,000 830,000 806,000
(Increase) decrease in rent and
other receivable (4,000) 9,000 (31,000)
Increase in other assets (178,000) (1,000) (38,000)
Increase (decrease) in accounts payable 206,000 (86,000) 44,000
(Decrease) increase in advance
payments from renters (13,000) (8,000) 22,000
----------- ----------- -----------
Total adjustments 872,000 744,000 803,000
----------- ----------- -----------
Net cash provided by operating activities 2,737,000 2,661,000 2,499,000
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from rental guarantees - - 1,000
Purchase of marketable securities of affiliate - (173,000) -
Additions to real estate facilities (108,000) (175,000) (116,000)
----------- ----------- -----------
Net cash used in investing activities (108,000) (348,000) (115,000)
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (2,239,000) (1,751,000) (2,075,000)
Purchase of Company Series A common stock (194,000) (2,065,000) (178,000)
----------- ----------- -----------
Net cash used in financing activities (2,433,000) (3,816,000) (2,253,000)
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 196,000 (1,503,000) 131,000
Cash and cash equivalents at
the beginning of the year 579,000 2,082,000 1,951,000
----------- ----------- -----------
Cash and cash equivalents at the end of the year $ 775,000 $ 579,000 $ 2,082,000
=========== =========== ===========
Supplemental schedule of non-cash
investing and financing activities:
(Increase) decrease in fair value of
marketable securities of affiliate $ (53,000) $ 4,000 $ -
=========== =========== ===========
Unrealized gain (loss) on
marketable securities of affiliate $ 53,000 $ (4,000) $ -
=========== =========== ===========
</TABLE>
See accompanying notes.
F3-5
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF BUSINESS
Partners Preferred Yield III, 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 Partners Preferred Yield III, Ltd. (the Partnership). The term
Company as used herein means the Partnership with respect to all matters
prior to November 8, 1991 (the Reorganization).
The Company owns and operates self-storage facilities.
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 1999, 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.
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, 1995 and 1994 to develop primarily mini-
warehouse 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.
At December 31, 1995, the basis of real estate facilities for Federal
income tax purposes (after adjustment for accumulated depreciation of
$5,137,000) is $21,265,000.
Revenue Recognition:
Property rents are recognized as earned.
F3-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Affiliate:
In February 1994, the Company purchased 11,700 common shares of Public
Storage, Inc. (PSI), a publicly traded real estate investment trust and an
affiliate of the Company, for $173,000. The market and carrying value of
these securities at December 31, 1995 was $222,000. The Company has
designated its portfolio of marketable securities as being available for
sale. Accordingly, at December 31, 1995, the Company has recorded the
marketable securities at fair value, based upon the closing quoted price of
the securities at December 31, 1995, and has recorded a corresponding
unrealized gain totaling $49,000 in shareholders equity. The Company
recognized $10,000 in dividends for 1995 and 1994 and included this amount
in other income in the Statements of Income.
Net Income Per Share:
Net income per share is based on net income attributable to each series
of common shares and the weighted average number of such shares outstanding
during the periods presented.
Net income per share is presented on a primary and fully diluted basis.
Primary earnings per share represents the Series A shareholders rights to
distributions out of the respective periods net income, which is calculated
by dividing net income after reduction for distributions to the Convertible
Series B shareholders (Series C shareholders are not entitled to cash
distributions) by the weighted average number of outstanding Series A shares
(Note 4). Primary earnings per share for the twelve months ended December
31, 1995 and 1994 reflect dividends to the Series B shareholders totaling
$241,000 and $79,000, respectively. Fully diluted earnings per share assumes
conversion of the Convertible Series B and Series C shares into Series A
shares. Series D shares are only entitled to a portion of distributions from
sales and refinancings and therefore, are not included in the weighted
average number of shares.
Environmental cost:
Substantially all of the Companys facilities were acquired prior to the
time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995,
the Company completed environmental assessments of its properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. These assessments were performed by an
independent environmental consulting firm. Based on the assessments, the
Company has expensed, as of December 31, 1995, an estimated $91,000 for
known environmental remediation requirements. Although there can be no
assurance, the Company is not aware of any environmental contamination of
any of its property sites which individually or in the aggregate would be
material to the Companys overall business, financial condition, or results
of operations.
3. RELATED PARTY TRANSACTIONS
In 1995, there were a series of mergers among Pubic Storage Management,
Inc. (which was the Companys mini-warehouse operator), Public Storage, Inc.
and their affiliates (collectively, PSMI), culminating in the November 16,
1995 merger, (the PSMI merger) of PSMI into Storage Equities, Inc. (SEI). In
the PSMI merger, Storage Equities, Inc.s name was changed to Public Storage,
Inc. (PSI). B. Wayne Hughes and members of his family (the Hughes Family)
are the major shareholders of PSI.
The Company has a Management Agreement with PSI (as successor-in-
interest to PSMI). Under the terms of the agreement, PSI operates the mini-
warehouse facilities for a fee equal to 6% of the facilities' monthly gross
revenue (as defined).
F3-7
<PAGE>
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The Management Agreement provides that the agreement will expire in
February 2002 provided that in February of each year 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.
In August 1995, the Management Agreement with PSMI was amended to
provide that upon demand from PSI or PSMI made prior to December 15, 1995,
the Company agreed to prepay (within 15 days after such demand) up to 12
months of management fees (based on the management fees for the comparable
period during the calendar year immediately preceding such prepayment)
discounted at the rate of 14% per year to compensate for early payment. In
November 1995, the Company prepaid, to PSI, 8 months of 1996 management fees
at a cost of $176,000. The amount is included in other assets in the Balance
Sheet at December 31, 1995 and will be amortized as management fee expense
in 1996.
4. SHAREHOLDERS' EQUITY
The Series B shares and Series C shares will convert automatically into
Series A shares on a share-for-share basis (the Conversion) when (A)
Investor Distributions (as defined below) equal (B) Remaining Investors
Capital (as defined below). The term Investors Distributions means the sum
of (1) all cumulative dividends and other distributions from all sources to
the holders of the Series A shares issued to the limited partners in the
Reorganization and (2) the cumulative Partnership distributions from all
sources with respect to all units. The term Remaining Investors Capital
means the product of (1) $20 multiplied by (2) the number of the then-
outstanding Limited Partners Original Series A shares, and the term Limited
Partners Original Series A shares means the 1,503,200 Series A shares issued
in the Reorganization to the Limited Partners (not including the 1% Series A
shares issued to the General Partners).
The Series B shares (prior to the Conversion) are not entitled to
participate in distributions attributable to sales or financing of the
properties or the liquidation of the Company, but begin to participate in
other distributions on the same basis as the Series A shares (the
Participation) when Investor Distributions equal (B) Remaining Investors
Capital minus $15,032,000 (50% of the limited partners' original capital
contribution). The Series C shares (prior to Conversion) are not entitled to
participate in any distributions, including liquidating distributions. After
the Conversion, the Series D shares will be entitled to participate in any
distributions attributable to the sale or financing of the properties or the
liquidation of the Company on the same basis as the Series A shares, but
will not participate in other distributions.
F3-8
<PAGE>
4. SHAREHOLDERS EQUITY (CONTINUED)
Through December 31, 1995, the Company has made and declared cumulative
Investor Distributions of $14,036,000. In connection with the payment of the
Companys dividend payable to shareholders of record on December 31, 1994,
the requirements for Participation occurred and the Series B shares began
participating in distributions as described above. As of December 31, 1995,
the Conversion of Series B shares and Series C shares will occur when
$12,100,000 in additional Investor Distributions have been made.
Assuming liquidation of the Company at its net book value at December
31, 1995 and 1994, each Series of common shares would receive the following
as a liquidating distribution:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Series A $17,599,000 $21,074,000
Convertible Series B 701,000 525,000
Convertible Series D 413,000 309,000
Series D 272,000 204,000
----------- -----------
Total $18,985,000 $19,404,000
=========== ===========
</TABLE>
The Company's Board of Directors has authorized the Company to purchase
up to 250,000 shares of the Company's Series A common stock. As of December
31, 1995, the Company had purchased and retired 196,400 shares of Series A
common stock, of which 11,600 and 137,200 were purchased and retired in 1995
and 1994, respectively.
For Federal income tax purposes, all distributions declared by the
Board of Directors in 1995, 1994 and 1993 were ordinary income.
5. SUBSEQUENT EVENT
In November 1995, the Companys Board of Directors authorized the
Company to obtain an unsecured revolving credit facility with a bank for
borrowings up to $1,500,000 for working capital purposes, including the
repurchase of the Companys stock.
In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $1,000,000 for working capital
purposes and to repurchase the Companys stock. Outstanding borrowings on
the credit facility, at the Companys option, bear interest at either the
banks Prime Rate or the banks LIBOR Rate plus 2.25%. Interest is payable
monthly beginning in March 1996. On January 31, 1999, all unpaid principal
and accrued interest is due and payable.
Under covenants of the credit facility, (1) the Company is required to
maintain a cash flow ratio, as defined, of more than 3.0 to 1.0, (2) the
Companys total debt may not exceed 15% of its adjusted tangible net worth
and (3) advances from affiliates may not exceed $500,000.
