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As filed with the Securities and Exchange Commission on August 10, 1998
Registration No. 333-
================================================================================
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)
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<S> <C>
95-3551121 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial Classification Code Number)
701 Western Avenue HARVEY LENKIN
Glendale, California 91201-2397 Public Storage, Inc.
(818) 244-8080 701 Western Avenue
(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)
</TABLE>
______________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue
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 and there is compliance with
General Instruction G, 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]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
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CALCULATION OF REGISTRATION FEE
=================================================================================================================================
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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Common Stock, $.10 par value per share 650,000 shares(1) (1) $3,949,551.40(1) $1,165.12(1)(2)
=================================================================================================================================
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(1) This Registration Statement relates to the proposed acquisition by the
Registrant of all of the 20,018 units of limited partnership interest
("Units") in PS Partners, Ltd. (the "Partnership") that are not currently
owned by the Registrant. The Registrant's acquisition of the 20,018 Units
will be accomplished through a merger of a subsidiary of the Registrant into
the Partnership and the conversion of the 20,018 Units into either cash or
common stock of the Registrant. The book value of the Units at March 31,
1998 was $197.30 per Unit. The maximum number of shares of Registrant to be
issued in the merger is 650,000. The exact number of shares of common stock
of the Registrant to be issued in the merger cannot be determined at this
time.
(2) Calculated in accordance with rule 457(f)(2) under the Securities Act of
1933. $790 of the registration fee was previously paid in connection with
the Partnership's preliminary information statement.
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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<PAGE>
PS PARTNERS, LTD.
701 Western Avenue
Glendale, California 91201-2397
August __, 1998
Dear Limited Partner:
Enclosed is an information statement, notice of action without a meeting
and prospectus and accompanying cash election form relating to the acquisition
by Public Storage, Inc. ("PSI") of all of the units of limited partnership
interest in the Partnership not currently owned by PSI. PSI is a general
partner of the Partnership and owner of 70% of the Partnership units. PSI's
acquisition of units is being accomplished through the merger of a PSI
subsidiary into the Partnership. In the merger, each of your units will be
converted into the right to receive a value of $713 in PSI common stock or, at
your election, in cash.
The Partnership is not seeking the consent, authorization or proxy of its
limited partners with respect to the merger or related amendment to the
partnership agreement. PSI, the holder of a majority of the Partnership units,
has executed a written consent approving the merger and the related amendment to
the partnership agreement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. IF YOU WANT TO RECEIVE CASH IN THIS TRANSACTION, YOU MUST MAKE A CASH
ELECTION BY SEPTEMBER 11, 1998, IN ACCORDANCE WITH THE ACCOMPANYING CASH
ELECTION FORM.
If you have any questions, please contact Public Storage, Inc.'s Investor
Services Department at (800) 807-3055, (800) 421-2856 or (818) 244-8080.
Very truly yours,
PUBLIC STORAGE, INC.
General Partner
/s/ HARVEY LENKIN
By: Harvey Lenkin
President
<PAGE>
PUBLIC STORAGE, INC.
PS PARTNERS, LTD.
INFORMATION STATEMENT, NOTICE OF ACTION WITHOUT A MEETING AND PROSPECTUS
This information statement, notice of action without a meeting and
prospectus is being furnished to limited partners of PS Partners, Ltd. (the
"Partnership") in connection with the acquisition by Public Storage, Inc.
("PSI") of all of the units of limited partnership interest not currently owned
by PSI. PSI is a general partner of the Partnership and owner of 70% of the
Partnership units. PSI's acquisition of units is being accomplished through the
merger of a PSI subsidiary into the Partnership. In the merger, each unit not
currently owned by PSI will be converted into the right to receive a value of
$713 in PSI common stock or, at the election of a limited partner, in cash.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY LIMITED PARTNERS, INCLUDING THE FOLLOWING:
. PSI owns sufficient Partnership units to approve the merger without
the vote of any other limited partner and is voting its units in favor
of the merger.
. The merger has not been negotiated at arm's length. No independent
persons were hired to negotiate the terms of the merger on behalf of
public limited partners. No person was asked to make an offer to buy
the Partnership's assets.
. The merger will be a taxable event for public limited partners,
resulting in the recognition of a substantial gain to original taxable
limited partners who receive either cash or PSI common stock.
. The investment of the limited partners who do not elect cash will be
changed from holding an interest in a specified portfolio of
properties for a fixed period to holding an investment in an ongoing
fully-integrated real estate company.
. The level of distributions to a limited partner who receives PSI
common stock will be significantly lower after the merger than the
amount received as a limited partner of the Partnership.
. The Partnership's properties may continue to increase in value and
might be able to be sold at a higher price at a later date. PSI will
realize the benefit of any increase in value.
. Under California law, limited partners will not be entitled to
---
dissenters' rights of appraisal in connection with the merger.
. PSI, which controls the Partnership, has significant conflicts of
interest in connection with, and will benefit from, the merger. In
the absence of such conflicts, the terms of the merger may have been
more favorable to limited partners.
. The public PSI shareholders are substantially limited in their ability
to control PSI. B. Wayne Hughes, the chief executive officer and
chairman of the board of PSI and a general partner of the Partnership,
and members of his family own 32% of the PSI common stock (36% upon
conversion of the PSI class B common stock). Also the number of
shares that may be owned by any other person is restricted. These
factors should prevent any takeover not approved by Mr. Hughes.
. The market price of PSI common stock may fluctuate after the date that
the number of shares to be issued to limited partners in the merger is
determined and before those shares actually are issued. In addition,
the market price could decrease as a result of increased selling
activity following issuance of shares in the merger and other factors,
such as changes in interest rates and market conditions.
____________________
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. IF YOU WANT TO RECEIVE CASH IN THIS TRANSACTION, YOU MUST MAKE A CASH
ELECTION BY SEPTEMBER 11, 1998, IN ACCORDANCE WITH THE ACCOMPANYING CASH
ELECTION FORM.
____________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE'S SECURITIES
REGULATOR HAS APPROVED THE COMMON STOCK OF PUBLIC STORAGE, INC. TO BE ISSUED
UNDER THIS INFORMATION STATEMENT AND PROSPECTUS OR DETERMINED IF THIS
INFORMATION STATEMENT AND PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
August __, 1998
<PAGE>
The merger will be effected under the Agreement and Plan of Reorganization
attached as Exhibit A to this statement. This statement also serves as a
prospectus of PSI under the Securities Act of 1933, as amended, for the issuance
of up to 650,000 shares of PSI common stock in the merger.
The PSI common stock is traded on the New York Stock Exchange under the
symbol "PSA". On August __, 1998, the closing price of the PSI common stock on
the NYSE was $_______. There is no active market for the Partnership units.
The Partnership is not seeking the consent, authorization or proxy of its
limited partners with respect to the merger or related amendment to the
partnership agreement. PSI, the holder of a majority of the Partnership units,
has executed a written consent approving the merger and the related amendment to
the partnership agreement.
This statement is first being mailed on or about August 14, 1998 to limited
partners of record at the close of business on the date of this statement.
ii
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TABLE OF CONTENTS
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Page
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Available Information................................................................................ 1
Incorporation of Certain Documents by Reference...................................................... 1
Cautionary Statement................................................................................. 1
Summary.............................................................................................. 2
Overview of Merger................................................................................ 2
Summary Risk Factors.............................................................................. 2
Vote by PSI.................................................................................... 2
No Arm's Length Negotiation or Independent Representatives..................................... 2
Tax to Limited Partners........................................................................ 2
Change from Finite Life to Infinite Life....................................................... 3
Lower Level of Distributions After the Merger.................................................. 3
Potential Loss of Future Appreciation.......................................................... 3
No Dissenters' Rights of Appraisal............................................................. 3
Conflicts of Interest.......................................................................... 3
Control and Influence over PSI by the Hughes Family and PSI Ownership Limitations.............. 3
Uncertainty Regarding Market Price of PSI Common Stock......................................... 3
Tax Risks -- Additional Risks to PSI's Continued REIT Qualification............................ 3
Financing Risks................................................................................ 3
Possible Future Dilution....................................................................... 3
Merger Payments Based on Appraisals Instead of Arm's Length Negotiations....................... 3
Benefits to Insiders.............................................................................. 4
Potential Benefits of the Merger.................................................................. 4
The Partnership................................................................................... 4
PSI............................................................................................... 5
Background and Reasons for the Merger............................................................. 5
Detriments of the Merger.......................................................................... 6
Determination of Amounts to be Received by Limited Partners in the Merger......................... 6
Federal Income Tax Matters........................................................................ 7
Fairness Analysis; Appraisal and Opinion of Financial Advisor..................................... 7
Fairness Analysis.............................................................................. 7
Absence of Arm's Length Negotiation............................................................ 7
Fairness Opinion from Stanger.................................................................. 7
Comparison of Partnership Units with PSI Common Stock............................................. 8
Summary Financial Information.....................................................................10
Relationships.....................................................................................12
Risk Factors.........................................................................................13
Vote by PSI.......................................................................................13
No Arm's Length Negotiation or Independent Representatives........................................13
Tax to Limited Partners...........................................................................13
Change from Finite Life to Infinite Life..........................................................13
Lower Level of Distributions After the Merger.....................................................13
Potential Loss of Future Appreciation.............................................................13
No Dissenters' Rights of Appraisal................................................................13
Conflicts of Interest.............................................................................13
Relationships Among Parties....................................................................13
Structuring of Merger by Insiders..............................................................13
Benefits to Insiders...........................................................................14
Control and Influence over PSI by the Hughes Family and PSI Ownership Limitations.................14
Uncertainty Regarding Market Price of PSI Common Stock............................................14
</TABLE>
iii
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Tax Risks of Ownership of PSI Common Stock -- Failure to Maintain REIT Status.................... 15
Financing Risks.................................................................................. 15
Dilution and Subordination.................................................................... 15
Risk of Leverage.............................................................................. 15
Merger Payments Based on Appraisal Instead of Arm's Length Negotiation........................... 15
Operating Risks.................................................................................. 15
Value of Investment Reduced by General Risks of Real Estate Ownership......................... 15
Significant Competition Among Mini-Warehouses................................................. 16
Risk of Environmental Liabilities............................................................. 16
Tenant Reinsurance............................................................................ 16
Canadian Operations........................................................................... 16
Merchandise and Portable Self-Storage Companies............................................... 16
Liabilities with Respect to Acquired General Partner Interests................................ 17
Shares Eligible for Future Sale.................................................................. 17
Benefits to Insiders................................................................................ 17
The Merger.......................................................................................... 18
General.......................................................................................... 18
Background and Reasons for the Merger............................................................ 18
Fairness Analysis................................................................................ 19
Alternatives to the Merger....................................................................... 19
Liquidation................................................................................... 19
Continued Ownership of the Partnership........................................................ 20
Determination of Amounts to be Received by Limited Partners in the Merger........................ 20
Potential Benefits of the Merger................................................................. 21
Detriments of the Merger......................................................................... 22
Fairness Analysis................................................................................ 22
Comparison of Consideration to be Received in the Merger to Other Alternatives................... 23
Real Estate Portfolio Appraisal by TNG........................................................... 26
Fairness Opinion from Stanger.................................................................... 28
The Merger Agreement............................................................................. 32
Cash Election Procedure.......................................................................... 33
Consequences to the Partnership if the Merger is Not Completed................................... 34
Costs of the Merger.............................................................................. 34
Accounting Treatment............................................................................. 34
Regulatory Requirements.......................................................................... 35
Comparison of Partnership Units with PSI Common Stock............................................ 35
Amendment to Partnership Agreement.................................................................. 40
Approval of the Merger and Partnership Agreement Amendment.......................................... 41
General.......................................................................................... 41
Security Ownership of Certain Beneficial Owners and Management................................... 41
Certain Related Transactions........................................................................ 47
Description of Partnership Properties............................................................... 48
Description of PSI's Properties..................................................................... 51
Distributions and Price Range of PSI Common Stock................................................... 53
Distributions and Market Prices of Partnership Units................................................ 54
Description of PSI Capital Stock.................................................................... 57
Common Stock..................................................................................... 57
Ownership Limitations............................................................................ 57
Class B Common Stock............................................................................. 58
Preferred Stock.................................................................................. 59
Equity Stock..................................................................................... 59
Effects of Issuance of Capital Stock............................................................. 59
Federal Income Tax Considerations................................................................... 60
Opinion of Counsel............................................................................... 60
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iv
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The Merger....................................................................................... 60
General Tax Treatment of PSI..................................................................... 61
Consequences of the PSMI Merger on PSI's Qualification as a REIT................................. 65
Taxation of Taxable Domestic Holders of PSI Common Stock......................................... 68
Taxation of Non-U.S. Shareholders................................................................ 70
Ownership Records................................................................................ 71
Recent Legislation............................................................................... 71
Recent Administration Proposal................................................................... 72
State and Local Taxes............................................................................... 72
Legal Opinions...................................................................................... 72
Experts............................................................................................. 73
Glossary............................................................................................ 74
</TABLE>
Appendix A - Agreement and Plan of Reorganization among PSI, PS Partners
Merger Co., Inc. and the Partnership dated as of July 14, 1998
Appendix B - Real Estate Appraisal Report by The Nicholson Group, Ltd. for the
Partnership dated July 30, 1998
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated August 7, 1998
Appendix D - Proposed Amendment to the Partnership Agreement
Appendix E - Financial Statements of the Partnership
Appendix F - Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Partnership
v
<PAGE>
AVAILABLE INFORMATION
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires both PSI and the Partnership to file reports, statements and other
information with the Securities and Exchange Commission (the "Commission").
This material can be inspected and copied at the Commission's public reference
facilities 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 Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or by accessing
the Commission's Worldwide Web site at http://www.sec.gov. This material can
also be inspected, in the case of PSI, at the NYSE, 20 Broad Street, New York,
New York 10005 and at The Pacific Exchange, Inc., 301 Pine Street, San
Francisco, California 94104.
PSI has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This statement does not contain all the information set forth in the
Registration Statement. For further information, please refer 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,
1997, as amended by a Form 10-K/A dated April 23, 1998; (ii) the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998; and (iii) the Current
Reports on Form 8-K dated January 15, 1998, February 10, 1998 and April 23,
1998.
All documents filed by PSI pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this statement and before September 14, 1998
will be incorporated by reference herein from the date of filing such documents.
The following documents filed by the Partnership with the Commission under
Section 13 of the Exchange Act (File No. 0-11186) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1997; (ii) the Quarterly Report on Form 10-Q for the quarter ended March 31,
1998; and (iii) the Current Report on Form 8-K dated July 14, 1998.
Limited partners should rely on information in this statement, or in any
subsequently filed document which is made part of this statement, over different
information in documents previously filed. Any information in documents
previously filed different from information in this statement, or in any
subsequently filed document which is made part of this statement, should be
disregarded.
The merger agreement, which is attached as Appendix A to this statement, is
also made part of this statement.
AS NOTED ABOVE, OTHER DOCUMENTS NOT INCLUDED WITH THIS STATEMENT ARE MADE A
PART OF THIS STATEMENT. IF YOU WOULD LIKE COPIES OF THESE OTHER DOCUMENTS
(INCLUDING DOCUMENTS FILED AFTER THE DATE OF THIS STATEMENT) FREE OF CHARGE,
PLEASE WRITE TO THE INVESTOR SERVICES DEPARTMENT, 701 WESTERN AVENUE, GLENDALE,
CALIFORNIA 91201-2397 OR CALL AT (800) 807-3055, (800) 421-2856 OR (818) 244-
8080. IN ORDER TO ENSURE TIMELY DELIVERY, ANY REQUEST SHOULD BE MADE BY
SEPTEMBER 4, 1998. DOCUMENTS WILL BE SENT BY FIRST CLASS MAIL WITHIN ONE
BUSINESS DAY AFTER YOUR REQUEST IS RECEIVED.
LIMITED PARTNERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
STATEMENT OR IN DOCUMENTS TO WHICH LIMITED PARTNERS HAVE BEEN REFERRED. PSI AND
THE PARTNERSHIP HAVE NOT AUTHORIZED ANYONE TO PROVIDE LIMITED PARTNERS WITH
INFORMATION THAT IS DIFFERENT.
CAUTIONARY STATEMENT
Statements contained in this statement 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 elsewhere in this statement identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
1
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this statement, including the appendices.
See "Glossary" beginning on page 74 for definitions of certain terms used in
this statement.
OVERVIEW OF MERGER
The acquisition of the Partnership units not currently owned by PSI will be
accomplished in the merger as follows:
. A wholly owned, second tier subsidiary of PSI will be merged into the
Partnership.
. Each Partnership unit (other than units owned by PSI) will be
converted into the right to receive a value of $713 in PSI common
stock or, at the election of a limited partner, in cash. To be
effective a cash election must be made by September 11, 1998, in
accordance with the accompanying cash election form.
. Distributions will be made to holders of Partnership units to cause
the estimated net asset value per unit as of September 14, 1998 to be
substantially equivalent to $713.
. For purposes of the merger, the market value of the PSI common stock
will be the average of the per share closing prices on the NYSE of the
PSI common stock during the 20 consecutive trading days ending on
September 4, 1998.
. Following the merger, PSI (through a wholly owned entity) will own all
Partnership units.
. PSI (through a wholly owned entity) and Hughes will retain their
general partnership interests in the Partnership, and the Partnership
will remain in existence.
See "The Merger -- Determination of Amounts to be Received by Limited
Partners in the Merger." For a description of the terms of the merger, see "The
Merger -- The Merger Agreement."
The PSI common stock is listed on the NYSE. On August __, 1998, the last
full trading day prior to the date of this statement, the reported closing price
per share of PSI common stock was $_____. There is no established trading
market for the Partnership units. See "Distributions and Price Range of PSI
Common Stock" and "Distributions and Market Prices of Partnership Units."
SUMMARY RISK FACTORS
The merger involves certain risks and detriments that should be considered
by limited partners, including the following:
. Vote by PSI. PSI owns sufficient Partnership units to approve the
merger without the vote of any other limited partner and is voting its
units in favor of the merger.
. No Arm's Length Negotiation or Independent Representatives. The merger
has not been negotiated at arm's length. No independent persons were
hired to negotiate the terms of the merger on behalf of public limited
partners. If such persons had been hired, the terms of the merger may
have been more favorable to them. In addition, no other person was
asked to make an offer to buy the Partnership's assets. Such offers
could have generated higher prices.
. Tax to Limited Partners. The merger will be a taxable event for public
limited partners, resulting in the recognition of a substantial gain to
original taxable limited partners who receive either cash or PSI common
stock.