F3-9
<PAGE>
6. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------
March 1995 June 1995 Sept 1995 Dec. 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,190,000 $1,242,000 $1,265,000 $1,265,000
Expenses 718,000 712,000 724,000 943,000
---------- ---------- ---------- ----------
Net income $ 472,000 $ 530,000 $ 541,000 $ 322,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $0.31 $0.35 $0.37 $0.19
===== ===== ===== =====
Fully Diluted - Series A $0.29 $0.33 $0.34 $0.19
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------
March 1994 June 1994 Sept 1994 Dec. 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,153,000 $1,171,000 $1,198,000 $1,186,000
Expenses 717,000 696,000 644,000 734,000
---------- ---------- ---------- ----------
Net Income $ 436,000 $ 475,000 $ 554,000 $ 452,000
========== ========== ========== ==========
Earnings per share:
Primary- Series A $0.30 $0.34 $0.41 $0.28
===== ===== ===== =====
Fully diluted- Series A $0.25 $0.29 $0.34 $0.28
===== ===== ===== =====
</TABLE>
F3-10
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,174,000 $ 775,000
Marketable securities of affiliate
at market value (cost of $173,000) 241,000 222,000
Rent and other receivables 30,000 28,000
Other assets 99,000 225,000
Real estate facilities at cost:
Building, land improvements and equipment 19,146,000 19,091,000
Land 4,870,000 4,870,000
----------- -----------
24,016,000 23,961,000
Less accumulated depreciation (5,328,000) (4,888,000)
----------- -----------
18,688,000 19,073,000
----------- -----------
Total assets $20,232,000 $20,323,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 529,000 $ 565,000
Dividends payable 504,000 611,000
Advance payments from renters 172,000 162,000
Shareholders equity:
Series A common, $.01 par value,
1,851,696 shares authorized,
1,314,384 shares issued and
outstanding (1,321,984 shares
issued and outstanding in 1995) 13,000 13,000
Convertible Series B common, $.01 par
value, 168,709 shares authorized,
issued and outstanding 2,000 2,000
Convertible Series C common, $.01 par
value, 99,241 shares authorized,
issued and outstanding 1,000 1,000
Series D common, $.01 par value,
65,354 shares authorized, issued
and outstanding 1,000 1,000
Paid-in-capital 24,883,000 25,012,000
Cumulative income 9,549,000 8,389,000
Unrealized gain in marketable securities 68,000 49,000
Cumulative distributions (15,490,000) (14,482,000)
------------ ------------
Total shareholders' equity 19,027,000 18,985,000
------------ ------------
Total liabilities and shareholders' equity $ 20,232,000 $ 20,323,000
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F3-11
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES:
Rental income $1,305,000 $1,234,000 $2,565,000 $2,421,000
Dividends from marketable securities
of affiliate 3,000 3,000 6,000 6,000
Interest income 8,000 5,000 14,000 5,000
---------- ---------- ---------- ----------
1,316,000 1,242,000 2,585,000 2,432,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 345,000 398,000 797,000 794,000
Management fees paid to an affiliate 66,000 74,000 132,000 146,000
Depreciation 221,000 214,000 440,000 428,000
Administrative 25,000 26,000 56,000 62,000
---------- ---------- ---------- ----------
657,000 712,000 1,425,000 1,430,000
---------- ---------- ---------- ----------
NET INCOME $ 659,000 $ 530,000 $1,160,000 $1,002,000
========== ========== ========== ==========
Earnings per share:
Primary - Series A $0.45 $0.35 $0.79 $0.66
===== ===== ===== =====
Fully diluted - Series A $0.41 $0.33 $0.73 $0.62
===== ===== ===== =====
Dividends declared per share:
Series A $0.34 $0.34 $0.68 $0.68
===== ===== ===== =====
Series B $0.34 $0.34 $0.68 $0.68
===== ===== ===== =====
Weighted average common
shares outstanding:
Primary - Series A 1,314,384 1,332,784 1,315,301 1,332,784
========= ========= ========= =========
Fully diluted - Series A 1,582,334 1,600,734 1,583,251 1,600,734
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F3-12
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<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 31, 1995 1,321,984 $13,000 168,709 $2,000 99,241 $1,000 65,354 $1,000
Net income - - - - - - - -
Repurchase of shares (7,600) - - - - - - -
Unrealized gain in
marketable securities - - - - - - - -
Cash distributions declared:
$.68 per share - Series A - - - - - - - -
$.68 per share - Series B - - - - - - - -
--------- ------- ------- ------ ------ ------ ------ ------
Balances at June 30, 1996 1,314,384 $13,000 168,709 $2,000 99,241 $1,000 65,354 $1,000
========= ======= ======= ====== ====== ====== ====== ======
<CAPTION> Unrealized
Cumulative gain in Total
Paid-In Net Cumulative marketable Shareholders'
Capital Income Distributions securities Equity
----------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 $25,012,000 $8,389,000 $(14,482,000) $49,000 $18,985,000
Net income - 1,160,000 - - 1,160,000
Repurchase of shares (129,000) - - - (129,000)
Unrealized gain in
marketable securities - - - 19,000 19,000
Cash distributions declared:
$.68 per share - Series A - - (894,000) - (894,000)
$.68 per share - Series B - - (114,000) - (114,000)
----------- ---------- ------------ ------- -----------
Balances at June 30, 1996 $24,883,000 $9,549,000 ($15,490,000) $68,000 $19,027,000
=========== ========== ============ ======= ===========
</TABLE>
See acommpanying notes to condensed financial statements.
F3-13
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,160,000 $ 1,002,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 440,000 428,000
Increase in rent and other receivables (2,000) (9,000)
Amortization of prepaid management fees 132,000 -
Increase in other assets (6,000) -
(Decrease) increase in accounts payable (36,000) 40,000
Increase (decrease) in advance payments from renters 10,000 (3,000)
----------- -----------
Total adjustments 538,000 456,000
----------- -----------
Net cash provided by operating activities 1,698,000 1,458,000
----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (55,000) (3,000)
----------- -----------
Net cash used in investing activities (55,000) (3,000)
----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (1,115,000) (1,218,000)
Purchase of Company Series A common stock (129,000) (11,000)
----------- -----------
Net cash used in financing activities (1,244,000) (1,229,000)
----------- -----------
Net increase in cash
and cash equivalents 399,000 226,000
Cash and cash equivalents at
the beginning of the period 775,000 579,000
----------- -----------
Cash and cash equivalents at
the end of the period $ 1,174,000 $ 805,000
=========== ===========
Supplemental schedule of non-cash
investing and financing activities:
Increase in fair value of marketable securities $ (19,000) $ (23,000)
=========== ===========
Unrealized gain on marketable securities $ 19,000 $ 23,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F3-14
<PAGE>
PARTNERS PREFERRED YIELD III, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes
appearing in the Companys Form 10-K for the year ended December 31, 1995.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Companys financial position at
June 30, 1996 and December 31, 1995, the results of its operations for the
three and six months ended June 30, 1996 and 1995 and its cash flows for
the six months then ended.
3. The results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results expected for the full year.
4. Certain prior year amounts have been restated in order to conform to
current year presentation.
5. In 1995, the Company prepaid eight months of 1996 management fees at a
total cost of $176,000. The Company expensed $132,000 of the 1996 prepaid
management fees for the six months ended June 30, 1996. The balance of
prepaid management fees, $44,000, is included in other assets in the
Balance Sheet at June 30, 1996.
6. In February 1994, the Company purchased 11,700 common shares of Public
Storage, Inc., a publicly traded real estate investment trust and an
affiliate of the Company, for $173,000. The market value of these
securities at June 30, 1996 was $241,000. The Company recognized $3,000
and $6,000 in dividends for the three and six months ended June 30, 1996,
respectively.
7. In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $1,000,000 for working capital
purposes and to repurchase the Companys stock. Outstanding borrowings on
the credit facility, at the Companys option, bear interest at either the
banks Prime Rate or the banks LIBOR Rate plus 2.25%. Interest is payable
monthly and on January 31, 1999, all unpaid principal and accrued interest
is due and payable. At June 30, 1996, there was no outstanding balance on
the credit facility. As of June 30, 1996, the Company was in compliance
with the covenants of the credit facility.
F3-15
<PAGE>
Appendix G-1
PARTNERS PREFERRED YIELD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
- ---------------------
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS
-------------------------------------------------------------------------
ENDED JUNE 30, 1995: Partners Preferred Yield, Inc.'s (the "Company") net
- -------------------
income for the six months ended June 30, 1996 and 1995 was $1,973,000 and
$2,043,000, respectively, representing a decrease of $70,000 or 3%. This
decrease is primarily due to an increase in interest expense combined with a
decrease in property net operating income (rental income less cost of
operations, management fees paid to affiliate and depreciation expense). Net
income for the three months ended June 30, 1996 and 1995 was $1,060,000 and
$1,063,000, respectively, representing a decrease of $3,000. This decrease is
primarily due to an increase in interest expense partially offset by an increase
in property net operating income.
Rental income for the six months ended June 30, 1996 and 1995 was
$4,898,000 and $4,731,000, respectively, representing an increase of $167,000 or
4%. Rental income for the three months ended June 30, 1996 and 1995 was
$2,510,000 and $2,409,000, respectively, representing an increase of $101,000 or
4%. These increases are primarily due to increased rental rates at a majority
of the Company's properties.
The Company's mini-warehouse operations had weighted average occupancy
levels of 89% for both the six month periods ended June 30, 1996 and 1995.
Cost of operations (including management fees paid to affiliate and
depreciation expense) for the six months ended June 30, 1996 and 1995 was
$2,754,000 and $2,559,000, respectively, representing an increase of $195,000 or
8%. Cost of operations for the three months ended June 30, 1996 and 1995 was
$1,369,000 and $1,285,000, respectively, representing an increase of $84,000 or
7%. These increases are primarily attributable to increases in property tax
expense, advertising and repairs and maintenance costs. Property taxes
increased primarily due to an increase in property tax rates at the Company's
Colorado and Illinois properties. Repairs and maintenance costs increased
mainly due to an increase in snow removal costs associated with higher than
normal snow levels experienced at the Company's properties located in the
eastern states.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. During the six
month period ended June 30, 1996, the Company expensed $262,000 of prepaid
management fees. The amount is shown as management fees paid to affiliate in the
condensed statements of income. As a result of the prepayment, the Company
saved approximately $32,000 in management fees, based on the management fees
that would have been payable on rental income generated in the six months ended
June 30, 1996 compared to the amount prepaid.
During the three and six months ended June 30, 1996, the Company incurred
$22,000 and $41,000, respectively, in interest expense on its line of credit
facility. No such expense was incurred during the same periods in 1995 since
the Company did not have a credit facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Net
---------------------------------------------------------------------
income in 1995 was $4,015,000 compared to $4,035,000 in 1994, representing a
decrease of $20,000. This decrease is primarily due to environmental costs
incurred on the Company's properties in the fourth quarter of 1995 (see
discussion below). However, net income per fully diluted Series A share was
$1.02 in 1995 compared to $1.00 in 1994, representing an increase of $.02 or 2%
per share. The increase in net income per share in 1995 benefited by the
reduction in the number of Series A shares outstanding due to the Company's
repurchase of Series A shares.
G1-1
<PAGE>
During 1995, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $140,000 from $4,315,000 in 1994 to $4,455,000 in 1995. This increase
is attributable to an increase in rental revenues at the Company's mini-
warehouse operations. The Company's depreciation expense increased $46,000 from
$1,900,000 in 1994 to $1,946,000 in 1995.
Rental income of the mini-warehouse operations increased $306,000 or 3%
from $9,335,000 in 1994 to $9,641,000 in 1995. Cost of operations (including
management fees paid to an affiliate of the Company) increased $120,000 or 4%
from $3,120,000 in 1994 to $3,240,000 in 1995. The results of these changes was
a net increase in property net operating income before depreciation expense of
$186,000 or 3% from $6,215,000 in 1994 to $6,401,000 in 1995. The Company's
California, Colorado, Oregon and Nevada properties contributed 83% to the
increase in rental income primarily due to an increase in rental rates. The
increase in cost of operations is primarily due to an increase in property tax
expense and management fees paid to an affiliate (as a result of increased
revenues) offset by a decrease in repairs and maintenance. The increase in
property taxes is mainly attributable to the one-time tax refunds received on
the two Colorado properties in the first quarter of 1994 from appealing prior
year tax assessments. The decrease in repairs and maintenance is due to
earthquake expenses and higher than normal snow removal costs incurred in early
1994.
Substantially all of the Company's facilities were acquired prior to the
time that it was customary to conduct environmental investigations in connection
with property acquisitions. During the fourth quarter of 1995, the Company
completed environmental assessments of its properties to evaluate the
environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Company has expensed, as of
December 31, 1995, an estimated $182,000 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware of
any environmental contamination of any of its property sites which individually
or in the aggregate would be material to the Company's overall business,
financial condition, or results of operations.
Weighted average occupancy levels for the Company's mini-warehouse
facilities were 89% and 91% in 1995 and 1994, respectively.
Mini-warehouse Operating Trends.
- --------------------------------
The following table illustrates the operating trends for the Company's 19
mini-warehouses:
<TABLE>
<CAPTION>
Years ended December 31
------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Weighted average occupancy level 89% 91% 90%
Realized monthly rent per occupied
square foot (1) $.71 $.70 $.67
Operating margin: (2)
Before reduction for depreciation expense 66% 67% 63%
After reduction for depreciation expense 46% 46% 42%
</TABLE>
- -------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions. Includes administrative and late fees.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
G1-2
<PAGE>
Management believes that the trends in property operations are due to:
. 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
(in 1994 compared to 1993) offset in part by an increase in expense
(approximately 4% for 1995 (as compared to 1994) and combined with a
decrease in expense of 1% in 1994).
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
Capital structure. The Company's financial profile is characterized by
-----------------
increasing cash provided by operating activities and increasing funds from
operations ("FFO").
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 (net income plus depreciation and
amortization) 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 $4,953,000 in 1993 to $5,849,000 in 1995. Net cash provided by
operating activities has increased from $3,044,000 for the six months ended June
30, 1995 to $3,262,000 for the six months ended June 30, 1996.
The Company's FFO is defined generally by the National Association of Real
Estate Investment Trusts as net income before loss on early extinguishment of
debt and gain on disposition of real estate, plus depreciation and amortization.
FFO is a supplemental performance measure for equity Real Estate Investment
Trusts 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 computed in accordance with generally accepted
accounting principles, as a measure of liquidity or operating performance.
G1-3
<PAGE>
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to
make principal payments on its note payable, pay distributions to
shareholders and repurchase its stock.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
-------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 1,973 $ 2,043 $ 4,015 $ 4,035 $ 3,229
Environmental cost - - 182 - -
Depreciation and amortization 1,001 967 1,946 1,900 1,840
------- ------- ------- ------- -------
Funds from operations
(Net cash provided by operating
activities before changes in
working capital components) 2,974 3,010 6,143 5,935 5,069
Capital improvements to
maintain facilities (287) (27) (228) (235) (289)
------- ------- ------- ------- -------
Excess funds available for
distributions to shareholders
and repurchase of stock 2,687 2,983 5,915 5,700 4,780
Cash distributions to shareholders (2,455) (2,678) (4,652) (3,599) (3,385)
------- ------- ------- ------- -------
Excess funds available for principal
payments, cash distributions to share-
holders and repurchase of stock $ 232 $ 305 $ 1,263 $ 2,101 $ 1,395
======= ======= ======= ======= =======
</TABLE>
Cash flows from operating activities is expected to be sufficient to cover
operating expenses, capital improvements, debt service requirements and
distributions to shareholders.
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
During the six months ended June 30, 1996, the Company incurred
approximately $225,000 in capital costs related to the expansion of the facility
located in Los Angeles, California.
In May 1995, the Company borrowed $55,000 from an affiliate for working
capital purposes. The advance was repaid in May 1995.
In December 1995, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,500,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on the
credit facility, at the Company's option, bear interest at either the bank's
prime rate plus .25% (8.50% at June 30, 1996) or the bank's LIBOR rate plus
2.25% (7.80% at June 30, 1996). Interest is payable monthly. On December 31,
1999, all unpaid principal and accrued interest is due and payable. During the
first quarter of 1996, the Company borrowed $1,000,000 on its line of credit
facility. During the second quarter of 1996, the Company borrowed and repaid an
additional $450,000 on its line of credit facility. At June 30, 1996, the
outstanding balance on the credit facility was $1,000,000. The Company is
subject to certain covenants including cash flow coverages and dividend
restrictions. As of June 30, 1996, the Company was in compliance with the
covenants of the credit facility.
G1-4
<PAGE>
The Company's Board of Directors has authorized the Company to purchase up
to 800,000 shares of Series A common stock. As of June 30, 1996, the Company
had repurchased 701,451 shares of Series A common stock, of which 84,100 were
purchased in the first quarter of 1996. No shares were repurchased in the
second quarter of 1996, however, share repurchases are expected to continue in
the third quarter.
The Company has elected and intends to continue to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. As a REIT, the
Company must meet, among other tests, sources of income, share ownership, and
certain asset tests. The Company is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that at least 95% of
its taxable income is so distributed to its shareholders prior to filing of the
Company's tax return. The primary difference between book income and taxable
income is depreciation expense. In 1995, the Company's federal tax depreciation
was $1,517,000.
The bylaws of the Company provide that, during 1999, 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.
G1-5
<PAGE>
Appendix G-2
PARTNERS PREFERRED YIELD II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
- ---------------------
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS
-------------------------------------------------------------------------
ENDED JUNE 30, 1995: Partners Preferred Yield II, Inc.'s ("the Company") net
- -------------------
income for the six months ended June 30, 1996 and 1995 was $2,293,000 and
$2,102,000, respectively, representing an increase of $191,000 or 9%. Net
income for the three months ended June 30, 1996 and 1995 was $1,183,000 and
$1,102,000, respectively, representing an increase of $81,000 or 7%. These
increases are primarily the result of increases in property net operating income
(rental income less cost of operations, management fees paid to affiliate and
depreciation expense).
Rental income for the six months ended June 30, 1996 and 1995 was
$5,407,000 and $5,151,000, respectively, representing an increase of $256,000 or
5%. Rental income for the three months ended June 30, 1996 and 1995 was
$2,741,000 and $2,624,000, respectively, representing an increase of $117,000 or
4%. These increases are primarily due to increased rental rates at a majority of
the Company's properties.
The Company's mini-warehouse operations had weighted average occupancy
levels of 91% and 90% for the six month periods ended June 30, 1996 and 1995,
respectively.
Cost of operations (including management fees paid to affiliate and
depreciation expense) for the six months ended June 30, 1996 and 1995 was
$2,977,000 and $2,904,000, respectively, representing an increase of $73,000 or
3%. Cost of operations for the three months ended June 30, 1996 and 1995 was
$1,496,000 and $1,460,000, respectively, representing an increase of $36,000 or
2%. These increases are primarily attributable to an increase in property tax
expense. Property taxes increased primarily due to an increase in property tax
rates at the Company's Colorado and Illinois properties.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. During the six
month period ended June 30, 1996, the Company expensed $278,000 of prepaid
management fees. The amount is shown as management fees paid to an affiliate in
the condensed statement of income. As a result of the prepayment, the Company
saved approximately $46,000 in management fees, based on the management fees
that would have been payable on rental income generated in the six months ended
June 30, 1996 compared to the amount prepaid.
During the three and six months ended June 30, 1996, the Company incurred
$5,000 and $12,000, respectively, in interest expense on its line of credit
facility compared to $1,000 and $6,000 incurred during the same periods in 1995
which represented interest paid on advances the Company had with an affiliate.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Net
---------------------------------------------------------------------
income in 1995 was $4,285,000 compared to $3,854,000 in 1994, representing an
increase of $431,000. Net income per fully diluted Series A share was $1.11 in
1995 compared to $0.97 in 1994, representing an increase of $0.14 per share.
The increase in net income is primarily due to an increase in property
operations combined with a decrease in administrative expense. Net income per
share in 1995 also benefited due to the reduction in the number of Series A
shares outstanding as a result of the Company's repurchase of Series A shares.
During 1995, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $433,000 from $4,164,000 in 1994 to $4,597,000 in 1995. This increase
is primarily attributable to an increase in property operations.
Rental income increased $628,000 or 6% from $9,870,000 in 1994 to
$10,498,000 in 1995. Cost of operations (including management fees paid to an
affiliate of the Company) increased $137,000 or 4% from $3,766,000
G2-1
<PAGE>
in 1994 to $3,903,000 in 1995. The increase in rental income is primarily due to
an average 6% increase in rental rates at the Company's 24 properties. The
increase in cost of operations is mainly due to increases in payroll, repairs
and maintenance, and management fees paid to an affiliate. Payroll increased due
to an increase in incentive payroll attributable to an increase in property net
operating income. Repairs and maintenance cost increased due to painting and
miscellaneous building cost. Due to an increase in rental income, management
fees paid to affiliates increased.
Substantially all of the Company's facilities were acquired prior to the
time that it was customary to conduct environmental investigations in connection
with property acquisitions. During the fourth quarter of 1995, the Company
completed environmental assessments of its properties to evaluate the
environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Company has expensed, as of
December 31, 1995, an estimated $38,000 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware of
any environmental contamination of any of its property sites which individually
or in the aggregate would be material to the Company's overall business,
financial condition, or results of operations.
Administrative expense decreased $17,000 from 1995 to 1994 primarily due to
a decrease in legal fees.
Weighted average occupancy levels for the mini-warehouse facilities were
91% and 88% in 1995 and 1994, respectively.
MINI-WAREHOUSE OPERATING TRENDS.
- --------------------------------
The following table illustrates the operating trends for the Company's 24
mini-warehouses:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Weighted average occupancy level 91% 88% 86%
Realized monthly rent per occupied square foot (1) $.70 $.69 $.66
Operating margin (2)
Before reduction for depreciation expense 63% 62% 62%
After reduction for depreciation expense 44% 42% 41%
</TABLE>
- -------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions. Includes administrative and late fees.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
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
PSI.
. 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 4% for
1995 (as compared to 1994).