2
<PAGE>
. Change from Finite Life to Infinite Life. The investment of limited
partners who do not elect cash will be changed from holding an interest
in specified properties for a fixed period to holding an investment in
an ongoing integrated real estate company. PSI changes its portfolio of
properties from time to time without approval of shareholders, does not
plan to sell its assets within a fixed period of time and is engaged in
all aspects of the mini-warehouse industry, including property
development and management. Limited partners who receive PSI common
stock will be able to liquidate their investment only by selling their
shares. The market value of their shares may or may not reflect the
full fair market value of PSI's assets and will fluctuate.
. Lower Level of Distributions After the Merger. The level of
distributions to a limited partner who receives PSI common stock is
expected to be significantly lower after the merger than the amount
received as a limited partner of the Partnership.
. Potential Loss of Future Appreciation. The Partnership's assets may
increase in value and might be able to be sold at higher prices at a
later date. PSI will realize the benefit of any increase in value.
. No Dissenters' Rights of Appraisal. Under California law, limited
partners will not be entitled to dissenters' rights of appraisal in
---
connection with the merger.
. Conflicts of Interest. PSI, which controls the Partnership, has
conflicts of interest in, and will benefit from, the merger. PSI has an
interest in acquiring Partnership units at the lowest possible price,
while limited partners have an interest in selling units at the highest
possible price. In the absence of these conflicts, the terms of the
merger may have been more favorable to limited partners.
. Control and Influence over PSI by the Hughes Family and PSI Ownership
Limitations. The public PSI shareholders are substantially limited in
their ability to control PSI. The Hughes family owns approximately 33%
of the PSI common stock (approximately 37% upon conversion of the PSI
class B common stock). Also, the number of PSI shares that may be owned
by any other person is restricted. These ownership factors should
prevent any takeover of PSI not approved by Mr. Hughes.
. Uncertainty Regarding Market Price of PSI Common Stock. The market
price of PSI common stock may fluctuate after the date that the number
of shares to be issued to limited partners in the merger is determined,
but before those shares actually are issued. In addition, the market
price could decrease because of sales of shares issued in the merger
and for other reasons.
. Tax Risks -- Additional Risks to PSI's Continued REIT Qualification.
PSI is subject to tax risks, including risks as to PSI's continued
qualification for income tax purposes as a "Real Estate Investment
Trust" or "REIT."
. Financing Risks. PSI, unlike the Partnership, has outstanding debt
($104 million at December 31, 1997) 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
reduced through the issuance of additional stock by PSI. PSI has
outstanding preferred stock ($922 million at December 31, 1997) and
intends to issue additional preferred stock that prevents payment of
distributions on PSI common stock unless distributions are paid
quarterly on the preferred stock.
. Merger Payments Based on Appraisals Instead of Arm's Length
Negotiations. Payments to public limited partners are based on a third
party appraisal of the Partnership's properties. However, appraisals
are opinions as of the date specified and are subject to certain
assumptions. The true worth or realizable value of these properties may
be higher or lower than the appraised value.
3
<PAGE>
BENEFITS TO INSIDERS
The merger involves certain benefits to PSI, including the following:
. Ownership of All Partnership Units. As a result of the merger, PSI will
own all of the Partnership units without taxable gain to PSI.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by PSI as owner
of 70% of the Partnership units.
. Issuance of Capital Stock. The merger will enable PSI, which is seeking
to expand its capital base, to issue up to 577,000 shares of common
stock.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other mini-
warehouses owned by PSI.
POTENTIAL BENEFITS OF THE MERGER
The general partners believe that the following are the principal potential
benefits to limited partners:
(i) Limited partners who elect to receive cash will have fully liquidated
their investment at approximately 140% of their original investment and at an
amount substantially higher than the prices in the limited secondary
transactions. Also, they will have simplified their tax reporting for years
after 1998.
(ii) For limited partners who receive PSI common stock, the principal
potential benefits are:
. Ownership Interest in a Diversified Real Estate Company. Because the
Partnership is not authorized to issue new securities or to reinvest
sale or financing proceeds, the Partnership is 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.
. Increased Liquidity. There is no active market for the Partnership
units. In comparison, PSI has approximately 115 million shares of PSI
common stock listed on the NYSE (approximately 79 million of which are
freely tradeable) with an average daily trading volume during the 12
months ended December 31, 1997 of 98,000 shares. Given PSI's market
capitalization and trading volume, limited partners who receive PSI
common stock are likely to enjoy a more active trading market and
increased liquidity for the PSI securities they receive.
. Simplified Tax Reporting. The merger also will simplify tax reporting
for years after 1998 for limited partners who receive PSI common
stock.
THE PARTNERSHIP
The Partnership is a California limited partnership organized in 1982,
which raised $33,000,000 from the sale of 66,000 units at $500 per unit in a
registered public offering of the units completed in January 1983. All of the
Partnership's net proceeds of that offering were invested in mini-warehouses
and, to a lesser extent, business parks. The Partnership owns jointly with PSI:
(1) interests in 27 mini-warehouses (the "Properties"); and (2) a 0.7% interest
in PS Business Parks, L.P. ("PSBP"), which owns and operates commercial
properties and is controlled by PSI.
The general partners of the Partnership are PSI and Hughes. The Properties
are managed by PSI and are operated under the "Public Storage" name. See
"Description of Partnership Properties." There is no active market for the
Partnership units. See "Distributions and Market Prices of Partnership Units."
4
<PAGE>
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. PSBP, an affiliate, owns and operates business
parks containing commercial and industrial rental space. At December 31, 1997,
PSI had equity interests (through direct ownership, as well as general and
limited partnership and capital stock interests) in 1,136 properties located in
38 states, consisting of 1,073 mini-warehouse facilities and 63 business parks.
In a series of transactions 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."
The principal executive offices of the Partnership and PSI are located at
701 Western Avenue, Glendale, California 91201-2397. The telephone number is
(818) 244-8080.
BACKGROUND AND REASONS FOR THE MERGER
THE MERGER HAS NOT BEEN NEGOTIATED AT ARM'S LENGTH. THE MERGER HAS BEEN
STRUCTURED BY PSI, WHICH CONTROLS THE PARTNERSHIP AND HAS SIGNIFICANT CONFLICTS
OF INTEREST IN CONNECTION WITH, AND WILL BENEFIT FROM, THE MERGER. BASED IN
SIGNIFICANT PART ON A THIRD PARTY APPRAISAL OF THE PROPERTIES AND ON THE OPINION
OF A FINANCIAL ADVISOR, IN WHICH THEY CONCUR, PSI AND HUGHES, THE GENERAL
PARTNERS OF THE PARTNERSHIP, BELIEVE THAT THE MERGER IS FAIR TO PUBLIC LIMITED
PARTNERS.
The Partnership was organized in 1982 to acquire properties jointly with
PSI. The Partnership is well beyond its original anticipated term. As
indicated in the Partnership's initial prospectus, the Partnership originally
anticipated selling the Properties and liquidating from five to eight years
after acquisition, i.e., between late 1988 and late 1991.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification, such as by
increasing its interest in affiliated entities, like the Partnership. PSI's
interest in the Partnership include (i) PSI and the Partnership jointly own the
Properties, (ii) PSI (through a wholly owned entity) and Hughes are general
partners of the Partnership, (iii) PSI (through a wholly owned entity) owns 70%
of the Partnership units and (iv) the Properties are managed by PSI. As a
result of the merger, PSI will own all of the Partnership units and almost all
Partnership administrative expenses, including the cost of operating as a public
entity, will be eliminated.
The consideration to be received by the limited partners in the merger is
based on the appraised value of the Properties as determined by a third party
appraiser, The Nicholson Group, Ltd. ("TNG"), as of March 31, 1998. Based in
significant part on a third party appraisal of the Properties and on the opinion
of a financial advisor, Robert A. Stanger & Co., Inc. ("Stanger"), in which they
concur, the general partners believe that the merger is fair to the public
limited partners.
The general partners believe that the consideration to be received by
limited partners in the merger compares favorably with: (1) the prices at which
limited secondary sales of Partnership units have been effectuated; (2) a range
of estimated going-concern values per unit; (3) an estimated liquidation value
per unit; and (4) the book value per unit. The general partners recognize that
these comparisons are subject to significant assumptions, qualifications and
limitations. See "The Merger -- Comparison of Consideration to be Received in
the Merger to Other Alternatives."
The general partners considered liquidation and continued ownership by
limited and general partners as alternatives to the merger. Based on a
comparison of the potential benefits and detriments of the merger with these
alternatives, the general partners concluded that the merger is more attractive
to limited partners than the
5
<PAGE>
alternatives considered. The general partners did not solicit any proposals for
the acquisition of the Partnership's assets.
In comparing the merger to other alternatives, PSI noted the following:
Liquidation. The general partners believe that the Properties may continue
to appreciate in value and accordingly are opposed to a sale of the Properties.
The merger provides limited partners with the opportunity either to convert
their investment into an investment in PSI, which like the Partnership primarily
owns mini-warehouses, or to receive cash based on the appraised value of the
Properties. However, if the Partnership liquidated its assets through asset
sales to unaffiliated third parties, limited partners would not need to rely
upon a real estate portfolio appraisal to estimate the fair market value of the
Properties.
Continued Ownership. The Partnership is operating profitably. Continued
ownership by the limited and general partners should provide limited partners
with continued distributions of net operating cash flow and participation in any
future potential appreciation of the Properties, as well as avoiding many of the
risks described under "Risk Factors." However, continued ownership by the
limited and general partners would fail to secure the potential benefits of the
merger to limited partners described under "The Merger -- Potential Benefits of
the Merger" or to PSI described under "The Merger -- Benefits to Insiders."
DETRIMENTS OF THE MERGER
For a summary of certain risks and detriments of the merger, refer to
"- Summary Risk Factors" beginning on page 2.
DETERMINATION OF AMOUNTS TO BE RECEIVED BY LIMITED PARTNERS IN THE MERGER
The general partners have determined the amount to be received by limited
partners in the merger based on the estimated net asset value per Partnership
unit computed as follows:
<TABLE>
<S> <C>
Estimated value of Partnership's interest in the
Properties (1) $45,407,000
Plus:
Market value of Partnership's
interest in PSBP (2) 3,092,000
Partnership's interest in other tangible
net assets (3) 336,000
-----------
Net proceeds available for distribution 48,835,000
Distributions to general partners (4) (1,789,000)
-----------
Distributions to limited partners $47,046,000
===========
Amount per Partnership unit (5) $ 713
===========
</TABLE>
_______________
(1) Reflects appraised value of the Properties determined by TNG, as of
March 31, 1998. Assumes proceeds from a deemed sale of the Properties
at the appraised value are allocated between the Partnership and PSI
based on the joint venture agreement.
(2) Reflects closing price of shares of PS Business Parks, Inc. on The
American Stock Exchange, Inc. ("AMEX") as of June 18, 1998 (the PSBP
partnership interests are exchangeable for those shares on a one unit
for one share basis). Assumes proceeds from a deemed sale of the units
at that price are allocated between the Partnership and PSI based on
the joint venture agreement. See note (7) to table in "The Merger --
Determination of Amounts to be Received by Limited Partners in the
Merger."
6
<PAGE>
(3) Includes the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of March 31, 1998.
(4) Represents subordinated incentive distributions payable to the general
partners under the partnership agreement and distributions attributable
to general partners' 1% capital interest in the Partnership.
(5) Based on 66,000 Partnership units.
FEDERAL INCOME TAX MATTERS
The merger will be a taxable event resulting in the recognition of taxable
----
gain or loss to taxable public limited partners who receive either cash or PSI
common stock. Gain or loss will be recognized by taxable limited partners in an
amount equal to the difference between the amount of cash or the fair market
value of the PSI common stock received in exchange and their adjusted basis in
their Partnership units. It has been estimated that an original limited partner
will realize approximately $500 of capital gain per Partnership unit. The
merger should not be a taxable event to PSI. See "Federal Income Tax
------ ---
Considerations -- The Merger."
FAIRNESS ANALYSIS; APPRAISAL AND OPINION OF FINANCIAL ADVISOR
FAIRNESS ANALYSIS. The merger has not been negotiated at arm's length.
The merger has been structured by PSI, which controls the Partnership and has
significant conflicts of interest in connection with, and will benefit from, the
merger. Based in significant part on the real estate portfolio appraisal of the
Properties and the opinion of a financial advisor, in which they concur, the
general partners believe that the merger is fair to public limited partners.
The general partners base their conclusion on the following factors: (i)
the consideration to be received by the limited partners in the merger is based
on the appraised value of the Properties as determined by TNG; (ii) the
Partnership has received a fairness opinion from Stanger relating to the
consideration to be received by public limited partners; (iii) although the
merger has been structured by PSI, the merger provides public limited partners
with a choice of converting their investment into an investment in PSI or
receiving cash for their investment; and (iv) based on certain significant
assumptions, qualifications and limitations, the consideration to be received by
public limited partners compares favorably with other alternatives.
The general partners believe that the engagement of TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements by
PSI and its affiliates and may receive fees in the future. See "The Merger --
Real Estate Portfolio Appraisal by TNG" and "- Fairness Opinion from Stanger."
ABSENCE OF ARM'S LENGTH NEGOTIATION. Although no independent
representatives were appointed to negotiate the terms of the merger on behalf of
public limited partners, the general partners believe that their conclusion
regarding the fairness of the merger is based upon the proper exercise of their
fiduciary duty. The general partners relied, in significant part, on the
fairness opinion and appraisal, which are subject to certain limitations.
FAIRNESS OPINION FROM STANGER. Stanger was engaged by the Partnership to
deliver a written summary of its determination as to the fairness of the
consideration to be received in the merger, from a financial point of view, to
public limited partners. The full text of the opinion is set forth in Appendix
C to this statement. Subject to the assumptions, qualifications and limitations
contained therein, the fairness opinion concludes that, as of the date of the
fairness opinion, the consideration to be received in the merger is fair to
public limited partners, from a financial point of view. In arriving at its
opinion, Stanger considered, among other things, the independent appraised value
of the Properties, the estimated liquidation value of the Partnership prepared
by the Partnership, based upon a sale of the Partnership's assets to a third
party for cash, financial analyses and projections prepared by the general
partners concerning the going-concern value from continuing operation of the
Partnership under its current business plan and
7
<PAGE>
a comparison of the prices at which limited secondary sales of Partnership units
have been effectuated with the consideration being received by public limited
partners in the merger. Stanger was not requested to, and therefore did not: (i)
select the method of determining the consideration being received by public
limited partners in the merger; (ii) make any recommendation to public limited
partners whether to select the cash or PSI common stock option in the merger; or
(iii) express any opinion as to the business decision to effect the merger,
alternatives to the merger or tax factors resulting from the merger or relating
to PSI's qualification as a REIT. Stanger's opinion is based on business,
economic, real estate and securities markets and other conditions as of the date
of its analysis. See "The Merger -- Fairness Opinion from Stanger."
COMPARISON OF PARTNERSHIP UNITS WITH PSI COMMON STOCK
The information below summarizes certain principal differences between the
Partnership units and the PSI common stock and the effect of the merger on
limited partners who receive PSI common stock in the merger (set forth in
italics below each caption). For an expanded discussion of these and other
comparisons and effects, see "The Merger -- Comparison of Partnership Units with
PSI Common Stock."
<TABLE>
<CAPTION>
PARTNERSHIP PSI
INVESTMENT OBJECTIVES AND POLICIES
<S> <C>
To provide (i) quarterly cash distributions from To maximize funds from operations ("FFO") allocable to holders
operations and (ii) long-term capital gains of PSI common stock and to increase shareholder value through
through appreciation in the value of the internal growth and acquisitions. FFO is a supplemental
Properties. 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>
Limited partners who receive PSI common stock in the merger will be changing
their investment from "finite-life" to "infinite life," and they will be able
to realize the value of their investment only by selling the 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, equity
stock and warrants and intends to issue additional securities under this
registration statement. There is no assurance that any such securities will be
issued. The preferred stock and the equity stock are issuable from time to
time in one or more series and would, if issued, have rights, including
dividend rights, conversion rights, voting rights, redemption price and
liquidation rights, as may be determined by PSI's Board of Directors. See
"Risk Factors Uncertainty Regarding Market Price of PSI Common Stock" and "--
Financing Risks -- Dilution and Subordination."
PSI has no plans with respect to a sale or financing of any of the
Properties.
<TABLE>
<S> <C>
BORROWING POLICIES
No outstanding borrowings. Permitted to borrow in furtherance of its investment
objectives, subject to certain limitations.
</TABLE>
PSI has outstanding debt and reinvests proceeds from borrowings. The
incurrence of debt increases the risk of loss of investment.
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PARTNERSHIP PSI
TRANSACTIONS WITH AFFILIATES
Limited partner approval required for a variety Restricted from acquiring properties from its affiliates or from
of business transactions with affiliates. See selling properties to them unless the transaction is approved by
"Amendment to Partnership Agreement." a majority of PSI's independent directors and is fair to PSI
based on an independent appraisal.
</TABLE>
Given PSI's control of all voting decisions with respect to the Partnership,
both PSI and the Partnership can enter into transactions with affiliates
without the need for approval of the public shareholders and public limited
partners, respectively. In the case of PSI, however, these transactions
require approval of PSI's independent directors.
PROPERTIES (As of December 31, 1997)
<TABLE>
<CAPTION>
<S> <C>
Equity interests in 27 properties in 13 states. Direct and indirect equity interests in 1,136 properties
Also owns interest in PSBP. in 38 states.
</TABLE>
Because PSI owns substantially more property interests in more states than
the Partnership, PSI's results of operations are less affected by the
operations of a single property than are those of the Partnership, and it would
be more difficult to liquidate PSI than the Partnership within a reasonable
period of time.
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<TABLE>
<S> <C>
No active trading market for Partnership units. PSI common stock is traded on the NYSE. During the 12 months
The Partnership may not issue securities having ended December 31, 1997, the average daily trading volume of
priority over Partnership units. PSI common stock was 98,000 shares. PSI has issued, and may
in the future issue, securities that have priority over PSI common
stock as to cash flow, distributions and liquidation proceeds.
</TABLE>
Distributions are paid to limited partners from cash available for
distribution. PSI is required to distribute at least 95% of its ordinary REIT
taxable income in order to maintain its qualification as a REIT. 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 limited partner who receives PSI common stock in the merger will have an
investment for which the market is broader and more active than the market for
Partnership units. Distributions on PSI common stock are lower than the
distributions on the Partnership units. Distributions on PSI common stock also
are subject to priority of preferred stock.