G2-2
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
- -------------------------------
Capital structure. The Company's financial profile is characterized by
-----------------
increasing net income, increasing cash provided by operating activities and
increasing funds from operations ("FFO").
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 (net income plus depreciation and
amortization) reflects the cash generated from the Company's business before
distributions to shareholders, and capital expenditures. Net cash provided by
operating activities has increased over the past years from $5,286,000 in 1993
to $5,961,000 in 1995. Net cash provided by operating activities has increased
from $3,127,000 for the six months ended June 30, 1995 to $3,584,000 for the six
months ended June 30, 1996.
The Company's FFO is defined generally by the National Association of Real
Estate Investment Trusts as net income before loss on early extinguishment of
debt and gain on disposition of real estate, plus depreciation and amortization.
FFO is a supplemental performance measure for equity Real Estate Investment
Trusts 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 computed in accordance with generally accepted
accounting principles, as a measure of liquidity or operating performance.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to
make pay distributions to shareholders and repurchase its stock.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
-------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 2,293 $ 2,102 $ 4,285 $ 3,854 $ 3,459
Environmental cost - - 38 - -
Depreciation and amortization 1,017 994 1,998 1,940 1,986
------- ------- ------- ------- -------
Funds from operations
(Net cash provided by operating
activities before changes in
working capital components) 3,310 3,096 6,321 5,794 5,445
Capital improvements to
maintain facilities (100) (133) (269) (296) (226)
------- ------- ------- ------- -------
Excess funds available for
distributions to shareholders
and repurchase of stock 3,210 2,963 6,052 5,498 5,219
Cash distributions to shareholders (2,401) (2,556) (4,602) (4,153) (3,044)
------- ------- ------- ------- -------
Excess funds available for cash
distributions to share-
holders and repurchase of stock $ 809 $ 407 $ 1,450 $ 1,345 $ 2,175
======= ======= ======= ======= =======
</TABLE>
Cash flows from operating activities is expected to be sufficient to cover
operating expenses, capital improvements and distributions to shareholders.
G2-3
<PAGE>
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
In January and April 1995, the Company borrowed $700,000 from an affiliate
for working capital purposes. The advance was repaid in May 1995. This advance
bore interest at the prime interest rate plus 1/4%. Interest expense of $6,000
was charged to income for the year ended December 31, 1995 with respect to this
advance.
In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,000,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on the
credit facility, at the Company's option, bear interest at either the banks
Prime Rate or the banks LIBOR Rate plus 2.25%. Interest is payable monthly and
on January 31, 1999, all unpaid principal and accrued interest is due and
payable. During the six months ended June 30, 1996, the Company borrowed and
repaid $300,000 on its credit facility. At June 30, 1996, there was no
outstanding balance on the credit facility. As of June 30, 1996, the Company was
in compliance with the covenants of the credit facility.
The Company's Board of Directors has authorized the Company to purchase up
to 800,000 shares of Series A common stock. The Company has repurchased 649,276
shares of Series A common stock, of which 33,700 shares were purchased in the
first quarter of 1996. No shares were repurchased in the second quarter of
1996, however, share repurchases are expected to continue in the third quarter.
The Company has elected and intends to continue to qualify as a real estate
investment trust (REIT) for federal income tax purposes. As a REIT, the Company
must meet, among other tests, sources of income, share ownership, and certain
asset tests. The Company is not taxed on that portion of its taxable income
which is distributed to its shareholders provided that at least 95% of its
taxable income is so distributed to its shareholders prior to filing of the
Company's tax return. The primary difference between book income and taxable
income is depreciation expense. In 1995, the Company's federal tax depreciation
was $1,500,000.
The bylaws of the Company provide that, during 1999, 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.
G2-4
<PAGE>
Appendix G-3
PARTNERS PREFERRED YIELD III, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
- ---------------------
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS
-------------------------------------------------------------------------
ENDED JUNE 30, 1995: Partners Preferred Yield III, Inc.'s ("the Company") net
- -------------------
income for the six months ended June 30, 1996 and 1995 was $1,160,000 and
$1,002,000, respectively, representing an increase of $158,000 or 16%. Net
income for the three months ended June 30, 1996 and 1995 was $659,000 and
$530,000, respectively, representing an increase of $129,000 or 24%. These
increases are primarily the result of increases in property net operating income
(rental income less cost of operations, management fees paid to affiliate and
depreciation expense).
Rental income for the six months ended June 30, 1996 and 1995 was
$2,565,000 and $2,421,000, respectively, representing an increase of $144,000 or
6%. Rental income for the three months ended June 30, 1996 and 1995 was
$1,305,000 and $1,234,000, respectively, representing an increase of $71,000 or
6%. These increases are primarily attributable to increased rental rates at all
of the Company's properties.
The Company's mini-warehouse operations had weighted average occupancy
levels of 93% for both the six month periods ended June 30, 1996 and 1995.
Cost of operations (including management fees paid to affiliate and
depreciation expense) for the six months ended June 30, 1996 and 1995 was
stable. Cost of operations for the three months ended June 30, 1996 and 1995
was $632,000 and $686,000, respectively, representing a decrease of $54,000 or
8%. This decrease is primarily attributable to a decrease in property tax
expense primarily due to a one-time tax refund of $65,000 received with respect
to the Company's Hillside, New Jersey property during the second quarter of
1996.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. During the six
month period ended June 30, 1996, the Company expensed $132,000 of prepaid
management fees. The amount is shown as management fees paid to an affiliate in
the condensed statement of income. As a result of the prepayment, the Company
saved approximately $22,000 in management fees, based on the management fees
that would have been payable on rental income generated in the six months ended
June 30, 1996 compared to the amount prepaid.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Net
---------------------------------------------------------------------
income in 1995 was $1,865,000 compared to $1,917,000 in 1994, representing a
decrease of $52,000. Net income per fully diluted Series A share was $1.17 in
1995 compared to $1.16 in 1994, representing an increase of $.01 per share. The
decrease in net income is primarily due to environmental cost incurred in 1995
offset by an increase in property net operating income. Net income per share
benefited from the reduction in the number of Series A shares outstanding as a
result of the Company's repurchase of Series A shares.
During 1995, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $34,000 from $2,014,000 in 1994 to $2,048,000 in 1995. This increase
is primarily attributable to an increase in property operations.
Rental income increased $253,000 or 5% from $4,677,000 in 1994 to
$4,930,000 in 1995. Cost of operations (including management fees paid to an
affiliate of the Company) increased $188,000 or 10% from $1,833,000 in 1994 to
$2,021,000 in 1995. The increase in rental income is primarily due to a 7.6%
increase in rental rates combined with stable occupancy levels. Approximately
43% of the increase in rental income is attributable to the Company's two
Illinois properties where rental rates have increased approximately 10%. The
increase in cost of operations is mainly due to increases in property tax
expense, payroll and management fees paid to an affiliate. Property taxes
increased due
G3-1
<PAGE>
to actual bills paid being more than amounts estimated in 1994. Payroll
increased due to an increase in incentive payroll attributable to an increase in
property performance.
Substantially all of the Company's facilities were acquired prior to the
time that it was customary to conduct environmental investigations in connection
with property acquisitions. During the fourth quarter of 1995, the Company
completed environmental assessments of its properties to evaluate the
environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Company has expensed, as of
December 31, 1995, an estimated $91,000 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware of
any environmental contamination of any of its property sites which individually
or in the aggregate would be material to the Company's overall business,
financial condition, or results of operations.
Weighted average occupancy levels for the mini-warehouse facilities were
94% and 93% in 1994 and 1995, respectively.
MINI-WAREHOUSE OPERATING TRENDS.
- --------------------------------
The following table illustrates the operating trends for the Company's 9
mini-warehouses:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Weighted average occupancy level 93% 94% 92%
Realized monthly rent per occupied square foot (1) $.71 $.67 $.70
Operating margin (2)
Before reduction for depreciation expense 59% 61% 60%
After reduction for depreciation expense 42% 43% 41%
</TABLE>
- -------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions. Includes administrative and late fees.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
Capital structure. The Company's financial profile is characterized by
-----------------
increasing net income, increasing cash provided by operating activities and
increasing funds from operations ("FFO").
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 (net income plus depreciation and
amortization) reflects the cash generated from the Company's business before
distributions to shareholders, and capital expenditures. Net cash provided by
operating activities has increased over the past years from $2,499,000 in 1993
to $2,737,000 in 1995. Net cash provided by operating activities has increased
from $1,458,000 for the six months ended June 30, 1995 to $1,698,000 for the six
months ended June 30, 1996.
G3-2
<PAGE>
The Company's FFO is defined generally by the National Association of Real
Estate Investment Trusts as net income before loss on early extinguishment of
debt and gain on disposition of real estate, plus depreciation and amortization.
FFO is a supplemental performance measure for equity Real Estate Investment
Trusts 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 computed in accordance with generally accepted
accounting principles, as a measure of liquidity or operating performance.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to
make pay distributions to shareholders and repurchase its stock.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
-------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 1,160 $ 1,002 $ 1,865 $ 1,917 $ 1,696
Environmental cost - - 91 - -
Depreciation and amortization 440 428 861 830 806
------- ------- ------- ------- -------
Funds from operations
(Net cash provided by operating
activities before changes in
working capital components) 1,600 1,430 2,817 2,747 2,502
Capital improvements to
maintain facilities (55) (3) (108) (175) (64)
------- ------- ------- ------- -------
Excess funds available for
distributions to shareholders
and repurchase of stock 1,545 1,427 2,709 2,572 2,438
Cash distributions to shareholders (1,115) (1,218) (2,143) (1,751) (2,407)
------- ------- ------- ------- -------
Excess funds available for cash
distributions to share-
holders and repurchase of stock $ 430 $ 209 $ 566 $ 821 $ 31
======= ======= ======= ======= =======
</TABLE>
Cash flows from operating activities is expected to be sufficient to cover
operating expenses, capital improvements and distributions to shareholders.
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
In February 1994, the Company purchased 11,700 common shares of Public
Storage, Inc., a publicly traded real estate investment trust and an affiliate
of the Company, for $173,000. The market value of these securities at June 30,
1996 was $241,000. The Company recognized $3,000 and $6,000 in dividends for
the three and six months ended June 30, 1996, respectively.
In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $1,000,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on the
credit facility, at the Company's option, bear interest at either the bank's
Prime Rate or the bank's LIBOR Rate plus 2.25%. Interest is payable monthly and
on January 31, 1999, all unpaid principal and accrued interest is due and
payable. At June 30, 1996, there was no outstanding balance on the credit
facility. As of June 30, 1996, the Company was in compliance with the covenants
of the credit facility.
G3-3
<PAGE>
The Company's Board of Directors has authorized the Company to purchase up
to 250,000 shares of Series A common stock. As of June 30, 1996, the Company
had repurchased 204,000 shares of Series A common stock, of which 7,600 shares
were purchased in the first quarter of 1996. No shares were repurchased in the
second quarter of 1996, however, share repurchases are expected to continue in
the third quarter.
The Company has elected and intends to continue to qualify as a real estate
investment trust (REIT) for federal income tax purposes. As a REIT, the Company
must meet, among other tests, sources of income, share ownership, and certain
asset tests. The Company is not taxed on that portion of its taxable income
which is distributed to its shareholders provided that at least 95% of its
taxable income is so distributed to its shareholders prior to filing of the
Company's tax return. The primary difference between book income and taxable
income is depreciation expense. In 1995, the Company's federal tax depreciation
was $494,000.
The bylaws of the Company provide that, during 1999, 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.
G3-4
<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 Section V of the Certificate of Amendment of Articles of
Incorporation (Exhibit 3.11) and Article VII of the By-Laws (Exhibit 3.16) 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, 1995 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 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. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
S-1
<PAGE>
(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.
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.
2. That, for the purpose 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.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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. 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.
6. 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. 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.
8. 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 of 1933 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 of 1933 and will be governed by the final adjudication of such
issue.
S-2
<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 14th day of October, 1996.
PUBLIC STORAGE, 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 October 14, 1996
- -------------------------- Officer and Director (principal executive
B. Wayne Hughes officer)
HARVEY LENKIN President and Director October 14, 1996
- --------------------------
Harvey Lenkin
RONALD L. HAVNER, JR. Senior Vice President and Chief October 14, 1996
- ------------------------ Financial Officer (principal financial
Ronald L. Havner, Jr. officer)
JOHN REYES Vice President and Controller (principal October 14, 1996
- ------------------------ accounting officer)
John Reyes
ROBERT J. ABERNETHY Director October 14, 1996
- ------------------------
Robert J. Abernethy
DANN V. ANGELOFF Director October 14, 1996
- ------------------------
Dann V. Angeloff
WILLIAM C. BAKER Director October 14, 1996
- ------------------------
William C. Baker
URI P. HARKHAM Director October 14, 1996
- ------------------------
Uri P. Harkham
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization among Registrant, Partners Preferred
Yield, Inc. ("PPY"), Partners Preferred Yield II, Inc. ("PPY2") and
Partners Preferred Yield III, Inc. ("PPY3") dated as of August 15, 1996
(filed as Appendix A to the Combined 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 10% Cumulative Preferred Stock,
Series A. Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock,
Series B. Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the 9.20% Cumulative
Preferred Stock, Series B. Filed with Registrant's Registration Statement
No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the 8.25% 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 Cumulative Preferred
Stock, Series C. Filed with Registrant's Registration Statement No. 33-
54557 and incorporated herein by reference.
3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock,
Series D. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.50% Cumulative Preferred Stock, Series D and
incorporated herein by reference.
3.8 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series E. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 10% Cumulative Preferred Stock, Series E and incorporated
herein by reference.
3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock,
Series F. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.75% Cumulative Preferred Stock, Series F and
incorporated herein by reference.
3.10 Certificate of Determination for the Convertible Participating Preferred
Stock. Filed with Registrant's Registration Statement No. 33-63947 and
incorporated herein by reference.
3.11 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 33-63947 and incorporated herein
by reference.
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock,
Series G. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8-7/8% Cumulative Preferred Stock, Series G and
incorporated herein by reference.
3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock,
Series H. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8.45% Cumulative Preferred Stock, Series H and
incorporated herein by reference.
3.14 Certificate of Determination for the Convertible Preferred Stock, Series
CC. Filed with Registrant's Registration Statement No. 333-03749 and
incorporated herein by reference.
3.15 Certificate of Correction of Certificate of Determination for the
Convertible Participating Preferred Stock. Filed with Registrant's
Registration Statement No. 333-08791 and incorporated herein by
reference.
S-4
<PAGE>
3.16 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.17 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
5.1 Opinion on legality. Filed herewith.
8.1 Opinion on tax matters for PPY. Filed herewith.
8.2 Opinion on tax matters for PPY2. Filed herewith.
8.3 Opinion on tax matters for PPY3. Filed herewith.
10.1 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.
10.2 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.
10.3 Credit Agreement by and among Registrant, Wells Fargo Bank, National
Association, as agent, and the financial institutions party thereto dated
as of May 22, 1995. Filed with Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1995 and incorporated herein by reference.
10.4 Note Assumption and Exchange Agreement by and among Public Storage
Management, Inc., Public Storage, Inc., Registrant and the holders of the
notes dated as of November 13, 1995. Filed with Registrant's Registration
Statement No. 33-64971 and incorporated herein by reference.
*10.5 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.
*10.6 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.
*10.7 Registrant's 1996 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-13463 and incorporated herein
by reference.
10.8 Agreement and Plan of Reorganization by and among Public Storage, Inc.
Public Storage Management, Inc. and Registrant dated as of June 30, 1995.
Filed as Appendix A to Registrant's Proxy Statement dated October 11,
1995 (filed October 13, 1995) and incorporated herein by reference.
10.9 Amendment to Agreement and Plan of Reorganization by and among Public
Storage, Inc., Public Storage Management, Inc. and Registrant dated as of
November 13, 1995. Filed with Registrant's Current Report on Form 8-K
dated November 16, 1995 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. for PPY (included in Exhibit 8.1).
23.4 Consent of Hogan & Hartson L.L.P. for PPY2 (included in Exhibit 8.2).
23.5 Consent of Hogan & Hartson L.L.P. for PPY3 (included in Exhibit 8.3).
23.6 Consent of Nicholson-Douglas Realty Consultants, Inc. Filed herewith.
S-5
<PAGE>
99.1 Proxy card for PPY. Filed herewith.
99.2 Proxy card for PPY2. Filed herewith.
99.3 Proxy card for PPY3. Filed herewith.
99.4 Cash Election Form for PPY. Filed herewith.
99.5 Cash Election Form for PPY2. Filed herewith.
99.6 Cash Election Form for PPY3. Filed herewith.
99.7 Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants,
Inc. for PPY dated August 14, 1996 (filed as Appendix B-1 to the
Combined Proxy Statement and Prospectus).
99.8 Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants,
Inc. for PPY2 dated August 14, 1996 (filed as Appendix B-2 to the
Combined Proxy Statement and Prospectus).
99.9 Real Estate Appraisal Report by Nicholson-Douglas Realty Consultants,
Inc. for PPY3 dated August 14, 1996 (filed as Appendix B-3 to the
Combined Proxy Statement and Prospectus).
99.10 Opinion of Robert A. Stanger & Co., Inc. (PPY Merger) dated October 15,
1996 (filed as Appendix C-1 to the Combined Proxy Statement and
Prospectus).
99.11 Opinion of Robert A. Stanger & Co., Inc. (PPY2 Merger) dated October 15,
1996 (filed as Appendix C-2 to the Combined Proxy Statement and
Prospectus).
99.12 Opinion of Robert A. Stanger & Co., Inc. (PPY3 Merger) dated October 15,
1996 (filed as Appendix C-3 to the Combined Proxy Statement and
Prospectus).
_______________
* Compensatory benefit plan.
S-6
<PAGE>
EXHIBIT 5.1
DAVID GOLDBERG
Senior Vice President and General Counsel
701 Western Avenue, Suite 200
Glendale, California 91201-2397
October 14, 1996
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Gentlemen:
As Senior Vice President and General Counsel of Public Storage, 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,
/s/ DAVID GOLDBERG
DAVID GOLDBERG
<PAGE>
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
Exhibit 8.1
October 14, 1996
Partners Preferred Yield, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section
7.1.7 of the Agreement and Plan of Merger by and among Public Storage, Inc., a
California corporation ("PSI"), Partners Preferred Yield, Inc., a California
corporation ("PPY"), Partners Preferred Yield II, Inc. and Partners Preferred
Yield III, Inc. Pursuant to the Agreement and Plan of Reorganization dated
August 15, 1996 (the "Merger Agreement"), PPY will merge with and into PSI (the
"Merger").
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Merger Agreement and in the Combined Proxy
Statement and Prospectus filed with the Securities and Exchange Commission on or
about the date of delivery of this opinion (the "Proxy Statement and
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 PPY 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 PSI as set forth in a letter to us
dated on or about the date hereof;
3. Representations made to us by PPY as set forth in a letter to us
dated on or about the date hereof;
4. The Proxy Statement and Prospectus;
5. The Shareholder's Representations provided to us by B.
Wayne Hughes; and
<PAGE>
Partners Preferred Yield, Inc.
October 14, 1996
Page 2
6. Such other instruments and documents related to the formation,
organization and operation of PSI and PPY 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.
(S) 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 PPY or PSI has or will represent
equity for tax purposes; no outstanding equity of PPY or PSI has represented or
will represent indebtedness for tax purposes.
5. Each limited partnership and each limited liability company in
which the Company owns an interest is properly classified as a partnership for
federal income tax purposes.
6. PSI is a validly organized and duly incorporated corporation under
the laws of the State of California and the provisions of the Shareholders'
Agreement dated November 16, 1995 ("Shareholders' Agreement") entered into by B.
Wayne Hughes, Tamara L. Hughes, B. Wayne Hughes, Jr. and Parker Hughes Trust No.
2 and Article IV of the Amendment to PSI's Restated Articles of Incorporation
are fully enforceable in the manner set forth therein under the laws of the
State of California.
We have made the above assumptions and are relying upon the various
representations described above with your consent. In the event any of the
<PAGE>
Partners Preferred Yield, Inc.
October 14, 1996
Page 3
statements, representations, or assumptions upon which we have relied in
rendering this opinion is incorrect or incomplete, our opinion could be
adversely affected and may not be relied upon.
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
PSI continues to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code (the "Code") following the merger of Public Storage
Management, Inc. ("PSMI") into PSI (the "PSMI Merger") SO LONG AS (A) PSI has
met at all times since the PSMI Merger and continues to meet the stock ownership
and gross income requirements applicable to REITs and (B) PSMI at the time of
(and after giving effect to) the PSMI Merger was not considered to have any
current or accumulated earnings and profits for tax purposes, and (3) that the
discussion under the heading "Certain Federal Income Tax Matters" in the Proxy
Statement and Prospectus to the extent that it describes matters of law or legal
conclusions, is correct in all material respects.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
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:
<PAGE>
Partners Preferred Yield, Inc.