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
The Partnership Agreement does not provide for Subject to the rules of the NYSE and applicable provisions of
the issuance of additional Partnership units. California law, PSI has issued and intends to continue
to issue authorized capital stock without shareholder approval.
</TABLE>
Given the ownership level of PSI common stock by the Hughes family and PSI's
flexibility to issue capital stock, including senior securities with special
voting rights and priority over PSI common stock, and control of all Partnership
voting decisions by PSI, both PSI and the Partnership are in a position to deter
attempts to obtain control in transactions not approved by management.
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial data in this section should be read in conjunction with the
financial statements included herein and in the documents incorporated herein by
reference.
PSI
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
($ In thousands, except per share data)
OPERATING DATA:
Total revenues $114,680 $147,196 $ 212,550 $ 338,951 $ 470,844 $ 100,740 $ 142,566
Depreciation and amortization 24,998 28,274 40,760 64,967 91,356 19,787 28,219
Interest expense 6,079 6,893 8,508 8,482 6,792 1,597 1,162
Minority interest in income 7,291 9,481 7,137 9,363 11,684 2,447 6,352
Net income $ 28,036 $ 42,118 $ 70,386 $ 153,549 $ 178,649 $ 42,318 48,364
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and cash equivalents $ 10,532 $ 20,151 $ 80,436 $ 26,856 $ 41,455 $ 125,436 $ 243,190
Total assets 666,133 820,309 1,937,461 2,572,152 3,311,645 2,681,307 3,613,804
Total debt 84,076 77,235 158,052 108,443 103,558 107,909 108,024
Minority interest 193,712 141,227 112,373 116,805 228,479 110,535 365,243
Shareholders' equity $376,066 $587,786 $1,634,503 $2,305,437 $2,848,960 $2,422,870 $3,072,071
PER SHARE OF COMMON STOCK:
Net income-basic (1) $ .98 $ 1.05 $ .96 $ 1.10 $ .92 $ .26 $ .26
Net income-diluted (1) .98 1.05 .95 1.10 .91 .26 .26
Distributions (2) .84 .85 .88 .88 .88 .22 .22
Book value (at end of period)(3) $ 11.93 $ 12.66 $ 13.99 $ 15.43 $ 17.19 $ 15.89 $ 17.98
Weighted average-diluted shares of
common stock (in thousands) 17,558 24,077 41,171 77,358 98,961 89,476 110,036
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP
Three Months
Years Ended December 31, Ended March 31,
---------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
($ In thousands, except per unit data)
OPERATING DATA:
Total revenues $10,113 $10,692 $10,998 $11,258 $11,467 $ 2,733 $ 2,940
Depreciation and amortization 2,028 2,141 2,263 2,401 2,348 577 591
Interest expense 196
Minority interest in income 2,406 2,475 2,341 1,862 1,708 371 414
Net income 1,904 2,061 2,067 2,600 3,102 685 842
Limited partners' share 1,701 1,806 1,569 2,257 2,754 599 755
General partners' share 203 255 498 343 348 86 87
BALANCE SHEET DATA (AT END OF PERIOD)
Cash and cash equivalents $ 831 $ 1,855 $ 511 $ 506 $ 819 $ 561 $ 1,088
Total assets $39,452 $39,040 $36,307 $34,941 $33,942 $34,596 $33,666
LIMITED PARTNERS' PER UNIT DATA (4)
Net income $ 25.77 $ 27.36 $ 23.77 $ 34.20 $ 41.73 $ 9.08 $ 11.44
Cash distributions (5) $ 25.00 $ 32.00 $ 65.10 $ 43.20 $ 43.20 $ 10.80 $ 10.80
Book value (limited partners' equity) $253.11 $248.47 $207.14 $198.14 $196.67 $196.41 $197.30
</TABLE>
PARTNERSHIP - PRO FORMA
<TABLE>
<CAPTION>
PER PARTNERSHIP UNIT (6):
<S> <C>
Net income-diluted $ 6.62
Distributions paid on common stock 5.60
Book value (at December 31, 1997) $437.73
</TABLE>
- ---------------
(1) Net income per common share is computed in accordance with Statement of
Financial Accounting Standard No. 128 (SFAS 128) --"Earnings per Share" and
is presented on the diluted basis using the weighted average shares of PSI
common stock outstanding-diluted. The diluted net income per common share is
computed using the weighted average common shares outstanding (adjusted for
stock options). The class B common stock is not included in the
determination of net income per common share because all contingencies
required for the conversion to PSI Common Stock have not been satisfied as
of March 31, 1998. In addition, the inclusion of PSI's convertible preferred
stock in the determination of net income has been determined to be anti-
dilutive.
(2) For federal income tax purposes all distributions on the PSI common stock
are from ordinary income. All distributions for generally accepted
accounting principles ("GAAP") were from investment income.
(3) Book value per share computed based on the number of shares of PSI common
stock and PSI class B common stock outstanding.
(4) Limited partners' per unit data is based on the weighted average number of
units (66,000) outstanding during the year.
(5) A portion of the operating cash reserve of the Partnership estimated to be
$22.95 per unit was distributed in 1995.
(6) Presents pro forma amounts of PSI per equivalent Partnership unit. Net
income, cash distributions and book value data are calculated by multiplying
PSI's historical results (before impact of the merger, which is not expected
to have a material impact on PSI's per share amounts) by an assumed exchange
ratio of 25.46 (the Partnership's merger value of $713 divided by an assumed
issue price of PSI common stock of $28).
11
<PAGE>
RELATIONSHIPS
The following charts show the relationships among Hughes, PSI and the
Partnership both before and after the merger (assuming maximum cash elections).
As reflected in the charts below, PSI is controlled by Hughes, its chairman of
the board and chief executive officer. PSI and Hughes are the general partners
of the Partnership. PSI and the Partnership jointly own the Properties, which
are managed by PSI.
Before the Merger
-----------------
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the relationships among Hughes, PSI and the Partnership
before the merger: Hughes owns 33% of PSI and Public Shareholders own 67% of
PSI; Hughes is a general partner of the Partnership; PSI is a general
partner, joint venturer and the property manager of the Partnership and PSI
owns 70% of the units in the Partnership and Public Limited Partners own 30%
of the units in the Partnership.
After the Merger
----------------
(Assuming Maximum Cash Elections)
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the relationships among Hughes, PSI and the Partnership
after the merger (assuming maximum cash elections): Hughes owns 33% of PSI
and Public Shareholders own 67% of PSI; Hughes is a general partner of the
Partnership; PSI is a general partner, joint venturer and the property
manager of the Partnership and PSI owns 100% of the units in the Partnership.
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER
------------------------------------------------------------------------
RELATIONSHIPS.
--------------
PERCENTAGE OF OWNERSHIP OF THE PARTNERSHIP BY PSI REPRESENTS PERCENTAGE OF
UNITS OF LIMITED PARTNERSHIP INTEREST OWNED BY PSI. BOTH BEFORE AND AFTER THE
MERGER, PSI'S GENERAL AND LIMITED PARTNER INTERESTS ARE OWNED INDIRECTLY THROUGH
WHOLLY OWNED ENTITIES. PERCENTAGE OF STOCK OWNERSHIP OF PSI BY HUGHES
REPRESENTS PERCENTAGE OF OUTSTANDING SHARES OF PSI COMMON STOCK OWNED BY HUGHES
AND MEMBERS OF HIS IMMEDIATE FAMILY.
12
<PAGE>
RISK FACTORS
The merger involves certain risks and detriments that should be considered
by public limited partners, including the following:
VOTE BY PSI
PSI, as owner of 70% of the Partnership units, owns sufficient units to
approve the merger without the vote of any other limited partner and is voting
its units in favor of the merger.
NO ARM'S LENGTH NEGOTIATION OR INDEPENDENT REPRESENTATIVES
The merger has not been negotiated at arm's length. No independent persons
were hired to negotiate the terms of the merger on behalf of public limited
partners. If such persons had been hired, the terms of the merger may have been
more favorable to them. In addition, no other person was asked to make an offer
to buy the Partnership's assets. Such offers could have generated higher
prices.
TAX TO LIMITED PARTNERS
The merger will be a taxable event to public limited partners, resulting in
the recognition of substantial gain to original taxable limited partners who
receive either cash or PSI common stock.
CHANGE FROM FINITE LIFE TO INFINITE LIFE
The Partnership is a limited partnership organized to hold interests in
properties for a fixed 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 merger, limited partners receiving PSI common
stock will be able to liquidate their investment only by selling their shares on
the NYSE or in private transactions. The market value of PSI common stock may
or may not reflect the full fair market value of PSI's assets and will
fluctuate.
LOWER LEVEL OF DISTRIBUTIONS AFTER THE MERGER
The level of distributions to a limited partner who receives PSI common
stock in the merger will be significantly lower after the merger than the amount
received as a limited partner of the Partnership.
POTENTIAL LOSS OF FUTURE APPRECIATION
The Partnership's assets may increase in value and might be able to be sold
for higher prices at a later date. PSI will realize the benefit of any increase
in value.
NO DISSENTERS' RIGHTS OF APPRAISAL
Under California law, limited partners will not be entitled to dissenters'
---
rights in connection with the merger.
CONFLICTS OF INTEREST
RELATIONSHIPS AMONG PARTIES. Because of the relationships among PSI, the
Partnership and Hughes, there are significant conflicts of interest in
connection with the merger. PSI and Hughes are the general partners of the
Partnership, and PSI has a significant ownership interest in the Partnership,
owning 70% of the Partnership units. See "Summary -- Relationships."
STRUCTURING OF MERGER BY INSIDERS. The merger has been initiated and
structured by PSI, and the merger has not been negotiated at arm's length. PSI
has an interest in acquiring the Partnership units at the lowest possible
13
<PAGE>
price, while limited partners have an interest in selling their units at the
highest possible price. No independent persons were hired to negotiate the terms
of the merger on behalf of public limited partners. If such persons had been
hired, the terms of the merger might have been more favorable to public limited
partners.
BENEFITS TO INSIDERS. The merger involves certain benefits to PSI,
including the following:
. Ownership of All Partnership Units. As a result of the merger, PSI will
own all of the Partnership units without taxable gain to PSI.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by PSI as owner
of 70% of the Partnership units.
. Issuance of Capital Stock. The merger will enable PSI, which is seeking
to expand its capital base, to issue up to 577,000 shares of common
stock.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other mini-
warehouses owned by PSI.
CONTROL AND INFLUENCE OVER PSI BY THE HUGHES FAMILY AND PSI OWNERSHIP
LIMITATIONS
Public PSI shareholders are substantially limited in their ability to
control PSI. The Hughes family owns approximately 33% of the outstanding shares
of PSI common stock (approximately 37% upon conversion of the PSI class B common
stock). Consequently, the Hughes family effectively controls matters submitted
to a vote of PSI shareholders, 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, 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 or equity 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 possible, a concentration of ownership that might jeopardize the
ability of PSI to qualify as a REIT and to obtain the favorable tax benefits
afforded a qualified REIT. See "- Tax Risks -- Increased Risk of 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 then market value. See "Description
of PSI Capital Stock -- Ownership Limitations."
UNCERTAINTY REGARDING MARKET PRICE OF PSI COMMON STOCK
The number of shares of PSI common stock that would be received by limited
partners is based on the average market price of PSI common stock for the 20
consecutive trading days ending on September 4, 1998. Since the market price of
PSI common stock fluctuates, the market value of PSI common stock that limited
partners may receive in the merger may decrease after the date that the number
of shares is determined, but before those shares actually are issued. In
addition, because of possible increased selling activity following issuance of
shares in the merger and other factors, such as changes in interest rates and
market conditions, the market value of PSI common stock that limited partners
may receive in the merger may decrease following the merger.
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<PAGE>
TAX RISKS OF OWNERSHIP OF PSI COMMON STOCK -- FAILURE TO MAINTAIN REIT STATUS
Limited partners who elect to receive PSI Common Stock will be subject to
the risk that PSI may not qualify as a REIT. See "Federal Income Tax
Considerations -- General Tax Treatment of PSI," and "- Consequences of the PSMI
Merger on PSI's Qualification 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.
FINANCING RISKS
DILUTION AND SUBORDINATION. The interest of PSI shareholders in PSI,
including persons who receive shares in the merger, 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 merger. 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 $922 million in respect of preferred stock outstanding at
December 31, 1997), 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 $80.7 million per year in respect of
preferred stock outstanding at December 31, 1997), 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
"Federal Income Tax Considerations."
Certain of these securities have been issued under a currently effective
registration statement of PSI for preferred stock, common stock, equity stock
and warrants. PSI intends to issue additional securities under this
registration statement. There is no assurance that any such securities will be
issued. If PSI issues additional preferred or equity stock, the interest of PSI
shareholders could be further subordinated, and if PSI issues additional common
stock, the interest of PSI shareholders could be diluted. See "Description of
PSI Capital Stock" for a discussion of the terms of the preferred stock, common
stock and equity stock.
RISK OF LEVERAGE. In making real estate investments, PSI, unlike the
Partnership, has outstanding, and may continue to incur, debt, subject to
certain limitations. The incurrence of debt increases the risk of loss of the
investment. At December 31, 1997, PSI's debt of $104 million was approximately
3.1% of its total assets.
MERGER PAYMENTS BASED ON APPRAISAL INSTEAD OF ARM'S LENGTH NEGOTIATION
The payments to be received by public limited partners in the merger is
based in significant part on a third party appraised value of the Properties.
However, appraisals are opinions as of the date specified and are subject to
certain assumptions and may not represent the true worth or realizable value of
the Properties. There can be no assurance that if the Properties were sold,
they would be sold at the appraised values; the sales prices might be higher or
lower.
OPERATING RISKS
VALUE OF INVESTMENT REDUCED BY GENERAL RISKS OF REAL ESTATE OWNERSHIP.
Like the Partnership, 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 funds which may render the sale or financing
of a property difficult or unattractive and changes in tax, real estate and
zoning laws.
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<PAGE>
SIGNIFICANT COMPETITION AMONG MINI-WAREHOUSES. Like the Partnership, 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 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 (estimated at $4 million) from
environmental contamination or potential contamination and PSI is not aware of
any environmental contamination of its facilities material to its overall
business, financial condition or results of operation.
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.
MERCHANDISE AND PORTABLE SELF-STORAGE COMPANIES. At almost all of PSI's
mini-warehouses, PS Orangeco, Inc. (the "Lock/Box Company") offers for sale to
the general public, including mini-warehouse tenants, a variety of items such as
locks and boxes to assist in the moving and storage of goods. Because the
revenues
16
<PAGE>
received from the sale of these items would be nonqualifying income to
PSI, the nonvoting preferred stock of the Lock/Box Company (representing 95% of
the equity) is owned by PSI. The voting common stock of the Lock/Box Company
(representing 5% of the equity) is owned by the Hughes family, which will be
able to control the operations of the Lock/Box Company by reason of their
ownership of its voting stock.
Public Storage Pickup & Delivery, Inc. ("PSPUD") was organized in 1996 to
operate a portable self-storage business. Because the revenues from this
business would be non-qualifying income to PSI, the capital stock of PSPUD is
owned by the Lock/Box Company. In order to continue to meet the requirements
for qualification as a REIT, the value of the nonvoting preferred stock of the
Lock/Box Company held by PSI (which includes the value of the Lock/Box Company's
interest in PSPUD) may not exceed 5% of the value of PSI's total assets. The
ability of PSPUD to operate profitably depends upon its success in the
relatively new field of portable self-storage, and there can be no assurance as
to its profitability. As a start-up enterprise, PSPUD incurred operating losses
of $31,700,000 in 1997 and $9,900,000 during the first quarter of 1998.
LIABILITIES WITH RESPECT TO ACQUIRED GENERAL PARTNER INTERESTS. In
succeeding to substantially all of the properties and operations of PSMI in the
PSMI Merger, PSI became subject to the possibility of 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 agreed to
indemnify PSI for pre-merger activities and shares of PSI class B common stock
received in the PSMI Merger were placed in escrow 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
115 million shares of PSI common stock and seven million shares of PSI class B
common stock outstanding. Of these shares, approximately 79.2 million shares of
PSI common stock are tradeable without restriction (except as to affiliates of
PSI) or further registration under 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 under the Securities Act.
The beneficial owners of 15.5 million of the restricted securities (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
certain public information, volume and manner of sale requirements in Rule 144.
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. Sales of substantial amounts of such PSI common stock in the
public market could adversely affect the market price of the PSI common stock.
BENEFITS TO INSIDERS
The merger involves certain benefits to PSI, including the following:
. Ownership of All Partnership Units. As a result of the merger, PSI will
own all of the Partnership units without taxable gain to PSI.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by PSI as owner
of 70% of the Partnership units.
. Issuance of Capital Stock. The merger will enable PSI, which is seeking
to expand its capital base, to issue up to 577,000 shares of common
stock.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other mini-
warehouses owned by PSI.
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<PAGE>
THE MERGER
GENERAL
The acquisition of the Partnership units not currently owned by PSI will be
accomplished in the merger as follows:
. A wholly-owned, second tier subsidiary of PSI will be merged into the
Partnership.
. Each Partnership unit (other than units owned by PSI) will be converted
into the right to receive a value of $713 in PSI common stock or, at the
election of a limited partner, in cash. To be effective a cash election
must be made by September 11, 1998, in accordance with the accompanying
cash election form.
. Distributions will be made to holders of Partnership units to cause the
estimated net asset value per Partnership unit as of September 14, 1998
to be substantially equivalent to $713. In computing the estimated net
asset value per unit as of September 14, 1998, the PSBP partnership
interests will be valued at the average of the per share closing price
on the AMEX of the shares of PS Business Parks, Inc. during the 20
consecutive trading days ending on September 4, 1998.
. For purposes of the merger, the market value of the PSI common stock
will be the average of the per share closing prices on the NYSE of the
PSI common stock during the 20 consecutive trading days ending on
September 4, 1998.
. Following the merger, PSI (through a wholly owned entity) will own all
Partnership units.
. PSI (through a wholly owned entity) and Hughes retain their general
partnership interests in the Partnership, and the Partnership remains in
existence.
It is estimated that the aggregate consideration (cash or PSI common stock
or a combination of the two) to be paid by PSI to acquire in the merger the
Partnership units owned by the public limited partners will be $14,500,000. See
"- Determination of Amounts to be Received by Limited Partners in the Merger"
and "- Costs of the Merger."
BACKGROUND AND REASONS FOR THE MERGER
THE MERGER HAS NOT BEEN NEGOTIATED AT ARM'S LENGTH. THE MERGER HAS BEEN
STRUCTURED BY PSI, WHICH CONTROLS THE PARTNERSHIP AND HAS SIGNIFICANT CONFLICTS
OF INTEREST IN CONNECTION WITH, AND WILL BENEFIT FROM, THE MERGER. BASED IN
SIGNIFICANT PART ON A THIRD PARTY APPRAISAL OF THE PROPERTIES AND ON THE OPINION
OF A FINANCIAL ADVISOR, IN WHICH THEY CONCUR, PSI AND HUGHES, THE GENERAL
PARTNERS OF THE PARTNERSHIP, BELIEVE THAT THE MERGER IS FAIR TO THE PUBLIC
LIMITED PARTNERS.
The Partnership was organized in 1982 and raised $33 million in a public
offering. All of the proceeds from the offering have been invested to acquire
properties jointly with PSI. PSMI was the sponsor of the Partnership.
As indicated in the original prospectus, the Partnership originally
anticipated selling the Properties and liquidating from five to eight years
after acquisition, i.e., between late 1988 and late 1991. By 1990, significant
changes had taken place in the financial and real estate markets affecting the
timing of any proposed sale of the Properties, including: (i) the increased
construction of mini-warehouses from 1984 to 1988, which had increased
competition, (ii) the general deterioration of the real estate market (resulting
from a variety of factors, including the 1986 changes in tax laws), which had
significantly affected property values and decreased real estate sales
activities, (iii) the reduced sources of real estate financing (resulting from a
variety of factors, including adverse developments in the savings and loan
industry) and (iv) the glut in the real estate market caused by overbuilding and
sales of properties acquired by financial institutions. Accordingly, the
Properties were not marketed during the originally anticipated liquidation
period.
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In view of the events affecting the timing of the sale of the Properties,
PSMI concluded that the limited partners of the Partnership, 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. Accordingly, PSI purchased
Partnership units from those limited partners who desired to sell, including
through tender offers in 1995 and 1996. As a result of these purchases, public
limited partners now own only 30% of the units with the balance owned by PSI.
Since the Partnership is beyond its original anticipated term and the public
limited partners own only a minority of the units, the general partners have
decided to eliminate through the merger the ongoing costs of a public structure
and the conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal conflicts
involve the competition of the Properties with other mini-warehouses owned by
PSI.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification, such as by
increasing its interest in affiliated entities, like the Partnership. PSI's
interest in the Partnership include (i) PSI and the Partnership jointly own the
Properties, (ii) PSI (through a wholly-owned entity) and Hughes are general
partners of the Partnership, (iii) PSI (through a wholly owned entity) owns 70%
of the Partnership units and (iv) the Properties are managed by PSI. As a
result of the merger, PSI will own all of the Partnership units and almost all
Partnership administrative expenses will be eliminated.
FAIRNESS ANALYSIS
The merger has not been negotiated at arm's length. The merger has been
structured by PSI, which controls the Partnership and has significant conflicts
of interest in connection with, and will benefit from, the merger. However,
based in significant part on a third party appraisal of the Properties and on
the opinion of Stanger, in which they concur, the general partners believe that
the merger is fair to public limited partners.
The general partners based their conclusions on the following factors: (i)
the consideration to be received by the limited partners in the merger is based
on the appraised value of the Properties as determined by TNG; (ii) the
Partnership has received a fairness opinion from Stanger relating to the
consideration to be received by public limited partners; (iii) although the
merger has been structured by PSI, the merger provides public limited partners
with a choice of converting their investment into an investment in PSI or
receiving cash for their investment; and (iv) based on certain significant
assumptions, qualifications and limitations, the consideration to be received by
public limited partners compares favorably with other alternatives.
The general partners believe that the engagement of TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements
and may receive fees in the future. See "- Real Estate Portfolio Appraisal by
TNG" and "- Fairness Opinion from Stanger."
ALTERNATIVES TO THE MERGER
The general partners considered liquidation and continued ownership by the
limited and general partners as alternatives to the merger. In order to
determine whether the merger or one of its alternatives would be more
advantageous to public limited partners, the general partners compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of the alternatives.
LIQUIDATION
BENEFITS OF LIQUIDATION. An alternative to the merger would be to
liquidate the Partnership's assets, distribute the net liquidation proceeds to
the partners and thereafter dissolve the Partnership. Through such liquidation,
the Partnership would provide for a final disposition of its partners' interests
in the Partnership. Limited partners would receive cash liquidation proceeds
(as they will if they make cash elections). If the Partnership liquidated its
assets through asset sales to unaffiliated third parties, limited partners would
not need to rely upon a real estate portfolio appraisal of the fair market value
of the Partnership. The Partnership would be valued through arm's length
negotiations between the Partnership and prospective purchasers.
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DISADVANTAGES OF LIQUIDATION. Over the last several years, the
performance of the Properties has improved as described under "- Continued
Ownership of the Partnership -- Benefits of Continued Ownership." The general
partners believe that the improvement may continue. The merger provides limited
partners with the opportunity either to convert their investment in the
Partnership into an investment in PSI, which like the Partnership primarily owns
mini-warehouses, or to receive cash based on the appraised value of the
Properties. In contrast to the merger, the Partnership would also be expected
to incur certain costs in a liquidation.
Limited partners should recognize that appraisals are opinion as of the
date specified and are subject to certain assumptions and may not represent the
true worth or realizable value of the Properties. There can be no assurance
that if the Properties were sold, they would be sold at the appraised value; the
sales price might be higher or lower than the appraised value.
CONTINUED OWNERSHIP OF THE PARTNERSHIP
BENEFITS OF CONTINUED OWNERSHIP. Another alternative to the merger
would be to continue the Partnership in accordance with its existing business
plan, with the Partnership continuing to be owned by the limited and general
partners. The Partnership is operating profitably.
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
Properties. For example, from 1995 to 1997, weighted average occupancy for the
mini-warehouses increased slightly from 89% to 90%. During this same period,
realized annual rents per occupied square foot for the mini-warehouses increased
from an average of $7.09 to $7.59. Despite significant recent increases in the
development of new mini-warehouses, the general partners believe that the
financial performance of the Properties 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 could be expected to
increase. See "Description of Partnership Properties."
A number of advantages could be expected to arise from the continued
ownership of the Partnership by the limited and general partners. Limited
partners would continue to receive regular quarterly distributions of net cash
flow arising from operations and the sale or refinancing of the Partnership's
assets. Given the currently improving market conditions for mini-warehouses,
the general partners believe that the level of these distributions to limited
partners may increase. Continued ownership of the Partnership by the general
and limited partners affords limited partners with the opportunity to
participate in any future appreciation in the Partnership's assets. In
addition, this decision, if elected, would mean that there would be no change in
the nature of the investment of limited partners. This option avoids whatever
disadvantages might be deemed inherent in the merger. See "Risk Factors" for
discussion of various risks associated with the merger.
DISADVANTAGES OF CONTINUED OWNERSHIP. Not only is the Partnership well
beyond its anticipated term, but continued ownership of the Partnership by the
limited and general partners fails to secure the benefits that the limited and
general partners expect to result from the merger. The benefits to limited
partners are highlighted under "- Potential Benefits of the Merger," and the
benefits to the general partners are highlighted under "Benefits to Insiders."
The merger affords limited partners increased liquidity. In addition, because
the Partnership is not authorized to issue new securities or to reinvest sale or
financing proceeds, the Partnership is 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.
DETERMINATION OF AMOUNTS TO BE RECEIVED BY LIMITED PARTNERS IN THE MERGER
In connection with the merger, limited partners will receive a value of
$713 per Partnership unit in cash or PSI common stock. The general partners
have determined this amount based on the estimated net asset value per unit
computed as follows:
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<TABLE>
<S> <C>
Estimated value of Partnership's interest in the
Properties (1)
$45,407,000
Plus:
Market value of Partnership's
interest in PSBP (2) 3,092,000
Partnership's interest in other tangible
net assets (3) 336,000
-----------
Net proceeds available for distribution 48,835,000
Distributions to general partners (4) (1,789,000)
-----------
Distributions to limited partners $47,046,000
===========
Amount per Partnership unit (5)(6)(7)(8) $ 713
===========
</TABLE>
_______________
(1) Reflects appraised value of the Properties determined by TNG, as of
March 31, 1998. Assumes proceeds from a deemed sale of the Properties
at the appraised value are allocated between the Partnership and PSI
based on the joint venture agreement.
(2) Reflects closing price of shares of PS Business Parks, Inc. on the AMEX
as of June 18, 1998 (the PSBP partnership interests are exchangeable
for those shares on a one unit for one share basis). Assumes proceeds
from a deemed sale of the units at that price are allocated between the
Partnership and PSI based on the joint venture agreement. See note (7)
below.
(3) Includes the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of March 31, 1998.
(4) Represents subordinated incentive distributions payable to the general
partners under the partnership agreement and distributions attributable
to general partners' 1% capital interest in the Partnership.
(5) Based on 66,000 Partnership units.
(6) Upon completion of the merger, each Partnership unit would be converted
into PSI common stock with a value of $713 or, at the election of a
limited partner, in cash. The number of shares of PSI common stock to
be issued in the merger will be determined by dividing $713 by the
average of the closing prices of PSI common stock during the 20
consecutive trading days ending on September 4, 1998. The market price
of PSI common stock may fluctuate after the date that the number of
shares to be issued to limited partners in the merger is determined and
before those shares actually are issued.
(7) Distributions will be made to limited partners to cause the estimated
net asset value per Partnership unit as of the date of the merger to be
substantially equivalent to $713 per unit. In computing the estimated
net asset value per unit as of September 14, 1998, the PSBP partnership
interests will be valued at the average of the per share closing price
on the AMEX of the shares of PS Business Parks, Inc. during the 20
consecutive trading days ending on September 4, 1998.
(8) Original purchase price of a Partnership unit was $500.
POTENTIAL BENEFITS OF THE MERGER
The general partners believe that the following are the principal potential
benefits to limited partners:
(i) Limited partners who elect to receive cash will have fully liquidated
their investment at approximately 140% of their original investment and at an
amount substantially higher than the prices in the limited secondary
transactions. Also, they will have simplified their tax reporting for years
after 1998.
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(ii) For limited partners who receive PSI common stock, the principal
potential benefits are:
. Ownership Interest in a Diversified Real Estate Company. Because the
Partnership is not authorized to issue new securities or to reinvest
sale or financing proceeds, the Partnership is 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.
. Increased Liquidity. There is no active market for the Partnership
units. In comparison, PSI has approximately 115 million shares of PSI
common stock listed on the NYSE (approximately 79 million of which are
freely tradeable) with an average daily trading volume during the 12
months ended December 31, 1997 of 98,000 shares. Given PSI's market
capitalization and trading volume, limited partners who receive PSI
common stock are likely to enjoy a more active trading market and
increased liquidity for the PSI securities they receive.
. Simplified Tax Reporting. The merger also will simplify tax reporting
for years after 1998 for limited partners who receive PSI common stock.
PSI shareholders will receive Form 1099-DIV to report their dividends
from PSI. Form 1099-DIV is substantially easier to understand than the
Schedule K-1 prepared for the reporting of the financial results of the
Partnership.
DETRIMENTS OF THE MERGER
For a discussion of certain risks and detriments of the merger, see "Risk
Factors" beginning on page 13.
FAIRNESS ANALYSIS
CONCLUSIONS. Based upon an analysis of the merger, the general partners
have concluded that (i) the terms of the merger are fair to public limited
partners and (ii) after comparing the potential benefits and detriments of the
merger with alternatives, the merger is more advantageous to public limited
partners than such alternatives.
Although the general partners reasonably believe the terms of the merger
are fair to public limited partners, the general partners have significant
conflicts of interest with respect to the merger. The merger has been initiated
and structured by PSI, one of the general partners. See "Summary --
Relationships" and "Risk Factors -- Conflicts of Interest."
MATERIAL FACTORS UNDERLYING CONCLUSIONS OF GENERAL PARTNERS. The following
is a discussion of the material factors underlying the conclusions of the
general partners. The general partners have not quantified the relative
importance of these factors.
1. Consideration Offered. The general partners believe that (i) basing
the consideration to be paid to public limited partners in the merger on the
value of the Partnership's assets is reasonable and consistent with the
partnership agreement, (ii) the Partnership's net asset value represents a fair
estimate of the value of its assets, net of liabilities, and constitutes a
reasonable basis for determining the consideration to be received by public
limited partners, (iii) the allocation of the appraised value of the Properties
between the Partnership and PSI is fair because it reflects the amount each
would receive upon the Partnership's liquidation under the joint venture
agreement and (iv) the allocation of the Partnership's net asset value between
the limited and general partners is fair because it reflects the amount they
would receive upon the Partnership's liquidation under the partnership
agreement. There was no negotiation regarding the basis for determining the
consideration to be paid to public limited partners in the merger. See
"- Background and Reasons for the Merger."
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<PAGE>
2. Choice as to Form of Consideration. The merger provides public limited
partners with the choice of either (A) converting their investment into an
investment in PSI, which generally owns the same type of properties as the
Partnership and which has acquired, and is expected to continue to acquire,
additional properties or (B) receiving in cash the amounts they would receive if
the Properties were sold at their appraised values and the Partnership's
interest in PSBP were sold at its market value and the Partnership were
liquidated (without any reduction for commissions and other sales expenses).
3. Independent Portfolio Appraisal and Fairness Opinion. The conclusions
of the general partners are based in significant part upon the portfolio
appraisal prepared by TNG and Stanger's fairness opinion. The general partners
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 TNG's portfolio appraisal and Stanger's fairness
opinion. The general partners believe that the engagement of TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements by
PSI and its affiliates and may receive fees in the future. See "- Real Estate
Portfolio Appraisal by TNG" and "- Fairness Opinion from Stanger."
4. Comparison of Payments to be Received in the Merger to Other
Alternatives. The payments to be received in the merger of $713 per Partnership
unit generally compares favorably with (A) the prices at which limited secondary
sales of units have been effectuated, (B) a range of estimated going-concern
value per unit ($651 to $676), (C) an estimated liquidation value per unit
($686) and (D) the book value per unit as of December 31, 1997 ($197). The
general partners recognize that this comparison is subject to significant
assumptions, qualifications and limitations. See "- Comparison of Consideration
to be Received in the Merger to Other Alternatives."
5. Lower Level of Distributions to Limited Partners After the Merger. The
level of distributions to limited partners who receive PSI common stock in the
merger will be significantly lower after the merger than before.
6. Conflicts of Interest. The merger has been initiated and structured by
PSI, one of the general partners. Independent representatives were not engaged
to negotiate these arrangements on behalf of public limited partners, and the
terms of the merger are not the result of arm's length negotiations.
The general partners do not believe that the absence of independent
representatives to negotiate the merger undermines the fairness of the merger.
Based upon the use of an independent appraisal firm and the Stanger fairness
opinion, the general partners considered that the engagement of such independent
representatives was not necessary or cost effective.
COMPARISON OF CONSIDERATION TO BE RECEIVED IN THE MERGER TO OTHER ALTERNATIVES
GENERAL. The general partners compared the consideration to be received in
the merger, i.e., a value of $713 per Partnership unit to: (i) the prices at
which limited secondary sales have been effectuated; (ii) estimates of the value
of the Partnership on a liquidation basis assuming that its assets were sold at
their appraised fair market value and the net proceeds distributed between the
joint venture partners in accordance with the joint venture agreement and
between the limited and general partners in accordance with the partnership
agreement; and (iii) estimates of the value of the Partnership on a going-
concern basis assuming that it were to continue as a stand-alone entity and its
assets sold at the end of a five-year holding period. Due to the uncertainty in
establishing these values, the Partnership established a range of estimated
values for certain of the alternatives, representing a high and low estimated
value for the potential consideration. Since the value of the consideration for
alternatives to the merger 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 general partners 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.
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The results of these comparative analyses are summarized in the following
tables. Limited partners should bear in mind that the estimated values assigned
to the alternate forms of consideration are based on a variety of assumptions
that have been made by the Partnership. These assumptions relate, among other
things, to: projections as to the future income, expenses, cash flow and other
significant financial matters of the Partnership; the capitalization rates that
will be used by prospective buyers when the Partnership'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 Partnership
units. In addition, these estimates are based upon certain information
available to the Partnership 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 merger. The assumptions
used have been determined by the Partnership in good faith, and, where
appropriate, are based upon current and historical information regarding the
Partnership and current real estate markets, and have been highlighted below to
the extent critical to the conclusions of the general partners.
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and limited partners 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 and common stock of PS Business
Parks, Inc. as of the date of the merger being the same as during the 20 trading
days ending on September 4, 1998, (ii) projections as to the future revenues,
expenses, cash flow and other significant financial matters of the Partnership,
(iii) the capitalization rates that will be used by prospective buyers when the
Partnership's assets 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. 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.
PARTNERSHIP COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Limited Secondary Estimated Going Concern Estimated Liquidation Value
Payments in Merger Market Prices of Value per per Partnership Unit at
per Partnership unit Partnership Units(2) Partnership Unit(3) Appraised Value (4)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$713(1) $196 $548 $651 $676 $686
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) Based on the Partnership's net asset value consisting of the independently
appraised market value of the Properties as of March 31, 1998, the closing
price of PS Business Parks, Inc. on the AMEX on June 18, 1998 and estimated
book value of its other net assets as of March 31, 1998. The market price
of PSI common stock may fluctuate following establishment of the number of
shares to be issued to limited partners in the merger and prior to issuance
and could decrease as a result of increased selling activity following
issuance of the shares in the merger and other factors. See
"- Determination of Amounts to be Received by Limited Partners in the
Merger."
(2) There is no active market for the Partnership units. Based on the
information available to the Partnership, the prices at which limited
secondary sales have been effectuated ranged from $196 to $548 per unit from
January 1, 1997 through March 31, 1998. Included in this price range are
sales to PSI. See "Distributions and Market Prices of Partnership Units."
(3) Reflects a range of values based upon a number of assumptions regarding the
future net operating income and distributions of the Partnership and the
date of its liquidation. See "- Going-Concern Value."
(4) Based upon TNG's real estate appraisal, less estimated expenses of
liquidation. See "- Liquidation Values."
LIMITED SECONDARY MARKET PRICES OF UNITS. There is no active market for
the Partnership units. Based on the information available to the Partnership,
the prices at which limited secondary sales have been effectuated
24
<PAGE>
ranged from $196 to $548 per unit from January 1, 1997 through March 31, 1998.