October 14, 1996
Page 4
(i) whether and the extent to which any PPY Shareholder who has
provided or will provide services to PPY or PSI 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
PSI Common Stock received by any such shareholder in the Merger;
(ii) 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;
(iii) the tax consequences of the Merger to PPY or PSI, 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;
(iv) the basis of any equity interest in PPY acquired by PSI in the
Merger;
(v) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of PPY and/or holders of
options or warrants for PPY stock or that may be relevant to particular classes
of PPY Shareholders and/or holders of options or warrants for PPY 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;
and
(vi) with regard to whether PSI continues to qualify as a REIT
following the PSMI Merger, we specifically are not rendering an opinion as to
whether PSI has satisfied or will continue to satisfy the stock ownership and
gross income requirements applicable to REITs following the PSMI Merger or
whether PSMI had current or accumulated earnings and profits at the time of the
PSMI Merger.
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
<PAGE>
Partners Preferred Yield, Inc.
October 14, 1996
Page 5
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 7.1.7 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.
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 Proxy
Statement and 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,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
Exhibit 8.2
October 14, 1996
Partners Preferred Yield II, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section
7.1.7 of the Agreement and Plan of Merger by and among Public Storage, Inc., a
California corporation ("PSI"), Partners Preferred Yield, Inc., a California
corporation, Partners Preferred Yield II, Inc. ("PPY2") and Partners Preferred
Yield III, Inc. Pursuant to the Agreement and Plan of Reorganization dated
August 15, 1996 (the "Merger Agreement"), PPY2 will merge with and into PSI (the
"Merger").
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Merger Agreement and in the Combined Proxy
Statement and Prospectus filed with the Securities and Exchange Commission on or
about the date of delivery of this opinion (the "Proxy Statement and
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 PPY2 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 PSI as set forth in a letter to us
dated on or about the date hereof;
3. Representations made to us by PPY2 as set forth in a letter to us
dated on or about the date hereof;
4. The Proxy Statement and Prospectus;
5. The Shareholder's Representations provided to us by B. Wayne
Hughes; and
<PAGE>
Partners Preferred Yield II, Inc.
October 14, 1996
Page 2
6. Such other instruments and documents related to the formation,
organization and operation of PSI and PPY2 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.
(S) 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 PPY2 or PSI has or will represent
equity for tax purposes; no outstanding equity of PPY2 or PSI has represented or
will represent indebtedness for tax purposes.
5. Each limited partnership and each limited liability company in
which the Company owns an interest is properly classified as a partnership for
federal income tax purposes.
6. PSI is a validly organized and duly incorporated corporation under
the laws of the State of California and the provisions of the Shareholders'
Agreement dated November 16, 1995 ("Shareholders' Agreement") entered into by B.
Wayne Hughes, Tamara L. Hughes, B. Wayne Hughes, Jr. and Parker Hughes Trust No.
2 and Article IV of the Amendment to PSI's Restated Articles of Incorporation
are fully enforceable in the manner set forth therein under the laws of the
State of California.
We have made the above assumptions and are relying upon the various
representations described above with your consent. In the event any of the
<PAGE>
Partners Preferred Yield II, Inc.
October 14, 1996
Page 3
statements, representations, or assumptions upon which we have relied in
rendering this opinion is incorrect or incomplete, our opinion could be
adversely affected and may not be relied upon.
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
PSI continues to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code (the "Code") following the merger of Public Storage
Management, Inc. ("PSMI") into PSI (the "PSMI Merger") SO LONG AS (A) PSI has
met at all times since the PSMI Merger and continues to meet the stock ownership
and gross income requirements applicable to REITs and (B) PSMI at the time of
(and after giving effect to) the PSMI Merger was not considered to have any
current or accumulated earnings and profits for tax purposes, and (3) that the
discussion under the heading "Certain Federal Income Tax Matters" in the Proxy
Statement and Prospectus to the extent that it describes matters of law or legal
conclusions, is correct in all material respects.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
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:
<PAGE>
Partners Preferred Yield II, Inc.
October 14, 1996
Page 4
(i) whether and the extent to which any PPY2 Shareholder who has
provided or will provide services to PPY2 or PSI 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
PSI Common Stock received by any such shareholder in the Merger;
(ii) 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;
(iii) the tax consequences of the Merger to PPY2 or PSI, 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;
(iv) the basis of any equity interest in PPY2 acquired by PSI in the
Merger;
(v) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of PPY2 and/or holders of
options or warrants for PPY2 stock or that may be relevant to particular classes
of PPY2 Shareholders and/or holders of options or warrants for PPY2 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;
and
(vi) with regard to whether PSI continues to qualify as a REIT
following the PSMI Merger, we specifically are not rendering an opinion as to
whether PSI has satisfied or will continue to satisfy the stock ownership and
gross income requirements applicable to REITs following the PSMI Merger or
whether PSMI had current or accumulated earnings and profits at the time of the
PSMI Merger.
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
<PAGE>
Partners Preferred Yield II, Inc.
October 14, 1996
Page 5
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 7.1.7 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.
We hereby consent to the filing of this opinion letter as Exhibit 8.2 to
the Registration Statement and to the reference to this firm under the captions
"Legal Opinions" and "Certain Federal Income Tax Matters" in the Proxy Statement
and 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,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
Exhibit 8.3
October 14, 1996
Partners Preferred Yield III, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section
7.1.7 of the Agreement and Plan of Merger by and among Public Storage, Inc., a
California corporation ("PSI"), Partners Preferred Yield, Inc., a California
corporation, Partners Preferred Yield II, Inc. and Partners Preferred Yield III,
Inc. ("PPY3") Pursuant to the Agreement and Plan of Reorganization dated August
15, 1996 (the "Merger Agreement"), PPY3 will merge with and into PSI (the
"Merger").
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Merger Agreement and in the Combined Proxy
Statement and Prospectus filed with the Securities and Exchange Commission on or
about the date of delivery of this opinion (the "Proxy Statement and
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 PPY3 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 PSI as set forth in a letter to us
dated on or about the date hereof;
3. Representations made to us by PPY3 as set forth in a letter to us
dated on or about the date hereof;
4. The Proxy Statement and Prospectus;
5. The Shareholder's Representations provided to us by B. Wayne
Hughes; and
<PAGE>
Partners Preferred Yield III, Inc.
October 14, 1996
Page 2
6. Such other instruments and documents related to the formation,
organization and operation of PSI and PPY3 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.
(S) 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 PPY3 or PSI has or will represent
equity for tax purposes; no outstanding equity of PPY3 or PSI has represented or
will represent indebtedness for tax purposes.
5. Each limited partnership and each limited liability company in
which the Company owns an interest is properly classified as a partnership for
federal income tax purposes.
6. PSI is a validly organized and duly incorporated corporation under
the laws of the State of California and the provisions of the Shareholders'
Agreement dated November 16, 1995 ("Shareholders' Agreement") entered into by B.
Wayne Hughes, Tamara L. Hughes, B. Wayne Hughes, Jr. and Parker Hughes Trust No.
2 and Article IV of the Amendment to PSI's Restated Articles of Incorporation
are fully enforceable in the manner set forth therein under the laws of the
State of California.
We have made the above assumptions and are relying upon the various
representations described above with your consent. In the event any of the
<PAGE>
Partners Preferred Yield III, Inc.
October 14, 1996
Page 3
statements, representations, or assumptions upon which we have relied in
rendering this opinion is incorrect or incomplete, our opinion could be
adversely affected and may not be relied upon.
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
PSI continues to qualify as a REIT under sections 856 through 860 of the
Internal Revenue Code (the "Code") following the merger of Public Storage
Management, Inc. ("PSMI") into PSI (the "PSMI Merger") SO LONG AS (A) PSI has
met at all times since the PSMI Merger and continues to meet the stock ownership
and gross income requirements applicable to REITs and (B) PSMI at the time of
(and after giving effect to) the PSMI Merger was not considered to have any
current or accumulated earnings and profits for tax purposes, and (3) that the
discussion under the heading "Certain Federal Income Tax Matters" in the Proxy
Statement and Prospectus to the extent that it describes matters of law or legal
conclusions, is correct in all material respects.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
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:
<PAGE>
Partners Preferred Yield III, Inc.
October 14, 1996
Page 4
(i) whether and the extent to which any PPY3 Shareholder who has
provided or will provide services to PPY3 or PSI 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
PSI Common Stock received by any such shareholder in the Merger;
(ii) 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;
(iii) the tax consequences of the Merger to PPY3 or PSI, 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;
(iv) the basis of any equity interest in PPY3 acquired by PSI in the
Merger;
(v) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of PPY3 and/or holders of
options or warrants for PPY3 stock or that may be relevant to particular classes
of PPY3 Shareholders and/or holders of options or warrants for PPY3 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;
and
(vi) with regard to whether PSI continues to qualify as a REIT
following the PSMI Merger, we specifically are not rendering an opinion as to
whether PSI has satisfied or will continue to satisfy the stock ownership and
gross income requirements applicable to REITs following the PSMI Merger or
whether PSMI had current or accumulated earnings and profits at the time of the
PSMI Merger.
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
<PAGE>
Partners Preferred Yield III, Inc.
October 14, 1996
Page 5
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 7.1.7 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.
We hereby consent to the filing of this opinion letter as Exhibit 8.3
to the Registration Statement and to the reference to this firm under the
captions "Legal Opinions" and "Certain Federal Income Tax Matters" in the Proxy
Statement and 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,
/s/ HOGAN & HARTSON L.L.P.
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. 333-_________) with respect to Public
Storage, Inc.'s registration of common stock and in the related Combined Proxy
Statement and Prospectus of Public Storage, Inc., Partners Preferred Yield,
Inc., Partners Preferred Yield II, Inc. and Partners Preferred Yield III, Inc.
and to the incorporation by reference therein of our report dated February 26,
1996 with respect to the consolidated financial statements and schedules of
Public Storage, Inc. in its Annual Report on Form 10-K, as amended by a Form 10-
K/A (Amendment No. 3) dated May 15, 1996, for the year ended December 31, 1995
filed with the Securities and Exchange Commission, to the use of our report
dated February 27, 1996 with respect to the financial statements and schedules
of Partners Preferred Yield, Inc. included in the Registration Statement and
Combined Proxy Statement and Prospectus, to the use of our report dated February
27, 1996 with respect to the financial statements and schedules of Partners
Preferred Yield II, Inc. included in the Registration Statement and Combined
Proxy Statement and Prospectus, and to the use of our report dated February 27,
1996 with respect to the financial statements and schedules of Partners
Preferred Yield III, Inc. included in the Registration Statement and Combined
Proxy Statement and Prospectus.