Included in this price range are sales to PSI. See "Distributions and Market
Prices of Partnership Units."
GOING-CONCERN VALUE. The Partnership has estimated the going-concern value
of the Partnership by analyzing projected cash flows and distributions assuming
that the Partnership was operated as an independent stand-alone entity and its
assets sold in a liquidation of the Partnership after a five-year holding
period. The Partnership assumed sale of the Properties at the terminal value
projected by capitalizing the net operating income in year six at a
capitalization rate equal to the midpoint of the capitalization rates used by
the appraiser in the direct capitalization method and the residual value
component of the discounted cash flow analysis (an average capitalization rate
of 9.8% for the Properties). Under both scenarios, the Partnership assumed that
the Partnership's interest in PSBP was sold at an FFO multiple of 11.4. Real
estate selling costs were assumed to be incurred at the same percentage of sale
proceeds (4.5%) as incurred in the liquidation alternative. Distribution and
sale proceeds per Partnership unit were discounted in the projections at rates
ranging from 11.50% to 12.50%.
Both scenarios of the going-concern analysis assume that the Properties are
sold in a single transaction at the expiration of the holding period. Should
the assets be liquidated over time, even at prices equal to those projected,
distributions to limited partners out of the Partnership'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 of the Partnership on a going-concern basis is not
intended to reflect the distributions payable to limited partners if its assets
were to be sold at their current fair market value.
LIQUIDATION VALUES. Since one of the alternatives available to the general
partners is to proceed with a liquidation of the Partnership, and the
corresponding distribution of the net liquidation proceeds between the joint
venture partners and, within the Partnership, to the limited partners and the
general partners, the Partnership has estimated the liquidation value of the
Partnership assuming that the Properties are sold at their fair market value,
based upon the TNG real estate portfolio appraisal. This alternative assumes
that the Partnership's interest in PSBP is sold at the June 18, 1998 trading
price (less a commission of $.06 per share), the Partnership incurs real estate
selling costs at the time of liquidation (state and local transfer taxes, real
estate commissions of 3% of sales proceeds and legal and other closing costs) of
$3,766,000, and the remaining net liquidation proceeds are distributed between
the joint venture partners in accordance with the joint venture agreement and
between the limited and general partners in accordance with the partnership
agreement, according priority to limited partners.
The liquidation analysis assumes that the Properties are sold in a single
transaction at their appraised value. Should the assets be liquidated over
time, even at prices equal to those projected, distributions to limited partners
from cash flow from operations might be reduced because the Partnership's
relatively fixed costs, such as general and administrative expenses, are not
proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales of the Properties are assumed to occur
concurrently.
Applying these procedures, the Partnership arrived at the liquidation value
set forth in the table. The real estate portfolio appraisal sets forth, subject
to the specified assumptions, limitations and qualifications, TNG's professional
opinion as to the market value of the Properties as of March 31, 1998. While
the portfolio appraisal is not necessarily indicative of the price at which the
assets would sell, market value generally seeks to estimate the price at which
the Properties 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. The real estate portfolio
appraisal assumes that the Properties 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 Portfolio Appraisal by TNG."
DISTRIBUTION COMPARISON. The general partners have considered the
potential impact of the merger upon distributions that would be made to limited
partners who exchange their Partnership units for PSI common stock. Based on a
market price of PSI common stock of $28 and the current regular quarterly
distribution rate for PSI ($.22 per share) and the Partnership ($10.80 per
unit), limited partners would receive approximately $5.20 (48%) less in regular
quarterly distributions per Partnership unit after the merger from PSI than
before the merger from the
25
<PAGE>
Partnership and approximately $.19 less per unit in regular quarterly
distributions for each $1.00 (3.6%) increase in the market price of PSI common
stock above $28. These estimates are based upon the actual distributions made by
PSI and the Partnership (not upon the amounts that might have been distributed
by them based upon their cash flow from operations).
In evaluating this estimate, limited partners should bear in mind that this
comparison does not reflect the tax that a limited partner will have to pay in
connection with the merger. The merger will be a taxable event for the public
limited partners resulting in the recognition of gain to most taxable public
limited partners who receive either cash or PSI common stock. In evaluating
this estimate, limited partners should also 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 the Partnership does not show how the merger might affect a
limited partner's distribution level over a number of years.
REAL ESTATE PORTFOLIO APPRAISAL BY TNG
TNG was engaged by the Partnership to appraise the Properties and has
delivered a written report of its analysis, based upon the review, analysis,
scope and limitations described therein, as to the fair market value of the
Properties as of March 31, 1998. The Partnership selected TNG to provide the
appraisal because of its experience and reputation in appraising mini-
warehouses, including its appraisal of other properties managed by PSI. The
consideration to be paid by PSI to the limited partners in the merger is based
on the appraisal. The appraisal, which contains a description of the
assumptions and qualifications made, matters considered and limitations on the
review and analysis, is set forth as Appendix B and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations
to the appraisal are described below.
EXPERIENCE OF TNG. TNG was formed by Lawrence R. Nicholson, MAI to succeed
to the business of Nicholson-Douglas Realty Consultants, which was founded by
Mr. Nicholson in 1993. Mr. Nicholson has specialized in the appraisal of mini-
warehouses and other commercial properties since 1980. TNG 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. During 1996 and 1997, TNG appraised over 350
properties.
SUMMARY OF METHODOLOGY. At the request of the Partnership, TNG evaluated
the Properties. In valuing the Properties, TNG 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. TNG did not
consider the cost approach to be applicable to the Properties.
The income approach estimates a property's capacity to produce income
through an analysis of the rental market, operating expenses and net income.
Net income may then be processed into a value estimate through either (or a
combination) of two methods: direct capitalization or yield capitalization,
i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of substitution,
i.e., that an informed purchaser would pay no more for a property than the cost
of acquiring an existing property with the same utility. The sales comparison
approach establishes what typical investors in the marketplace are willing to
pay for comparable properties.
The cost approach is based on the estimated market value of the site as if
vacant plus the depreciated replacement cost of the existing improvements. The
cost approach was not considered appropriate in the case of the Properties 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 diminishes the validity of this
approach.
26
<PAGE>
While the appraisal was prepared for all of the Properties, TNG analyzed
the individual Properties by (a) reviewing each Property's previous three years'
operating statements, (b) reviewing information submitted to TNG by on-site
managers which included competitive rental and occupancy surveys, subject
facility descriptions, area trends and other factors, which were verified by TNG
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 Properties,
TNG considered such variables as property income growth patterns and potential,
quality of location and construction, tenant appeal, property appearance,
security and potential competition.
TNG also interviewed management personnel responsible for the Properties to
discuss competitive conditions, area economic trends affecting the properties,
historical operating revenues and expenses, lease terms 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 TNG or
persons engaged by them performed site inspections on the Properties in April
and May, 1998.
TNG then estimated the value of each Property relying heavily upon the
income approach. Indicated values were developed using a yield 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, TNG 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, TNG reviewed other published information concerning acquisition
criteria in use by property investors through the first quarter of 1998.
Further, TNG interviewed various sources in local markets to identify sales of
mini-warehouses and business parks 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. TNG
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 (assuming no indebtedness) were developed for a 10-year period
ending in the year 2008 with a terminal residual value computed at the end of
year 10. 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 late fees and rental concessions. TNG 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 of the Properties.
Estimated expenses were based upon each Property's actual operating
history. The projected expenses were tested for reasonableness based upon a
comparison of the operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
property. Consideration was given to and adjustment made to reflect capital
expenditures and replacement reserves. 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.
For the self-storage properties, TNG used a growth rate of between 3.5% and
5.0% for income and 3.5% for expenses. TNG then used terminal capitalization
rates ranging from 10.0% to 10.25% to capitalize each Property's 11th year net
income into a residual value at the end of a 10-year holding period, assuming
normal cost of disposing of the Properties. The 10 yearly cash flows were then
discounted to present worth using discount rates of 12.50% to 13.0% based upon
local market and property conditions. In addition, TNG valued each Property
using the direct capitalization method by applying capitalization rates between
9.5% and 9.75% to projected net operating income for the next 12 months. For
the one business park property, TNG applied a 10.0% capitalization rate to
projected net operating income for the next 12 months.
The indicated value for the 27 self-storage properties based upon the
discounted cash flow analysis is $75,800,000 and based upon the direct
capitalization technique is $77,600,000. The indicated value for the business
27
<PAGE>
park component of one of the properties based upon the direct capitalization
technique is $1,200,000. Considering the relatively stable income level and the
short-term nature of the existing leases, the direct capitalization technique
provided a reliable estimate of market value; the discounted cash flow analysis
was not utilized.
In applying the sales comparison approach to the Properties, TNG analyzed
over 200 mini-warehouse properties that were sold during 1996, 1997 and 1998.
Using a regression analysis, a statistically significant correlation was derived
between the comparable property's net income and its sales price per square
foot.
In addition, TNG reviewed capitalization rates and purchase prices paid in
recent and pending transactions of properties similar to the Properties
involving PSI and others and has concluded that the Properties are reasonably
and appropriately valued relative to these other portfolio transactions.
CONCLUSIONS AS TO VALUE. TNG reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. TNG gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the mini-
warehouse market.
Based on the valuation methodology described above, TNG assigned a market
value to the Properties as of March 31, 1998 of $78,700,000. The resulting
effective implied capitalization rate for the Properties based on reported
property operations (before non-recurring expenses and after certain property
tax adjustments) during the 12 months ended March 31, 1998 averaged 9.13%.
TNG's conclusion as to value relates to 100% of the Properties, which
includes the joint venture interests of both the Partnership and PSI. TNG did
not separately value the interest of the Partnership in the Properties.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISAL. The
appraisal reflects TNG's valuation of the Properties as of March 31, 1998 in the
context of the information available on such date. Events occurring after March
31, 1998 and before the closing of the merger could affect the properties or
assumptions used in preparing the appraisal. TNG has no obligation to update
the appraisal on the basis of subsequent events; however, TNG has informed the
Partnership that, as of the date of this statement, TNG is not aware of any
event or change in conditions since March 31, 1998 that may have caused a
material change in the value of the Properties since that date.
The appraisal is subject to certain general and specific assumptions and
limiting conditions and is in conformity with the Departure Provision of Uniform
Standards of Professional Appraisal Practice. Among other limitations, the
appraisal (i) did not consider the effect of easements, restrictions and other
similar items on the value of the Properties, (ii) assumed that the properties
comply with local building codes and zoning ordinances, (iii) assumed that there
are no new or planned facilities except as noted in the appraisal and (iv) did
not involve the physical inspections of competing properties. See Appendix B
for a discussion of the specific assumptions, limitations and qualifications of
the appraisal.
COMPENSATION AND MATERIAL RELATIONSHIPS. TNG is being paid an aggregate
fee of $53,200 for preparation of the appraisal, which fee includes
reimbursement for all of TNG's related out-of-pocket expenses. TNG is also
entitled to indemnification against certain liabilities. The fee was negotiated
with TNG and payment is not dependent upon completion of the merger. As a
leading appraiser of mini-warehouses, TNG (and its predecessor) have prepared
appraisals for PSI and its affiliates, including appraisals of the properties of
prior REITs in connection with their mergers with PSI, and TNG is expected to
continue to prepare appraisals for PSI. During the past three years (1995 to
the present), TNG (and its predecessor) have received compensation aggregating
approximately $800,000 for these services (exclusive of amounts received in
connection with the merger).
FAIRNESS OPINION FROM STANGER
Stanger was engaged by the Partnership to deliver a written opinion of its
determination as to the fairness of the consideration to be received in the
merger, from a financial point of view, to the public limited partners. The
full text of the opinion, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
opinion, is set forth in Appendix C to this statement and should be read in its
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<PAGE>
entirety. Certain of the material assumptions, qualifications and limitations
to the fairness opinion are set forth below. The summary set forth below does
not purport to be a complete description of the analyses used by Stanger in
rendering the fairness opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description.
Except for certain assumptions, described more fully below, which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
with respect to the methods and procedures to be followed in rendering the
fairness opinion. The Partnership has agreed to indemnify Stanger against
certain liabilities arising out of its engagement to prepare and deliver the
fairness opinion.
EXPERIENCE OF STANGER. Stanger, founded in 1978, has provided information,
research, investment banking and consulting services to clients throughout the
United States, including major 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 opinion regarding the merger, Stanger: (i) reviewed this statement;
(ii) reviewed the annual reports on Form 10-K of PSI and the Partnership for the
three fiscal years ending December 31, 1995, 1996 and 1997 and the quarterly
reports on Form 10-Q of PSI and the Partnership for the quarter ending March 31,
1998; (iii) reviewed the appraisal prepared by TNG and discussed with the
general partners and TNG the methodologies and procedures employed in preparing
the appraisal; (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 the Partnership, and
based in part on the appraisal, of the current net liquidation value per
Partnership unit of the Partnership's assets and projections of cash flow from
operations, cash distributions and going-concern values for the Partnership, and
the calculation of the allocation of such values between the joint venture
partners and between the limited and general partners; (vi) discussed with
certain members of management of PSI and the Partnership conditions in self-
storage property markets, conditions in the market for sales/acquisitions of
properties similar to those owned by the Partnership, current and expected
operations and performance, and the financial condition and future prospects of
PSI and the Partnership; (vii) reviewed historical market prices, trading volume
and dividends for PSI common stock and historical secondary market transactions
for Partnership units; 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 opinion. The summary of the opinion and analysis of Stanger set
forth in this statement is qualified in its entirety by reference to the full
text of such opinion.
Review of Appraisal. In preparing its opinion, Stanger relied upon the
appraisal of the Properties which was prepared as of March 31, 1998 by TNG, an
independent appraiser. Stanger reviewed the appraisal rendered by TNG, reviewed
a sample of supporting documentation for the appraisal and discussed with TNG
its experience and qualifications and the appraisal methodologies utilized.
Stanger observed that the appraisal was certified by a Member of the
Appraisal Institute and was conducted utilizing the income approach to
valuation, applying the discounted cash flow method to establish a value for
each individual property, and the sales comparison approach.
29
<PAGE>
Stanger observed that the effective capitalization rate utilized in the
appraisal was approximately 9.13%, based on net operating income (before non-
recurring expenses and after certain property tax adjustments) generated for the
12 months ended March 31, 1998. Lower capitalization rates generally reflect
higher sales prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared by
the Partnership of the estimated value of the Partnership based upon liquidation
of its portfolio on a property-by-property basis utilizing estimates prepared by
the Partnership and information provided by TNG.
The property-by-property liquidation analysis assumed each property could
be sold within an estimated marketing period of six months at the appraised
value as reported in the appraisal, to an independent third-party buyer. Costs
of such property sales by the Partnership to independent third-parties were
estimated by the Partnership to total approximately $3,766,000 and were
comprised of estimates of $655,000 in state and local transfer taxes, $2,336,000
in commissions and $775,000 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 the Partnership based on knowledge of real estate transactions.
Stanger observed that the estimated net proceeds from such liquidation, the sale
of the Partnership's interest in PSBP and the associated dissolution of the
Partnership and distribution of all remaining assets was $686 per Partnership
unit, versus the consideration offered in the merger of $713 cash per unit, or
the equivalent of $713 of PSI common stock per unit, based on the average
closing price of PSI common stock on the NYSE during the 20 consecutive trading
days ending on September 4, 1998.
Stanger also reviewed information on recent multi-property purchases and
sales of self-storage properties transacted by PSI, PSMI or affiliates during
the 24 months ending March 1998. Stanger observed that PSI, PSMI or affiliated
entities have completed 11 bulk purchases of property portfolios during the
period reviewed, excluding the properties associated with the mergers of 18
affiliated REITs with PSI. These transactions involved affiliated and
unaffiliated entities with an interest in 73 properties with an aggregate
acquisition cost of approximately $209 million. Capitalization rates ranged
from 9.1% to 11.6%, averaging 9.6%, for bulk transactions during the period
reviewed.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and
projections prepared by the Partnership concerning estimated cash flows and
distributions from the Partnership's continued operation as an independent
stand-alone entity and estimated sales proceeds from the liquidation of the
Properties. The analyses incorporated estimates of revenues and operating
expenses for the Properties, capital expenditures, entity-level general and
administrative costs, and cash flow distributions and proceeds from sale of the
Properties during a projection period of five years. The analyses and
projections assumed, among other things, that (i) net operating income for the
Partnership would grow at a compound annual rate of approximately 4.6% over the
five-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) the sale of the Properties would occur at the terminal value projected by
capitalizing the net operating income in year six at a capitalization rate equal
to the midpoint of the capitalization rates used by the appraiser in the direct
capitalization method and the residual value component of the discounted cash
flow analysis (an average capitalization rate of 9.8% for the Properties). Real
estate selling costs were assumed to be incurred at the same percentage of sale
proceeds (4.5%) as incurred in the liquidation alternative.
The projections evaluated the Partnership's going-concern value by
analyzing projected cash flow and distributions assuming that the Partnership
was operated as an independent stand-alone entity and its assets sold in a
liquidation of the Partnership after a five-year holding period. The
projections also assume that the Partnership's interest in PSBP is sold at an
FFO multiple of 11.4 (reduced by a commission of $.06 per share). Distributions
and sale proceeds per Partnership unit were discounted in the projections at
rates ranging from 11.50% to 12.50%.
Stanger observed that the estimated values per Partnership unit on a going-
concern basis resulting from the above analysis were $651 and $676, compared
with the consideration in the merger of $713 per Partnership unit.
The estimated values assigned to the alternative forms of consideration are
based on a variety of assumptions that have been made by the Partnership. While
the Partnership has advised Stanger that it believes that it has a reasonable
basis for these assumptions, these assumptions may not reflect the Partnership's
actual
30
<PAGE>
experience and such differences could be material. See "-- Comparison of
Consideration to be Received in the Merger to Other Alternatives."
Review of Tender Offer and Secondary Market Prices. Stanger observed that
Partnership units have been purchased in recent months on the informal secondary
market for partnership securities and in 1995 and 1996 through tender offers by
PSI.
Stanger observed that, based on prices reported to Stanger by various firms
active in the informal secondary market for partnership interests, the highest
selling prices reported for Partnership units in the informal secondary market
between January 1, 1997 and March 31, 1998 were $548 per unit compared with the
consideration in the merger of $713 per unit.
Stanger also observed that the Partnership units had been the subject of
tender offers by PSI in 1995 and 1996 and the tender offer prices ranged from
$400 to $548 per unit.
Distribution/FFO Analysis. Stanger reviewed distributions per Partnership
unit and FFO per Partnership unit on an equivalent per unit basis. Stanger
noted that based on a closing price of $28 for PSI common stock and the
resulting exchange ratio of Partnership units for PSI common stock and based on
operating results for PSI, regular quarterly distributions per share would
decrease by approximately $5.20 (48%) for limited partners receiving PSI common
stock.
Stanger observed that, at the closing price of $28 for PSI common stock and
based on operating results for PSI, annual FFO per Partnership unit on a fully-
diluted basis on an equivalent per share basis earned by limited partners would
decrease by $8.03 (14%).
CONCLUSIONS. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and as of the date of the fairness opinion, the
consideration to be received in the merger is fair to the public limited
partners, from a financial point of view.
ASSUMPTIONS. In evaluating the merger, Stanger relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in this statement or that was furnished or
otherwise communicated to Stanger. Stanger did not perform an independent
appraisal of the assets and liabilities of PSI and the Partnership and relied
upon and assumed the accuracy of the appraisal. Stanger also relied on the
assurances of PSI and the Partnership that any projections, budgets, or value
estimates contained in this statement 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
the property values and the Partnership's net asset value have been allocated
between the joint venture partners and between the limited and general partners
in the same manner they would be allocated upon the Partnership's liquidation;
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 the opinion; and that PSI and the
Partnership are not aware of any information or facts that would cause the
information supplied to Stanger to be incomplete or misleading in any material
respect.
In connection with preparing the fairness opinion, Stanger was not engaged
to, and consequently did not, prepare any written report or compendium of its
analysis for internal or external use beyond the analysis set forth in Appendix
C. Stanger does not intend to deliver any additional written summary of the
analysis.
COMPENSATION AND MATERIAL RELATIONSHIPS. For preparing the fairness
opinion and related services in connection with the merger, Stanger is being
paid a fee of $60,000. In addition, Stanger will be reimbursed for certain out-
of-pocket expenses, including legal fees, up to a maximum of $9,000 and will be
indemnified against certain liabilities, including certain liabilities under the
federal securities laws. The fee was negotiated with Stanger. Payment of the
fee to Stanger is not dependent upon completion of the merger. Stanger has
rendered consulting and related services and provided products to PSI and to
PSMI and its affiliates, including fairness opinion to the public shareholders
of 18 REITs in connection with their mergers with PSI, and may be engaged in the
future. During the past three years (1995 to the present), Stanger has received
compensation aggregating
31
<PAGE>
approximately $950,000 for these services and products (exclusive of amounts
received in connection with the merger).
LIMITATIONS AND QUALIFICATIONS. Stanger was not requested to, and
therefore did not: (i) select the method of determining the consideration being
paid in the merger; (ii) make any recommendation to the public limited partners
with respect to whether to approve or reject the merger or whether to select the
cash or PSI common stock option in the merger; or (iii) express any opinion as
to the business decision to effect the merger, alternatives to the merger or tax
factors resulting from the merger, or relating to PSI's continued qualification
as a REIT. Stanger's opinion is 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 opinion.
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of 18 affiliated 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
merger to public limited partners, and the Partnership has neither requested nor
received any views, preliminary or otherwise, from any party other than Stanger
regarding the fairness of the merger to the public limited partners.
THE MERGER AGREEMENT
If the conditions to the merger are satisfied or waived, the merger will be
consummated pursuant to the merger agreement which is set forth in Appendix A
to, and is incorporated by reference into, this statement. As a result of the
merger, all of the Partnership units will be held by a subsidiary of PSI. The
merger agreement contains representations and warranties of PSI and the
Partnership and certain other provisions relating to the merger. The
representations and warranties are extinguished by, and do not survive, the
merger.
CONDITIONS TO CONSUMMATION OF THE MERGER. Consummation of the merger is
contingent upon standard conditions, including the following: (i) the
Registration Statement shall have been declared effective by the Commission and
PSI shall have received all other authorizations necessary to issue PSI common
stock in exchange for Partnership units and to consummate the merger; (ii) the
merger agreement and the merger shall have been approved and adopted by the
requisite vote of the limited partners (which condition has been satisfied by
PSI's vote of its Partnership units in favor of the merger); (iii) the shares of
PSI common stock issued to limited partners shall be listed on the NYSE; (iv)
the Partnership shall have received a fairness opinion from Stanger (which
opinion has been received); (v) the board of directors of PSI shall have
approved the merger (which approval has been obtained); (vi) no legal action
challenging the merger shall be pending; and (vii) 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 September 4, 1998 is not less
than $25. The obligation of PSI to effect the merger is also subject to PSI, in
its sole discretion, being satisfied as to title to, and the results of an
environmental audit of, the Properties. Any of these conditions may be waived
by the board of directors of PSI.
AMENDMENT OR TERMINATION. The merger agreement provides for amendment or
modification thereof with respect to the merger by written agreement authorized
by the board of directors of PSI and the general partners. The merger may be
abandoned at any time before or after shareholder approval by mutual written
consent and may be abandoned by either party if, among other things, the closing
of the merger has not occurred on or before March 31, 1999.
CONSUMMATION. It is contemplated that the merger will be consummated by
filing a certificate of merger with the California Secretary of State.
CERTIFICATES FOR PSI COMMON STOCK. After the merger, holders of
Partnership units that were converted into shares of PSI common stock, without
any further action, will be entitled to receive certificates representing the
number of whole shares of PSI common stock into which Partnership units will
have been converted and cash payment in lieu of fractional share interests, if
applicable. As soon as practicable after the merger, the exchange agent,
BankBoston N.A., will send the certificates for the PSI common stock to each
holder of Partnership units whose Partnership units have been converted into
shares of PSI common stock. HOLDERS OF PARTNERSHIP UNITS WHO INTEND TO RECEIVE
PSI COMMON STOCK IN THE MERGER DO NOT NEED
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<PAGE>
TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE CERTIFICATES REPRESENTING THE PSI
COMMON STOCK. IT IS IMPORTANT THAT YOU MAKE SURE YOU RECEIVE YOUR CERTIFICATE
FOR THE PSI COMMON STOCK MAILED TO YOU BY BANKBOSTON N.A. IF YOU DO NOT RECEIVE
YOUR PSI COMMON STOCK CERTIFICATE BY OCTOBER 15, 1998, CALL BANKBOSTON N.A. AT
(781) 575-3120 SO THAT AN AFFIDAVIT OF NON-RECEIPT CAN BE SENT TO YOU AND A
CERTIFICATE REISSUED AT NO COST TO YOU. ANY SHAREHOLDER WHO CONTACTS BANKBOSTON
N.A. AFTER MARCH 15, 1999 REQUESTING THAT A CERTIFICATE BE REISSUED MAY NEED TO
EXECUTE AN AFFIDAVIT OF LOSS AND PAY THE COST OF A BOND OF INDEMNITY BEFORE A
CERTIFICATE CAN BE REPLACED.
After the merger, there will be no further registration of transfers of
Partnership units on the Partnership's records.
FRACTIONAL SHARES. No fractional shares of PSI common stock will be issued
in the merger. In lieu of any fractional share interests, each holder of
Partnership units who would otherwise be entitled to a fractional share of PSI
common stock will, upon surrender of the certificate representing PSI 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 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 merger by (ii) the fractional
interest.
RESTRICTIONS ON OTHER ACQUISITIONS. The Partnership has agreed not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a merger, consolidation, securities
exchange or similar transaction involving it, or any purchase of all or any
significant portion of its assets, or any equity interest in it, other than the
transactions contemplated by the merger agreement, or engage in any negotiations
concerning, or provide any confidential information or data to, or have
discussions with, any person relating to such a proposal, provided that the
general partners 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 Partnership
to breach their fiduciary duty to limited partners under applicable law as
advised by counsel. The Partnership has 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 it,
and to keep PSI informed of the status and terms of any such proposals and any
such negotiations or discussions.
DISTRIBUTIONS. Pending the merger, the Partnership is precluded from
declaring or paying any distributions to the limited partners other than (i)
regular distributions at a quarterly rate not in excess of $10.80 per
Partnership unit and (ii) distributions to the limited partners immediately
prior to the effectiveness of the merger equal to the amount by which the
Partnership's estimated net asset value allocable to limited partners as of the
date of the merger exceeds $713 per Partnership unit. See "-- Determination of
Payments to be Received by Limited Partners in the Merger."
CASH ELECTION PROCEDURE
Each holder of record of Partnership units may make a cash election to have
his or her Partnership units converted into the right to receive cash in the
merger. All cash elections are to be made on a cash election form. A cash
election form is being sent to all holders of record of Partnership units on the
date of this statement. To be effective, a cash election form must be properly
completed and signed and must be received by the exchange agent, BankBoston
N.A., no later than 5:00 p.m. New York City time on September 11, 1998. Holders
of record of units who hold units as nominees, trustees or in other
representative capacities may submit multiple cash election forms, provided that
such representative certifies that each such cash election form covers all the
units held by such representative for a particular beneficial owner. Any cash
election form may be revoked by written notice received by the exchange agent
prior to 5:00 p.m., New York City time, on September 11, 1998. In addition, all
cash election forms will automatically be revoked if the exchange agent is
notified in writing that the merger has been
33
<PAGE>
abandoned. The exchange agent may determine whether or not elections to receive
cash have been properly made or revoked, and any such determination shall be
conclusive and binding.
A HOLDER OF PARTNERSHIP UNITS MAY NOT MAKE A CASH ELECTION AS TO LESS THAN
ALL OF THE UNITS OWNED BY SUCH HOLDER. ANY HOLDER OF UNITS WHO DOES NOT SUBMIT
A PROPERLY COMPLETED AND SIGNED CASH ELECTION FORM WHICH IS RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 11, 1998
WILL RECEIVE PSI COMMON STOCK IN THE MERGER. IF PSI OR THE EXCHANGE AGENT
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 UNITS MAKING SUCH PURPORTED CASH ELECTION WILL, FOR PURPOSES HEREOF,
RECEIVE PSI COMMON STOCK IN THE MERGER. NONE OF PSI, THE PARTNERSHIP OR THE
EXCHANGE AGENT WILL BE UNDER ANY OBLIGATION TO NOTIFY ANY PERSON OF ANY DEFECT
IN A CASH ELECTION FORM.
The tax consequences of receiving cash or PSI common stock are described
under "Federal Income Tax Considerations -- The Merger."
CONSEQUENCES TO THE PARTNERSHIP IF THE MERGER IS NOT COMPLETED
If the merger is not completed, the Partnership will remain as a separate
legal entity and will continue to operate its properties.
COSTS OF THE MERGER
It is estimated that the total consideration (cash and PSI common stock) to
be paid by PSI to acquire all of Partnership units owned by the public limited
partners in the merger and to pay related costs and expenses would be
approximately $14,500,000. 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 $150,000,000 and bear interest at LIBOR plus .40% to 1.10%.
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 merger is completed, all costs incurred by PSI and the Partnership
in connection with the merger will be paid by PSI. If the merger is not
completed, all costs incurred in connection with the merger will be paid by the
party incurring such costs, except that PSI will pay one-half of the cost of any
expenses incurred in connection with the printing of this statement and related
registration statement, the appraisal, environmental and structural audits and
filing fees and the Partnership will pay the other one-half of such costs. The
Partnership's share of such costs would be paid from its working capital.
The following is a statement of certain fees and expenses estimated to be
incurred in connection with the merger (exclusive of amounts paid as a result of
cash elections).
<TABLE>
<S> <C>
Printing and mailing $ 10,000
Legal 50,000
Real estate appraisal and fairness opinion 115,000
Registration, listing and filing fees 10,000
Accounting 25,000
Other 10,000
--------
TOTAL $220,000
========
</TABLE>
ACCOUNTING TREATMENT
For accounting purposes, the merger will be treated as a purchase.
Accordingly, the cost of the assets and liabilities of the Partnership will be
allocated based on fair value.
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<PAGE>
REGULATORY REQUIREMENTS
The merger is subject to compliance with federal and state securities law
requirements.
COMPARISON OF PARTNERSHIP UNITS WITH PSI COMMON STOCK
The information below compares certain attributes of PSI Common Stock with
the Partnership units. The effect of the merger on limited partners who receive
PSI common stock in the merger is set forth in italics below each caption.
<TABLE>
PARTNERSHIP PSI
INVESTMENT OBJECTIVES AND POLICIES
<S> <C>
The principal investment objectives are to provide (i) The investment objectives of PSI are to maximize FFO
quarterly cash distributions from its operations and allocable to holders of PSI common stock and to increase
(ii) long-term capital gains through appreciation in shareholder value through internal growth and acquisitions.
the value of properties. FFO is a supplemental performance measure for equity REITs
used by industry analysts. FFO does not take into
Under its organizational documents, the Partnership is consideration principal payments on debt, capital
not permitted to raise new capital or to reinvest improvements, distributions and other obligations of PSI.
operating cash flow or sale or financing proceeds. Accordingly, FFO is not a substitute for PSI's net cash
The Partnership will terminate on December 31, 2015, provided by operating activities or net income as a measure
unless earlier dissolved. The Partnership of PSI's liquidity or operating performance. An increase
anticipated selling or financing its properties in PSI's FFO will not necessarily correspond with an
within five to eight years from acquisition (i.e., increase in distributions to holders of PSI common stock.
between 1988 and 1993). See "- 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 merger) as to cash flow, distributions and
liquidation proceeds, or from reinvesting cash flow or sale
or financing proceeds in new properties, except to the
extent such reinvestment precludes 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>
Limited partners who receive PSI common stock in the merger will be
changing their investment from "finite-life" to "infinite-life"; they will be
able to realize the value of their investment only by selling the 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, equity stock
and warrants and intends to issue additional securities under this registration
statement. There is no
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<PAGE>
PARTNERSHIP PSI
assurance that any such securities will be issued. See "Risk Factors --
Uncertainty Regarding Market Price of PSI Common Stock" and "- Financing Risks
- -- Dilution and Subordination."
PSI has no plans with respect to a sale or financing of any of the
Properties.
BORROWING POLICIES
<TABLE>
<S> <C>
The Partnership has no outstanding borrowings. It is Subject to certain limitations in PSI's bylaws, PSI has
fully invested and would distribute the proceeds from broad powers to borrow in furtherance of its investment
a financing of properties. objectives. PSI has incurred in the past, and may incur in
the future, both short-term and long-term debt to increase
its funds available for investment in real estate, capital
expenditures and distributions. As of December 31, 1997,
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 3%.
</TABLE>
PSI has outstanding debt and reinvests proceeds from borrowings. The
incurrence of debt increases the risk of loss of investment.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<S> <C>
The partnership agreement restricts a variety of PSI's bylaws restrict PSI from acquiring properties from
business transactions with affiliates. The its affiliates or from selling properties to them unless
partnership agreement may be amended by a majority the transaction (i) is approved by a majority of PSI's
vote of limited partners. See "Amendment to independent directors and (ii) is fair to PSI based on an
Partnership Agreement." independent appraisal.
</TABLE>
Given PSI's control of all voting decisions with respect to the
Partnership, both PSI and the Partnership can enter into transactions with
affiliates without the need for approval of the public shareholders and public
limited partners, respectively. In the case of PSI, however, these transactions
require approval of PSI's independent directors.
PROPERTIES (As of December 31, 1997)
<TABLE>
<S> <C>
The Partnership owns equity interests in 27 properties PSI owns equity interests (directly, as well as through
in 13 states. Also owns interest in PSBP. For the general and limited partnership interests and capital stock
12 months ended December 31, 1997, the weighted interests) in 1,136 properties in 38 states, including 533
average occupancy level and realized annual rent per wholly owned properties. See "Description of PSI's
square foot of the Properties were 90% and $7.59, Properties."
respectively. See "Description of Partnership
Properties."
</TABLE>
Because PSI owns substantially more property interests in more states than
the Partnership, PSI's results of operations are less affected by the
profitability or lack of profitability of a single property than are those of
the Partnership and it would be more difficult to liquidate PSI than the
Partnership within a reasonable period of time.
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<TABLE>
<S> <C>
There is no active trading market for Partnership PSI common stock is traded on the NYSE. During the 12
units. The Partnership has not issued any securities months ended December 31, 1997, the average daily trading
that have priority over its Partnership volume of PSI common stock
</TABLE>
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<PAGE>
PARTNERSHIP PSI
<TABLE>
<S> <C>
units. was 98,000 shares. PSI has issued, and may in the future
issue, securities that have priority over PSI common stock
as to cash flow, distributions and liquidation proceeds.
</TABLE>
Distributions are paid to limited partners from cash available for
distribution. PSI is required to distribute at least 95% of its ordinary REIT
taxable income in order to maintain its qualification as a REIT. 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 limited partner who receives PSI common stock in the merger will have an
investment for which the market is broader and more active than the market for
Partnership units. Distributions on PSI common stock are lower than the
distributions on the Partnership units. Distributions on PSI common stock also
are subject to priority of preferred stock. See "Distributions and Price Range
of PSI Common Stock" and "Distributions and Market Prices of Partnership Units"
for information on market prices of Partnership units and PSI Common Stock.
TAXATION
<TABLE>
<S> <C>
Income or loss earned by the Partnership is not taxed PSI was organized to qualify for taxation as a REIT and
at the partnership level. Limited partners are intends to continue to so qualify. REITs generally are
required to report their allocable share of permitted to deduct distributions to their shareholders,
Partnership income and loss on their respective tax which, to the extent of such deductions, effectively
returns. Income and loss from the Partnership eliminates the "double taxation" (at the corporate and
generally constitute "passive" income and loss, which shareholder levels) that typically results when a
can generally offset "passive" income and loss from corporation earns income and distributes that income to
other investments. Due to depreciation and other shareholders in the form of dividends. Distributions
noncash items, cash distributions are not generally received by PSI shareholders generally constitute portfolio
equivalent to the income and loss allocated to income, which cannot offset "passive" loss from other
limited partners. During operations, cash investments. Losses and credits generated within PSI do
distributions have been partially sheltered, but, if not pass through to shareholders. After the end of PSI's
the Properties retain their value or appreciate, gain calendar year, shareholders receive the less complicated
upon liquidation of the asset will exceed the cash Form 1099-DIV used by corporations to report their dividend
distributions available to limited partners. After income. See "Federal Income Tax Considerations."
the end of each fiscal year, limited partners receive
annual schedule K-1 forms showing their allocable
share of Partnership income and loss for inclusion on
their federal income tax returns. Limited partners
are also required to file state income tax returns
and/or pay state income taxes in California and in
certain other states in which the Properties are
located.