We also consent to the incorporation by reference of our report dated
September 6, 1996 on the combined summaries of historical information relating
to operating revenues and specified expenses -- certain properties which is
included in the Current Report on Form 8-K dated September 6, 1996 and
incorporated by reference in the Registration Statement on Form S-4
(No.333-_________) and related Combined Proxy Statement and Prospectus.
ERNST & YOUNG LLP
Los Angeles, California
October 14, 1996
<PAGE>
Exhibit 23.6
CONSENT OF NICHOLSON-DOUGLAS REALTY CONSULTANTS, INC.
We hereby consent to the references to our firm under "The Mergers -- Real
Estate Portfolio Appraisals by NDRC" in the Combined Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
/s/ Nicholson-Douglas Realty Consultants, Inc.
October 14, 1996
Hartland, Wisconsin
<PAGE>
Exhibit 99.1
PARTNERS PREFERRED YIELD, INC.
701 Western Avenue, Suite 200
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 of Partners Preferred
Yield, Inc. ("PPY") held of record by the undersigned on October 21, 1996, at
the Special Meeting of Shareholders to be held on December 17, 1996, 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 the merger (the "PPY Merger") of
PPY with and into Public Storage, Inc. ("PSI") pursuant to an Agreement and
Plan of Reorganization among PSI, PPY, Partners Preferred Yield II, Inc. and
Partners Preferred Yield III, Inc. described in the accompanying Combined
Proxy Statement and Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSED AMENDMENT TO BYLAWS. To consider and vote upon a related amendment
to PPY's bylaws to authorize the PPY Merger in the form of Appendix E-1 to
the accompanying Combined 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 Combined Proxy Statement and Prospectus dated October ___,
1996.
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: ____________________, 1996
______________________________________
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.
<PAGE>
Exhibit 99.2
PARTNERS PREFERRED YIELD II, INC.
701 Western Avenue, Suite 200
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 of Partners Preferred
Yield II, Inc. ("PPY2") held of record by the undersigned on October 21, 1996,
at the Special Meeting of Shareholders to be held on December 17, 1996, 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 the merger (the "PPY2 Merger")
of PPY2 with and into Public Storage, Inc. ("PSI") pursuant to an Agreement
and Plan of Reorganization among PSI, PPY2, Partners Preferred Yield, Inc.
and Partners Preferred Yield III, Inc. described in the accompanying
Combined Proxy Statement and Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSED AMENDMENT TO BYLAWS. To consider and vote upon a related amendment
to PPY2's bylaws to authorize the PPY2 Merger in the form of Appendix E-2
to the accompanying Combined 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 Combined Proxy Statement and Prospectus dated October ___,
1996.
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: ____________________, 1996
______________________________________
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.
<PAGE>
Exhibit 99.3
PARTNERS PREFERRED YIELD III, INC.
701 Western Avenue, Suite 200
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 of Partners Preferred
Yield III, Inc. ("PPY3") held of record by the undersigned on October 21, 1996,
at the Special Meeting of Shareholders to be held on December 17, 1996, 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 the merger (the "PPY3 Merger")
of PPY3 with and into Public Storage, Inc. ("PSI") pursuant to an Agreement
and Plan of Reorganization among PSI, PPY3, Partners Preferred Yield, Inc.
and Partners Preferred Yield II, Inc. described in the accompanying Combined
Proxy Statement and Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSED AMENDMENT TO BYLAWS. To consider and vote upon a related amendment
to PPY3's bylaws to authorize the PPY3 Merger in the form of Appendix E-3 to
the accompanying Combined 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 Combined Proxy Statement and Prospectus dated October ___,
1996.
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: ____________________, 1996
______________________________________
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.
<PAGE>
Exhibit 99.4
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD, 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
Partners Preferred Yield, Inc. ("PPY") Common Stock Series A, par value $.01 per
share ("PPY 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 PPY COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E
BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY 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 PPY COMMON STOCK WHO INTEND TO RECEIVE PUBLIC STORAGE, INC.
("PSI") COMMON STOCK IN THE PPY 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 PPY MERGER.
This Cash Election Form is to be executed and returned to the Depositary at
the following address:
<TABLE>
<S> <C>
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 406
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
(718) 921-8200
</TABLE>
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 "PPY Merger") of PPY with and into Public Storage, Inc. ("PSI"), pursuant
to the Agreement and Plan of Reorganization dated as of August 15, 1996, among
PSI, PPY, Partners Preferred Yield II, Inc. and Partners Preferred Yield III,
Inc. (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 PPY Common Stock listed in Box A (Certificate Information) and (b) elects (an
"Election"), as indicated below, upon consummation of the PPY Merger to have
each of the shares of PPY Common Stock represented by the Certificates converted
into the right to receive $19.00 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 PSI Common Stock in the PPY Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PPY 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 PPY Shareholder may not make a cash election as to less
than all of the shares of PPY Common Stock beneficially owned by such
shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Combined Proxy Statement and Prospectus, dated
_______________, 1996 (the "Combined Proxy Statement and Prospectus"), furnished
to shareholders of PPY, in connection with the PPY Merger, all of which are
incorporated herein by reference. Receipt of the Combined Proxy Statement and
Prospectus, including the Merger Agreement attached as Appendix A thereto, is
hereby acknowledged. Copies of the Combined 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 PPY Common Stock to be converted into the right to receive cash in
the PPY 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 PPY 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 Combined Proxy Statement and Prospectus (the "Election and
Allocation Procedures").
1
<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 PPY 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 PPY COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY 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 PPY 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 PPY 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 PPY (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 PPY Merger (the "Effective Time") could occur on the same
day approval of the PPY Merger by shareholders of PPY 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
_______________, 1996, 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 PPY Merger is anticipated to occur is determined, PPY and PSI 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 third 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 PSI COMMON STOCK IN THE PPY 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
PPY Merger to have each of the shares of PPY Common Stock covered by this Cash
Election Form converted into the right to receive $19.00 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
Combined Proxy Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Combined Proxy Statement and Prospectus. Copies of the
Combined Proxy Statement and Prospectus may be requested from the Depositary at
the address and telephone numbers 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 Combined
Proxy Statement and Prospectus. EACH HOLDER OF PPY COMMON STOCK IS STRONGLY
ENCOURAGED TO READ THE COMBINED PROXY STATEMENT AND PROSPECTUS IN ITS ENTIRETY
AND TO DISCUSS THE CONTENTS THEREOF, THE PPY 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 PPY 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 -- THE MERGERS" IN THE COMBINED 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 PPY
Common Stock covered by this Cash Election Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF PPY COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY 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 PPY 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 PSI 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 PSI Common
Stock in the PPY 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 PPY Common Stock subject to
such Election and the serial numbers shown on the Certificates representing such
PPY Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written notice
2
<PAGE>
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 PPY 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 Combined Proxy Statement and Prospectus under the caption "The
Mergers -- 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 PPY 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 PPY 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 PPY 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 PPY 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 PSI 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 PPY 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
PPY 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 PPY, PSI 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 PPY 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 PSI and its
decision will be conclusive and binding on all concerned. PSI may delegate this
function to the Depositary in whole or in part. PSI 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).
3
<PAGE>
(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 PPY Common Stock, you should contact American Stock Transfer &
Trust Company, PPY's transfer agent, at (800) 937-5449 or (718) 921-8200. 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 PPY 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 PPY
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 406
(individual holders), or (212) 805-7000 (banks and brokers). You may also
obtain additional copies of the Cash Election Form and the Combined Proxy
Statement and Prospectus from the Depositary at the addresses and telephone
numbers set forth on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the PPY Merger becomes effective, the
Depositary will make the allocations of cash to be received by holders of PPY
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 PPY 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 PPY Merger becomes
effective, a Letter of Transmittal for you to use to send in your stock
Certificates for shares of PPY 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 PSI
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 PPY 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 COMBINED PROXY STATEMENT AND PROSPECTUS FOR THAT
PURPOSE.
4
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD, INC.
EXECUTION SECTION
BOX A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.)
Number of Shares
Name and Address of Registered Holder(s) as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
__________________ ________________
__________________ ________________
__________________ ________________
__________________ ________________
Total Shares:
================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________________
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this Cash Election Form.
<S> <C>
Signature(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Date: ________________________________________ Telephone Number: _______________________________________________
<CAPTION>
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)).
<S> <C>
Name(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Capacity (Full Title): ____________________________________________________________________________________________________________
Address: ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
</TABLE>
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.
- --------------------------------------------------------------------------------
E-1
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD, INC.
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 PPY 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.
BOX D
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SUBSTITUTE SIGNING AND DATING BELOW. _______________________________
---------------------------------------------------------------------------------------------------
Form W-9 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
Department of the Treasury dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to
Internal Revenue Service 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 [_]
---------------------------
Signature: __________________________________ Date: _________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 PPY Common Stock submitted with this Cash Election Form no later than
5:00 p.m., New York City Time, on the third 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 PPY
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: _____________________________________________________________________
_____________________________________________________________________
- -------------------------------------------------------------------------------
E-2
<PAGE>
- -------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
[Graphics for Execution Section Page E-1,
left margin.]
[Graphics for Execution Section Page E-2,
right margin.]
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
<PAGE>
Exhibit 99.5
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD II, 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
Partners Preferred Yield II, Inc. ("PPY2") Common Stock Series A, par value $.01
per share ("PPY2 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 PPY2 COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E
BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY 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 PPY2 COMMON STOCK WHO INTEND TO RECEIVE PUBLIC STORAGE, INC.
("PSI") COMMON STOCK IN THE PPY2 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 PPY2 MERGER.
This Cash Election Form is to be executed and returned to the Depositary at
the following address:
<TABLE>
<S> <C>
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 406
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
(718) 921-8200
</TABLE>
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 "PPY2 Merger") of PPY2 with and into Public Storage, Inc. ("PSI"), pursuant
to the Agreement and Plan of Reorganization dated as of August 15, 1996, among
PSI, Partners Preferred Yield, Inc., PPY2 and Partners Preferred Yield III, Inc.
(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 PPY2 Common Stock listed in Box A (Certificate Information) and (b) elects
(an "Election"), as indicated below, upon consummation of the PPY2 Merger to
have each of the shares of PPY2 Common Stock represented by the Certificates
converted into the right to receive $20.39 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 PSI Common Stock in the PPY2 Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PPY2 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 PPY2 Shareholder may not make a cash election as to less
than all of the shares of PPY2 Common Stock beneficially owned by such
shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Combined Proxy Statement and Prospectus, dated
_______________, 1996 (the "Combined Proxy Statement and Prospectus"), furnished
to shareholders of PPY2, in connection with the PPY2 Merger, all of which are
incorporated herein by reference. Receipt of the Combined Proxy Statement and
Prospectus, including the Merger Agreement attached as Appendix A thereto, is
hereby acknowledged. Copies of the Combined 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 PPY2 Common Stock to be converted into the right to receive cash in
the PPY2 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 PPY2 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 Combined Proxy Statement and Prospectus (the "Election and
Allocation Procedures").
1
<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 PPY2 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 PPY2 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY2 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 PPY2 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 PPY2 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 PPY2 (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 PPY2 Merger (the "Effective Time") could occur on the same
day approval of the PPY2 Merger by shareholders of PPY2 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
_______________, 1996, 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 PPY2 Merger is anticipated to occur is determined, PPY2 and PSI 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 third 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 PSI COMMON STOCK IN THE PPY2 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
PPY2 Merger to have each of the shares of PPY2 Common Stock covered by this Cash
Election Form converted into the right to receive $20.39 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
Combined Proxy Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Combined Proxy Statement and Prospectus. Copies of the
Combined Proxy Statement and Prospectus may be requested from the Depositary at
the address and telephone numbers 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 Combined
Proxy Statement and Prospectus. EACH HOLDER OF PPY2 COMMON STOCK IS STRONGLY
ENCOURAGED TO READ THE COMBINED PROXY STATEMENT AND PROSPECTUS IN ITS ENTIRETY
AND TO DISCUSS THE CONTENTS THEREOF, THE PPY2 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 PPY2 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 -- THE MERGERS" IN THE COMBINED 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 PPY2
Common Stock covered by this Cash Election Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF PPY2 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY2 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 PPY2 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 PSI 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 PSI Common
Stock in the PPY2 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 PPY2 Common Stock subject
to such Election and the serial numbers shown on the Certificates representing
such PPY2 Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written
2
<PAGE>
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 PPY2 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 Combined Proxy Statement and Prospectus under the caption "The
Mergers -- 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 PPY2 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 PPY2 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 PPY2 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 PPY2 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 PSI
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 PPY2 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
PPY2 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 PPY2, PSI 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 PPY2 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 PSI and its
decision will be conclusive and binding on all concerned. PSI may delegate this
function to the Depositary in whole or in part. PSI 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).
3
<PAGE>
(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 PPY2 Common Stock, you should contact American Stock Transfer &
Trust Company, PPY2's transfer agent, at (800) 937-5449 or (718) 921-8200. 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 PPY2 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 PPY2
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 406
(individual holders), or (212) 805-7000 (banks and brokers). You may also
obtain additional copies of the Cash Election Form and the Combined Proxy
Statement and Prospectus from the Depositary at the addresses and telephone
numbers set forth on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the PPY2 Merger becomes effective, the
Depositary will make the allocations of cash to be received by holders of PPY2
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 PPY2 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 PPY2 Merger becomes
effective, a Letter of Transmittal for you to use to send in your stock
Certificates for shares of PPY2 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 PSI
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 PPY2 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 COMBINED PROXY STATEMENT AND PROSPECTUS FOR THAT
PURPOSE.
4
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD II, INC.
EXECUTION SECTION
BOX A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.)
Number of Shares
Name and Address of Registered Holder(s) as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- ---------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
__________________ ________________
__________________ ________________
__________________ ________________
__________________ ________________
Total Shares:
================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this Cash Election Form.
<S> <C>
Signature(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Date: ________________________________________ Telephone Number: ______________________________________________
<CAPTION>
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)).
<S> <C>
Name(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Capacity (Full Title): ____________________________________________________________________________________________________________
Address: ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
- -------------------------------------------------------------------------------
E-1
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD II, INC.
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 PPY2 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.
BOX D
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SUBSTITUTE SIGNING AND DATING BELOW. _______________________________
---------------------------------------------------------------------------------------------------
Form W-9 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
Department of the Treasury dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to
Internal Revenue Service 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 [_]
-------------------------------
Signature:_____________________________________________________ Date:____________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
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 PPY2 Common Stock submitted with this Cash Election Form no later than
5:00 p.m., New York City Time, on the third 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 PPY2
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: _____________________________________________________________________
_____________________________________________________________________
- -------------------------------------------------------------------------------
E-2
<PAGE>
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
[Graphics for Execution Section Page E-1,
left margin.]
[Graphics for Execution Section Page E-2,
right margin.]
- -------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
<PAGE>
Exhibit 99.6
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD III, 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
Partners Preferred Yield III, Inc. ("PPY3") Common Stock Series A, par value
$.01 per share ("PPY3 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 PPY3 COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E
BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY 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 PPY3 COMMON STOCK WHO INTEND TO RECEIVE PUBLIC STORAGE, INC.
("PSI") COMMON STOCK IN THE PPY3 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 PPY3 MERGER.
This Cash Election Form is to be executed and returned to the Depositary at
the following address:
<TABLE>
<S> <C>
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 406
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
(718) 921-8200
</TABLE>
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 "PPY3 Merger") of PPY3 with and into Public Storage, Inc. ("PSI"), pursuant
to the Agreement and Plan of Reorganization dated as of August 15, 1996, among
PSI, Partners Preferred Yield, Inc., Partners Preferred Yield II, Inc. and PPY3
(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 PPY3 Common Stock listed in Box A (Certificate Information) and (b) elects
(an "Election"), as indicated below, upon consummation of the PPY3 Merger to
have each of the shares of PPY3 Common Stock represented by the Certificates
converted into the right to receive $20.47 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 PSI Common Stock in the PPY3 Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PPY3 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 PPY3 Shareholder may not make a cash election as to less
than all of the shares of PPY3 Common Stock beneficially owned by such
shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Combined Proxy Statement and Prospectus, dated
_______________, 1996 (the "Combined Proxy Statement and Prospectus"), furnished
to shareholders of PPY3, in connection with the PPY3 Merger, all of which are
incorporated herein by reference. Receipt of the Combined Proxy Statement and
Prospectus, including the Merger Agreement attached as Appendix A thereto, is
hereby acknowledged. Copies of the Combined 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 PPY3 Common Stock to be converted into the right to receive cash in
the PPY3 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 PPY3 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 Combined Proxy Statement and Prospectus (the "Election and
Allocation Procedures").
1
<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 PPY3 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 PPY3 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY3 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 PPY3 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 PPY3 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 PPY3 (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 PPY3 Merger (the "Effective Time") could occur on the same
day approval of the PPY3 Merger by shareholders of PPY3 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
_______________, 1996, 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 PPY3 Merger is anticipated to occur is determined, PPY3 and PSI 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 third 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 PSI COMMON STOCK IN THE PPY3 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
PPY3 Merger to have each of the shares of PPY3 Common Stock covered by this Cash
Election Form converted into the right to receive $20.47 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
Combined Proxy Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Combined Proxy Statement and Prospectus. Copies of the
Combined Proxy Statement and Prospectus may be requested from the Depositary at
the address and telephone numbers 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 Combined
Proxy Statement and Prospectus. EACH HOLDER OF PPY3 COMMON STOCK IS STRONGLY
ENCOURAGED TO READ THE COMBINED PROXY STATEMENT AND PROSPECTUS IN ITS ENTIRETY
AND TO DISCUSS THE CONTENTS THEREOF, THE PPY3 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 PPY3 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 -- THE MERGERS" IN THE COMBINED 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 PPY3
Common Stock covered by this Cash Election Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF PPY3 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE
PPY3 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 PPY3 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 PSI 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 PSI Common
Stock in the PPY3 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 PPY3 Common Stock subject
to such Election and the serial numbers shown on the Certificates representing
such PPY3 Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written
2
<PAGE>
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 PPY3 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 Combined Proxy Statement and Prospectus under the caption "The
Mergers -- 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 PPY3 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 PPY3 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 PPY3 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 PPY3 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 PSI
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 PPY3 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
PPY3 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 PPY3, PSI 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 PPY3 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 PSI and its
decision will be conclusive and binding on all concerned. PSI may delegate this
function to the Depositary in whole or in part. PSI 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).
3
<PAGE>
(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 PPY3 Common Stock, you should contact American Stock Transfer &
Trust Company, PPY3's transfer agent, at (800) 937-5449 or (718) 921-8200. 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 PPY3 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 PPY3
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 406
(individual holders), or (212) 805-7000 (banks and brokers). You may also
obtain additional copies of the Cash Election Form and the Combined Proxy
Statement and Prospectus from the Depositary at the addresses and telephone
numbers set forth on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the PPY3 Merger becomes effective, the
Depositary will make the allocations of cash to be received by holders of PPY3
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 PPY3 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 PPY3 Merger becomes
effective, a Letter of Transmittal for you to use to send in your stock
Certificates for shares of PPY3 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 PSI
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 PPY3 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 COMBINED PROXY STATEMENT AND PROSPECTUS FOR THAT
PURPOSE.
4
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD III, INC.
EXECUTION SECTION
BOX A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.)
Number of Shares
Name and Address of Registered Holder(s) as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- ---------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
__________________ ________________
__________________ ________________
__________________ ________________
__________________ ________________
Total Shares:
================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this Cash Election Form.
<S> <C>
Signature(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Date: _________________________________________ Telephone Number: ______________________________________________
<CAPTION>
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)).
<S> <C>
Name(s): ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Capacity (Full Title): ____________________________________________________________________________________________________________
Address: ____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
- --------------------------------------------------------------------------------
E-1
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PARTNERS PREFERRED YIELD III, INC.
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 PPY3 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.
BOX D
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SUBSTITUTE SIGNING AND DATING BELOW. _______________________________
---------------------------------------------------------------------------------------------------
Form W-9 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
Department of the Treasury dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to
Internal Revenue Service 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 [_]
----------------------------
Signature: ______________________________________________ Date: ___________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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 PPY3 Common Stock submitted with this Cash Election Form no later than
5:00 p.m., New York City Time, on the third 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 PPY3
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: ______________________________________________________________________
______________________________________________________________________
- --------------------------------------------------------------------------------
E-2
<PAGE>
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
[Graphics for Execution Section Page E-1,
left margin.]
[Graphics for Execution Section Page E-2,
right margin.]
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