</TABLE>
The Partnership is a pass-through entity, whose income and loss is not
taxed at the entity level but instead allocated directly to the limited and
general partners. Limited partners are taxed on income or loss allocated to
them, whether or not cash distributions are made to them. In contrast, PSI
qualifies as a REIT, allowing it to deduct dividends paid to its shareholders.
To the extent PSI has net income (after taking into account the dividends paid
deduction), such income will be taxed at the corporate level at the standard
corporate tax rates. Dividends paid to PSI shareholders will constitute
portfolio income and not passive income.
37
<PAGE>
PARTNERSHIP PSI
VOTING RIGHTS
<TABLE>
<S> <C>
Limited partners by a majority vote may, without the PSI holds annual meetings, with each such meeting on a date
concurrence of the general partners, amend the within 15 months of the prior annual meeting, at which the
partnership agreement, dissolve the partnership, shareholders elect the directors, with each shareholder
remove and/or elect a general partner, and approve or entitled to cast as many votes as there are directors to be
disapprove the sale of all or substantially all of elected, multiplied by the number of shares registered in
the Partnership's assets. As owner of more than 50% his or her name. Under California law, a majority vote of
of the Partnership units, PSI controls all voting shareholders is required for (i) the removal of directors,
decisions with respect to the Partnership. (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. The public PSI shareholders are substantially
limited in their ability to control PSI in view of the
significant ownership of PSI Common Stock by the Hughes
family.
</TABLE>
Shareholders have different voting rights, including the right to elect
directors annually, than the voting rights afforded to limited partners.
MANAGEMENT AND DUTIES
<TABLE>
<S> <C>
As a matter of state law, the general partners have PSI is managed by its board of directors and executive
liability for the payment of Partnership obligations officers. A majority of the directors of PSI are
and debts, unless limitations upon such liability are independent directors. Under California law, directors are
expressly stated in the obligation. The partnership accountable to a corporation and its shareholders as
agreement provides that the general partners are not fiduciaries and are required to perform their duties in
liable to the Partnership or the limited partners for good faith, in a manner believed to be in the best
any act or omission performed in good faith pursuant interests of a corporation and its shareholders and with
to authority granted by the partnership agreement, such care, including reasonable inquiry, as an ordinarily
and in a manner reasonably believed to be within the prudent person in a like position would use under similar
scope of authority granted and in the best interests circumstances. The liability of the directors of PSI and
of the Partnership, provided that such act or the Partnership is limited pursuant to the provisions of
omission did not constitute fraud, misconduct, bad California law and their organizational documents, which
faith or negligence. In addition, the partnership limit a director's liability for monetary damages to the
agreement indemnifies the general partners for respective corporation or its shareholders for breach of
liability, loss, damage, costs and expenses, the director's duty of care, where a director fails to
including attorneys' fees, incurred by them in exercise sufficient care in carrying out the
conducting the Partnership's business, except in the responsibilities of office. Those provisions would not
case of fraud, misconduct, bad faith or negligence. 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, PSI's organizational
documents provide PSI 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 has taken advantage of those
provisions and
</TABLE>
38
<PAGE>
PARTNERSHIP PSI
<TABLE>
<S> <C>
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 has been advised that, in the opinion of the Commission,
such provisions are contrary to public policy and therefore are
not enforceable.
</TABLE>
The general partners have, under most circumstances, no liability to the
Partnership for acts or omissions it undertakes when performed in good faith,
in a manner reasonably believed to be within the scope of their authority and
in the best interests of the Partnership. The general partners also have,
under specified circumstances, a right to be reimbursed by the Partnership for
liability, loss, damage, costs and expenses they incur by virtue of serving as
general partners. Although the standards are expressed somewhat differently,
there are similar protections from liability available to directors and
officers of PSI when acting on behalf of PSI and rights of directors and
officers to seek indemnification from PSI. PSI believes that the scope of the
liability and indemnification provisions in PSI's governing documents provides
protection against claims for personal liability against PSI's directors and
officers which is comparable to, though not identical with, the protections
afforded to the general partners under the partnership agreement.
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
The Partnership Agreement does not provide for Subject to the rules of the NYSE and applicable provisions of
the issuance of additional Partnership units. California law, PSI has issued and intends to continue to issue
authorized capital stock without shareholder approval.
</TABLE>
Given the ownership level of PSI common stock by the Hughes family and
PSI's flexibility to issue capital stock, including senior securities with
special voting rights and priority over PSI common stock, and control of all
Partnership voting decisions by PSI, both PSI and the Partnership are in a
position to deter attempts to obtain control in transactions not approved by
management.
LIMITED LIABILITY OF INVESTORS
<TABLE>
<S> <C>
Under the partnership agreement and California law, Under California law, shareholders are not generally liable
the liability of limited partners for the Partnership for corporate debts or obligations. The PSI common stock
debts and obligations is limited to the amount of is nonassessable.
their investments in the Partnership, together with
an interest in undistributed income, if any. The
Partnership units are fully paid and nonassessable.
</TABLE>
The limitation on personal liability of PSI shareholders is substantially
the same as that of the limited partners.
REVIEW OF INVESTOR LISTS
<TABLE>
<S> <C>
A limited partner is entitled to request copies of Under applicable law, a PSI shareholder is entitled, upon
investor lists showing the names and addresses of all written demand, to inspect and copy the record of
limited partners. The right to receive such investor shareholders, at any time during usual business hours, for
lists is conditioned upon payment of the cost of a purpose reasonably related to his or her interest as a
duplication and mailing. shareholder.
</TABLE>
Limited Partners and shareholders are entitled to access to investor lists
and to share records, respectively, subject to certain requirements.
39
<PAGE>
AMENDMENT TO PARTNERSHIP AGREEMENT
While the general partners do not believe that the partnership agreement
prohibits the merger, the partnership agreement is being amended to expressly
authorize the merger. Appendix D contains a complete text of the amendment.
40
<PAGE>
APPROVAL OF THE MERGER AND PARTNERSHIP AGREEMENT AMENDMENT
GENERAL
This statement is first being mailed on or about August 14, 1998 to limited
partners in connection with the merger and the amendment to the partnership
agreement. The general partners are not soliciting proxies in connection with
these matters.
Holders of record at the close of business on the date of this statement
will be entitled to receive notice of the merger and the amendment to the
partnership agreement. On such date, there were outstanding 66,000 Partnership
units. As of the record date, PSI beneficially owned 45,982 units
(approximately 70% of the units).
The affirmative vote of a majority of the Partnership units is required to
approve the merger and the amendment. As indicated above, the general partners
are not soliciting proxies from the limited partners in connection with these
matters. PSI owns sufficient units to approve the merger and the amendment
without the vote of any other limited partner and has approved these matters by
written consent in accordance with California law and the partnership agreement.
The merger and the amendment will become effective upon the signing of the
amendment and the filing of a certificate of merger with the California
Secretary of State, which pursuant to Rule 14c-2 under the Exchange Act will not
take place until at least 20 business days following the date on which this
statement is mailed to limited partners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PARTNERSHIP. The Partnership is not aware of any beneficial owner of more
than 5% of the Partnership units other than PSI which owns 45,982 units (70% of
the units).
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 Common Stock
Beneficially Owned
---------------------------------------
Number Percent
Name and Address of Shares of Class
- ---------------- --------- --------
<S> <C> <C>
B. Wayne Hughes, B. Wayne Hughes, Jr., Parker Hughes 38,071,191 32.7%
Trust No. 2, Tamara L. Hughes, PS Orangeco, Inc., a
California corporation ("PSOI")
701 Western Avenue,
Glendale, California 91201-2397,
PS Insurance Company, Ltd., a
Bermuda corporation ("PSIC")
41 Cedar Avenue
Hamilton, Bermuda (1)
FMR Corp. 10,778,155 9.3%
82 Devonshire Street
Boston, Massachusetts 02109 (2)
Cohen & Steers Capital Management, Inc. 7,294,800 6.3%
757 Third Avenue
New York, New York 10017 (3)
</TABLE>
________________
(1) This information is as of August 3, 1998. The reporting persons listed
above (the "Reporting Persons") have filed a joint Schedule 13D, amended as
of June 24, 1997. 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-
41
<PAGE>
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. Each of the Reporting
Persons disclaims the existence of a group within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934. 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 (Tamara L. Hughes beneficially owns an aggregate of 16,733,399
shares (exclusive of the shares owned by PSOI and PSIC) or approximately
14.4% of the shares of Common Stock outstanding as of August 3, 1998). Each
of the other Reporting Persons disclaims beneficial ownership of the shares
owned by any other Reporting Person.
The above table does not include 7,000,000 shares of PSI's Class B Common
Stock which are owned by B. Wayne Hughes, Jr. and Tamara L. Hughes. The
Class B Common Stock is convertible into 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 February 28, 1998 and is based on a Schedule 13G
(Amendment No. 4) filed by FMR Corp. (except that the percent shown in the
table is based on the shares of Common Stock outstanding at August 3, 1998).
As of February 28, 1998, FMR Corp. beneficially owned 10,778,155 shares of
Common Stock. This number includes 9,801,900 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 974,255 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 893,255 shares and sole dispositive power with
respect to 10,778,155 shares.
(3) This information is as of December 31, 1997 and is based on a Schedule 13G
(Amendment No. 1) filed by Cohen & Steers Capital Management, Inc. (except
that the percent shown in the table is based on the shares of Common Stock
outstanding at August 3, 1998). As of December 31, 1997, Cohen & Steers
Capital Management, Inc. beneficially owned 7,294,800 shares of Common
Stock. Cohen & Steers Capital Management, Inc. has sole voting power with
respect to 6,375,000 shares and sole dispositive power with respect to
7,294,800 shares.
The following table sets forth information as of August 3, 1998 concerning
the beneficial ownership of PSI common stock of each director of PSI, the chief
executive officer of PSI, the four most highly compensated persons who were
executive officers of PSI on December 31, 1997, and all directors and executive
officers of PSI as a group:
42
<PAGE>
<TABLE>
<CAPTION>
Shares of PSI Common Stock:
Beneficially Owned(1)
Shares Subject to Options(2)
--------------------------------------
Name Positions Number of Shares Percent
---- --------- ---------------- -------
<S> <C> <C> <C>
B. Wayne Hughes Chairman of the Board and
Chief Executive Officer 20,329,670(1)(3) 17.5%
Harvey Lenkin President and Director 600,125(1)(4) 0.5%
73,333(2) *
------- ----
673,458 0.6%
B. Wayne Hughes, Jr. Vice President and Director 1,008,122(1)(5) 0.9%
Robert J. Abernethy Director 71,851(1) *
8,333(2) *
------ ----
80,184 *
Dann V. Angeloff Director 81,500(1)(6) *
4,999(2) *
------ ----
86,499 *
William C. Baker Director 30,000(1) *
4,999(2) *
------ ----
34,999 *
Thomas J. Barrack, Jr. Director 2,619,893(1)(7) 2.2%
Uri P. Harkham Director 471,156(1)(8) 0.4%
David Goldberg Senior Vice President 89,547(1)(9) *
and General Counsel 114,167(2) *
------- ----
203,714 0.2%
Marvin M. Lotz Senior Vice President 70,939(1)(10) *
127,500(2) 0.1%
------- ----
198,439 0.2%
A. Timothy Scott Senior Vice President 3,367(1) *
and Tax Counsel 16,666(2) *
------ ----
20,033 *
All Directors and Executive Officers 25,511,115(1)(3)(4)(5)(6)
as a Group (16 persons) (7)(8)(9)(10)(11) 21.9%
486,961(2) 0.4%
---------- -----
25,998,076 22.2%
</TABLE>
_______________
* Less than 0.1%
(1) Shares of Common Stock beneficially owned as of August 3, 1998. 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 August 3, 1998, and portion of which will
be vested within 60 days of August 3, 1998, of shares of Common Stock
subject to options granted to the named individuals or the group pursuant
to PSI's stock option and incentive plans.
(3) Includes 19,945,983 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, held by custodians of IRAs for Mr. Hughes and Mrs.
43
<PAGE>
Kathleen Hughes as to which each has investment power, 5,389 shares held by
Mrs. Hughes as to which she has investment power and 43,638 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.
(4) Includes 1,249 and 734 shares, held by custodians of IRAs for Mr. Lenkin
and Mrs. Lenkin as to which each has investment power, 468 shares held by
Mrs. Lenkin, 1,079 and 150 shares, 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.
(5) Includes 1,231 and 233 shares, held by custodians of IRAs for Mr. Hughes,
Jr. and Mrs. Hughes, Jr. as to which each has investment power, 344 shares
held by Mrs. Hughes, Jr., 6,556 and 2,960 shares, held by Mr. Hughes, Jr.
as custodian for a daughter and a son, 5,901 shares held by Mrs. Hughes,
Jr. as custodian for a daughter and 1,348 shares held by Mr. Hughes, Jr.
and Tamara L. Hughes Separate Property. Excludes 30,777 shares held of
record by PSOI as to which Mr. Hughes, Jr. shares voting and dispositive
power; such shares are included under Mr. Hughes above (see footnote 3).
(6) Includes 6,000 shares held by a custodian of an IRA for Mr. Angeloff, 3,000
shares held by Mr. Angeloff as trustee of Angeloff's Children Trust and
70,500 shares held by Mr. Angeloff as trustee of Angeloff Family Trust.
(7) Shares held of record by Colony PSA, LLC, a limited liability company of
which Mr. Barrack is a controlling member.
(8) Includes 65,057 shares held by Mr. Harkham as trustee of Harkham Industries
Profit Sharing Plan, 338,868 shares held by Harkham Industries, Inc. (dba
Jonathan Martin, Inc.), a corporation wholly owned by Mr. Harkham, 43,832
shares held by Mr. Harkham as trustee of Uri Harkham Trust, 1,440 shares
held by a custodian of an IRA for Mr. Harkham as to which he has investment
power, 3,768, 4,419, 4,343, 4,616 and 4,716 shares, held by Mr. Harkham as
custodian for five of his children and 97 shares held by a custodian of an
IRA for a son.
(9) Includes 7,199 shares held by a custodian of an IRA for Mr. Goldberg and
4,260 shares held by David Goldberg Profit Sharing Plan. Excludes 540,000
shares held of record by the PSI Plan as to which Mr. Goldberg, as a member
of the PSI Plan's Advisory Committee, shares the power to direct voting and
disposition; such shares are included under Mr. Lenkin above (see footnote
4).
(10) Includes 12,326 and 1,126 shares held by custodians of IRAs for Mr. Lotz.
(11) 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.
44
<PAGE>
The following tables set forth information as of August 3, 1998 concerning
the remaining security ownership of each director of PSI, the chief executive
officer of PSI, the four most highly compensated persons who were executive
officers of PSI on December 31, 1997, and all directors and executive officers
of PSI as a group:
<TABLE>
<CAPTION>
Shares of 9.20% Shares of Adjustable Rate
Shares of 10% Cumulative Cumulative Preferred Cumulative Preferred
Preferred Stock, Series A Stock, Series B Stock, Series C
Beneficially Owned (1) Beneficially Owned (1) Beneficially Owned (1)
------------------------- ------------------------- ----------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin 1,000 (1) * 1,600 (1) * - -
B. Wayne Hughes, Jr. - - 400 (1)(3) * - -
Robert J. Abernethy - - 225 * - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg - - - - 600 (1)(4) *
Marvin M. Lotz - - - - - -
A. Timothy Scott - - - - - -
All Directors and 5,060 (1)(2) 0.3% 6,225 (1)(2)(3) 0.3% 600 (1)(4) *
Executive Officers as a
Group (16 persons)
</TABLE>
<TABLE>
<CAPTION>
Shares of 9.50% Shares of 10% Shares of 9.75%
Cumulative Preferred Stock, Cumulative Preferred Cumulative Preferred
Series D Stock, Series E Stock, Series F
Beneficially Owned(1) Beneficially Owned (1) Beneficially Owned (1)
--------------------------- ---------------------- ----------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - 893 (1) * - -
B. Wayne Hughes, Jr. - - - - - -
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg - - - - - -
Marvin M. Lotz - - - - - -
A. Timothy Scott - - - - - -
All Directors and 6,800 (1)(2) 0.6% 13,993 (1)(2) 0.6% 8,600 (1)(2) 0.4%
Executive Officers as a
Group (16 persons)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Depositary Shares, Depositary Shares,
Each Representing 1/1,000 Each Representing 1/1,000
of a Share of 8-7/8% of a Share of 8.45%
Cumulative Preferred Cumulative Preferred
Stock, Series G Stock, Series H Class B Common Stock
Beneficially Owned (1) Beneficially Owned(1) Beneficially Owned(1)
---------------------- --------------------- --------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
B. Wayne Hughes, Jr. - - - - 3,204,758 (1) 45.8%
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg - - - - - -
Marvin M. Lotz - - - - - -
A. Timothy Scott - - - - - -
All Directors and 8,000 (1)(2) 0.1% 8,000 (1)(2) 0.1% 3,204,758 (1) 45.8%
Executive Officers as a
Group (16 persons)
</TABLE>
_________________
* Less than 0.1%
(1) Shares of 10% Cumulative Preferred Stock, Series A, 9.20% Cumulative
Preferred Stock, Series B, Adjustable Rate Cumulative Preferred Stock,
Series C, 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 Share of 8.45% Cumulative Preferred Stock, Series H, or Class B
Common Stock, as applicable, beneficially owned as of August 3, 1998.
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 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.
(3) Shares held by Mr. Hughes, Jr. and Tamara L. Hughes -- Separate Property.
(4) Includes 500 shares held by a custodian of an IRA for Mr. Goldberg and 100
shares held by David Goldberg Profit Sharing Plan.
As of August 3, 1998, the directors and executive officers of PSI did not
own any shares of PSI's Depositary Shares, each representing 1/1,000 of a Share
of 8-5/8% Cumulative Preferred Stock, Series I, Depositary Shares, each
representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J or
Equity Stock, Series A.
46
<PAGE>
CERTAIN RELATED TRANSACTIONS
The following are the principal relationships between PSI and the
Partnership:
JOINT VENTURE INTERESTS. PSI owns a joint venture interest (ranging from
approximately 25% to 70%) in all of the Properties and in the interest in PSBP.
Under the joint ventures, certain special allocation rules apply and PSI has the
right to compel the sale of the Properties. See Note (1) to the Notes to
Consolidated Financial Statements of the Partnership. (Appendix E).
GENERAL PARTNERS' INTEREST. PSI and Hughes are general partners of the
Partnership. PSI receives incentive distributions equal to 10% of the
Partnership's cash flow and has a subordinated interest in proceeds from sales
or financings of the Properties (15% of such proceeds so long as limited
partners have received sale or financing distributions equal to their capital
contributions plus any deficiency in a simple 8% annual return). In 1995, 1996
and 1997, the general partners received from the Partnership $482,000, $320,000
and $320,000, respectively, in respect of their incentive distributions. The
general partners also have a 1% interest in the Partnership in respect of their
capital contributions and participate in Partnership distributions in proportion
to their interest in the Partnership.
PROPERTY MANAGEMENT. The Properties are managed by PSI and PSBP pursuant
to management agreements under which the property managers receive 6% and 5% of
gross revenues from operations of the mini-warehouse and commercial space,
respectively. In 1995, 1996 and 1997, the property managers received $649,000,
$668,000 and $675,000, respectively, from the Partnership.
LIMITED PARTNER INTERESTS. Of the 66,000 outstanding Partnership units,
45,982 units (approximately 70%) are beneficially owned by PSI. PSI
participates in Partnership distributions on the same terms as other holders of
units in respect of units owned by PSI.
PSBP. The Partnership owns a 0.5% interest in PSBP. PSI controls PSBP
through a significant ownership interest.
47
<PAGE>
DESCRIPTION OF PARTNERSHIP PROPERTIES
The Partnership and PSI jointly own the 27 Properties. All of the
Properties are mini-warehouses, one of which includes commercial space. Mini-
warehouses are designed to offer accessible storage space for personal and
business use at a relatively low cost. A user rents a fully enclosed space
which is for the user's exclusive use and to which only the user has access on
an unrestricted basis during business hours. On-site operation is the
responsibility of resident managers who are supervised by area managers. Some
mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the storage
space which ranges generally from 25 to 400 square feet.
Users of space in mini-warehouses include both individuals and large and
small businesses. Individuals usually employ this space for storage of, among
other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
The following table sets forth information as of December 31, 1997 about
the Properties.
<TABLE>
<CAPTION>
Net Number Partnership's
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- --------------------------- --------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
ARIZONA
Tucson, N. Romero Rd. 63,400 585 11/02/83 72.5%
CALIFORNIA
Campbell 52,300 379 11/10/83 50.0
Salmar Ave.
Sacramento 36,900 406 12/30/82 58.7
Folsom
Ventura 51,900 526 06/17/83 68.8
Walker
COLORADO
Aurora 39,400 334 11/18/83 70.0
Hanover Way
Colorado Springs 26,500 147 05/13/83 59.7
Delta Drive
Colorado Springs 83,000 542 11/02/83 72.5
Edison Ave.
Colorado Springs 51,600 427 11/02/83 72.5
Mount View
Colorado Springs 50,400 478 01/04/83 51.6
Platte Ave.
Thornton 66,900 602 11/02/83 72.5
York St.
CONNECTICUT
Southington 42,600 491 09/08/83 46.5
Spring St.
DELAWARE
Dover 51,400 587 09/20/83 50.0
Jeffric
New Castle 64,900 667 09/20/83 50.0
New Churchmans Rd
Newark 62,600 748 09/20/83 50.0
Bellevue Rd.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Net Number Partnership's
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- --------------------------- --------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
FLORIDA
Orlando 56,500 537 10/13/83 70.0
J. Young Parkway
Semoran 82,200 733 01/31/83 50.8
Extra
INDIANA
Ft. Wayne 42,000 447 09/20/83 70.0
Bluffton Rd.
Ft. Wayne 67,600 599 09/20/83 70.0
W. Coliseum
Hobart 81,100 470 08/31/83 70.0
Ridge Rd.
NEW JERSEY
Blackwood 64,100 594 03/29/83 44.2
Peters Lane
NEW YORK
Vailsgate 37,200 354 04/22/83 41.6
Route 94
OKLAHOMA
Oklahoma City 62,900 478 11/02/83 72.5
Reno Ave.
OREGON
Portland 34,200 367 12/30/82 58.7
Halsey
PENNSYLVANIA
Langhorne 98,800 1,141 09/20/83 50.0
S. Flower Mill
Southhampton 93,000 785 09/13/83 30.0
Jaymor
TEXAS
Webster 75,100 609 09/01/83 60.4
Gulf Freeway
Webster
NASA Rd.
mini-warehouse 97,000 934 11/10/83 70.0
commercial space 20,700 20 11/10/83 70.0
</TABLE>
As of the date of this statement, each of the 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. At present, the Partnership has no plans for any
material renovation or improvement of its properties. However, the Partnership
budgets for regular maintenance, repair and upgrade to its properties. The
Partnership believes each of its properties is adequately covered by insurance.
Competition exists in all of the market areas in which the Properties are
located, and the barriers to entry are relatively low for competitors with the
necessary capital. However, the Partnership believes that the current overall
demand for mini-warehouse space is strong, and as reflected in the table below
the overall performance of
49
<PAGE>
the Properties has generally improved. The Properties are, and will continue
after the merger to be, operated as part of the "Public Storage" system by PSI,
the largest operator of mini-warehouses in the United States.
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the Properties for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Weighted average occupancy level (1) 89% 89% 90%
Annual realized rent per occupied
square foot (1)(2) $7.09 $7.25 $7.59
</TABLE>
- ---------------
(1) Mini-warehouse only.
(2) Realized rent per occupied 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.
None of the Properties has a book value of at least 10% of the
Partnership's total assets or has accounted for at least 10% of its gross
revenues.
50
<PAGE>
DESCRIPTION OF PSI'S PROPERTIES
At December 31, 1997, PSI had equity interests (through direct ownership,
as well as general and limited partnership interests and stock ownership
interests) in 1,136 facilities (533 of which were wholly-owned) located in 38
states. These facilities consist of 1,073 mini-warehouses and 63 business
parks. None of PSI's current investments involves 10% or more of PSI's total
assets or gross revenues.
For a general description of mini-warehouses, see "Description of
Partnership Properties."
The following table reflects the geographic diversification of PSI's mini-
warehouses ("Mini") and business parks ("BP"):
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
----------------------- ------------------------
Mini(1) BP Mini(1) BP
------------- ------- --------- ------
<S> <C> <C> <C> <C>
California:
Northern 129 8 7,172 891
Southern 149 23 9,443 3,083
Texas 122 8 8,029 843
Florida 98 - 5,705 -
Illinois 65 - 4,074 -
Colorado 37 - 2,329 -
Washington 36 1 2,226 28
Georgia 36 - 1,957 -
Virginia 33 8 2,040 712
New Jersey 35 - 2,018 -
Maryland 32 3 1,802 419
New York 29 - 1,692 -
Ohio 27 - 1,650 -
Oregon 25 2 1,171 102
Nevada 22 - 1,409 -
Pennsylvania 18 - 1,224 -
Missouri 18 - 954 -
Other states (22 states) 162 10 9,129 800
----- -- ------ -----
Totals 1,073 63 64,024 6,878
===== == ====== =====
</TABLE>
---------------------
(1) Includes properties that combine mini-warehouse and business park
space.
As of the date of this statement, each of PSI's properties is generating
sufficient revenues to cover its operating expenses. Only 29 of PSI's
properties are 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. These 29 properties are encumbered
by mortgages in the aggregate amount of $43,308,000, bearing interest at rates
ranging from 7.07% to 11.0% per year and maturing between July 1998 and
September 2020. Each of PSI's properties will continue to be used for its
current purpose. At present, PSI has no plans for any material renovation or
improvement of its properties except as noted in the property table above.
However, PSI budgets for regular maintenance, repair and upgrade to its
properties. PSI believes each of its properties is adequately covered by
insurance.
Competition exists in substantially all of the market areas in which PSI's
mini-warehouses and commercial properties are located, and the barriers to entry
are relatively low for competitors with the necessary capital. However, PSI
believes that the current overall demand for mini-warehouse and commercial space
is strong, and as reflected in the table below the overall performance of PSI's
mini-warehouses and commercial properties has generally improved. More than 10%
of PSI's net rentable square feet of space are located in each of the Southern
California, Northern California and Texas market areas. The economy of each of
those markets has been
51
<PAGE>
strengthening. PSI's mini-warehouses are operated as part of the "Public
Storage" system. PSI is the largest operator of mini-warehouses in the United
States.
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the 951 mini-warehouses in which PSI had an interest, direct
or indirect, in each of 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average occupancy level (1) 90.1% 91.2% 91.8%
Annual realized rent per occupied
square foot (1)(2) $8.40 $8.76 $9.24
</TABLE>
- ---------------
(1) Properties owned throughout the periods.
(2) Realized 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.
52
<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>
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 31 3/8 22 1/4 .22
1997:
First quarter 30 7/8 26 1/2 .22
Second quarter 29 1/4 25 7/8 .22
Third quarter 30 7/8 27 .22
Fourth quarter 30 5/8 26 1/8 .22
1998:
First quarter 33 5/8 28 11/16 .22
Second quarter 32 3/4 26 5/16 .22
Third quarter (through
August 6, 1998) 28 7/8 23 9/16 .22(2)
</TABLE>
_______________
(1) For GAAP purposes, all distributions were from investment income.
(2) Distribution of $.22 per share payable on September 30, 1998 to shareholders
of record on September 11, 1998.
As of June 30, 1998, there were approximately 23,264 record holders of PSI
common stock. On August __, 1998, the last full trading day prior to the date of
this statement, the closing price of the PSI common stock 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 "Federal Income Tax Considerations -- 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.
53
<PAGE>
DISTRIBUTIONS AND MARKET PRICES OF PARTNERSHIP UNITS
PARTNERSHIP DISTRIBUTIONS. The following table sets forth the
distributions paid per Partnership unit (original purchase price $500) in the
periods indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION
------------
<S> <C>
1996:
First Quarter $10.80
Second Quarter 10.80
Third Quarter 10.80
Fourth Quarter 10.80
1997:
First Quarter 10.80
Second Quarter 10.80
Third Quarter 10.80
Fourth Quarter 10.80
1998:
First Quarter 10.80
Second Quarter 10.80
</TABLE>
HOLDERS OF PARTNERSHIP UNITS. As of July 1, 1998, there were approximately
952 record holders of Partnership units.
SALES OF PARTNERSHIP UNITS. The Partnership units are not listed on any
national securities exchange or quoted in the over the counter market, and there
is no established public trading market for the units. Secondary sales activity
for the units has been limited and sporadic. The general partners monitor
transfers of the units (i) because the admission of the transferee as a
substitute limited partner requires the consent of the general partners under
the partnership agreement, (ii) in order to track compliance with safe harbor
provisions to avoid treatment as a "publicly traded partnership" for tax
purposes and (iii) because PSI has purchased units. However, the general
partners do not have information regarding the prices at which all secondary
sales transactions in the units have been effectuated. Various organizations
offer to purchase and sell limited partnership interests (such as the units) in
secondary sales transactions. Various publications such as The Stanger Report
summarize and report information (on a monthly, bimonthly or less frequent
basis) regarding secondary sales transactions in limited partnership interests
(including the units), including the prices at which such secondary sales
transactions are effectuated.
The general partners estimate, based solely on the transfer records of the
Partnership and the Partnership's transfer agent, that the number of Partnership
units transferred in sales transactions (i.e., excluding transactions believed
to be between related parties, family members or the same beneficial owner) was
as follows:
<TABLE>
<CAPTION>
NUMBER OF TOTAL PERCENTAGE OF NUMBER OF
YEAR UNITS TRANSFERRED(1) UNITS OUTSTANDING TRANSACTIONS(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 4,948(2)(3) 7.50% 248(2)(3)
1997 611(4) .93% 26(4)
1998 (through March 31) 100(5) .15% 5(5)
</TABLE>
(1) Transfers are recorded quarterly on the Partnership's records, as of the
first day following each calendar quarter.
(2) In 1996, PSI purchased 245 Units in 11 transactions: 40 Units at $400 per
Unit (January 1), 40 Units at $390 per Unit (April 1), 35 Units at $400 per
Unit (April 1), 20 Units at $455 per Unit (July 1) and 110 Units at $548 per
Unit (October 1).
54
<PAGE>
(3) In 1996, PSI accepted for purchase 4,532 Units tendered in response to PSI's
cash tender offer at $548 per Unit.
(4) In 1997, PSI purchased 359 Units in 12 transactions: 192 Units at $548 per
Unit (January 1), 20 Units at $548 per Unit (April 1), 47 Units at $548 per
Unit (July 1), 20 Units at $500 per Unit (October 1) and 80 Units at $548
per Unit (October 1).
(5) On January 1, 1998, PSI purchased 60 Units in three transactions: 60 Units
at $548 per Unit.
On April 1, 1998, PSI purchased 97 Units in three transactions: 7 Units at
$500 per Unit and 90 Units at $548 per Unit.
On June 2, 1998, PSI purchased 40 Units in one transaction at $548 per Unit.
All of the purchases of Partnership units described in notes (2), (4) and
(5) above were acquired directly from limited partners or through secondary
firms of the type described below under "Information From The Stanger Report
Regarding Sales Transactions." On June 2, 1998, PSI purchased 40 Units at $548
per Unit directly from a unitholder.
INFORMATION OBTAINED FROM DEAN WITTER REGARDING SALES TRANSACTIONS. Dean
Witter Reynolds Inc. ("Dean Witter") was the dealer-manager for the
Partnership's initial offering of Units. Set forth below is information
obtained from Dean Witter on the high and low sale price per Unit for sale
transactions during each quarter of 1996, 1997 and 1998 (through March 31):
<TABLE>
<CAPTION>
Per Unit Transaction Price (1)(2) Number
--------------------------------- Number of Units
High Low of Sales(2) Sold(2)
---- --- ----------- -------
<S> <C> <C> <C> <C>
1996
First Quarter - - - -
Second Quarter - - - -
Third Quarter - - - -
Fourth Quarter - - - -
1997
First Quarter - - - -
Second Quarter - - - -
Third Quarter - - - -
Fourth Quarter - - - -
1998
First Quarter - - - -
</TABLE>
_______________
(1) The original purchase price was $500 per Unit.
(2) This information was compiled by Dean Witter in the ordinary course based
upon reports made of negotiated sales. The price information represents the
prices reported to have been paid by the buyers to the sellers net of
commissions.
Dean Witter advised the Partnership that it had no information on
transactions in Units during the periods in the table.
INFORMATION FROM THE STANGER REPORT REGARDING SALES TRANSACTIONS. The
information set forth below is extracted from sections of the June 1996,
September 1996, Fall 1996, Winter 1996, Spring 1997, Summer 1997, Fall 1997,
Winter 1997 and Spring 1998 issues of The Stanger Report captioned "Limited
Partnership Secondary-Market Prices" and additional information provided to the
General Partners by Robert A. Stanger & Co., Inc. ("Stanger"). Those
publications (the "Stanger Publications") and the additional information
provided by Stanger summarized secondary market prices for public limited
partnerships based on actual transactions during the
55
<PAGE>
reporting periods listed on the tables below. The following secondary-market
firms provided high and low price data to The Stanger Report for some or all of
the reporting periods: American Partnership Board -- (602) 368-6240; American
Partnership Services -- (800) 736-9797, (801) 756-1166; Bigelow Management,
Inc. -- (800) 431-7811, (212) 697-5880; Chicago Partnership Board -- (800) 272-
6273, (312) 332-4100; Cuyler & Associates -- (800) 274-9991, (602) 596-0120; DCC
Securities Corp. -- (800) 945-0440, (212) 370-1090; Empire Securities -- (805)
723-5530; Equity Line Properties -- (800) 327-9990, (305) 670-9700; Equity
Resources Group -- (671) 876-4800; Fox & Henry, Inc. -- (708) 325-4445; Frain
Asset Management -- (800) 654-6110; MacKenzie-Patterson Securities -- (800) 854-
8357, (510) 631-9100; National Partnership Exchange -- (813) 636-9299;
Nationwide Partnership Marketplace -- (800) 969-8996, (415) 382-3555; New York
Partnership Exchange -- (800) 444-7357, (813) 955-8816; Northcoast Securities --
(561) 496-5387; Pacific Partnership Group -- (800) 727-7244, (602) 957-3050;
Partnership Service Network -- (800) 483-0776, (813) 588-0776; Raymond James &
Associates -- (800) 248-8863; and The Partnership Marketing Company -- (707)
824-8600.
The information regarding sale transactions in Partnership units from the
Stanger Publications and Stanger is as follows:
<TABLE>
<CAPTION>
Per Unit Transaction Price(1)
-----------------------------
Reporting period High Low No. of Units(2)
---------------- ---- --- ---------------
<S> <C> <C> <C>
1996
----
January 1 -- March 31 $455.00 $390.00 95
April 1 -- June 30 - - -
July 1 -- September 30 - - -
October 1 -- December 31 - - -
1997
----
January 1 -- March 31 196.00 196.00 6
April 1 -- June 30 425.00 176.00 49
July 1 -- September 30 500.00 431.17 27
October 1 -- December 31 - - -
1998
----
January 1 -- March 31(3) - - -
</TABLE>
_______________
(1) The original purchase price was $500 per Unit. The General Partners do
not know whether the transaction prices shown are before or after
commissions.
(2) The General Partners do not know the number of transactions.
The information from The Stanger Report contained above is provided without
verification by the General Partners and is subject to the following
qualifications in The Stanger Report: "Limited partnerships are designed as
illiquid, long-term investments. Secondary-market prices generally do not
reflect the current value of partnership assets, nor are they indicative of
total return since prior cash distribution and tax benefits received by the
original investor are not reflected in the price. Transaction prices are not
verified by Robert A. Stanger & Co."
56
<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, 50,000,000 shares of preferred stock, par value $.01 per share
and 200,000,000 shares of equity stock, par value $.01 per share. At August 6,
1998, PSI had outstanding 116,491,167 shares of PSI common stock (before
redemptions of __________ shares of PSI common stock not reflected in the
transfer agent's records as of August 6, 1998 and 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, 11,129,650 shares of
preferred stock and 225,000 shares of equity 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 or equity 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 was established in order to assist
in preserving PSI's REIT status in view of the Hughes family's substantial
ownership interest in PSI. See "Federal Income Tax Considerations -- General
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
57
<PAGE>
who would be treated as "individuals" for the purposes of Section 542(a)(2) of
the Code and who would beneficially own the largest amounts of stock of 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,
58
<PAGE>
Inc. ("NAREIT"). The NAREIT definition does not specifically address the
treatment of minority interest in the determination of FFO or the treatment of
the amortization of property management agreements and goodwill. In the case of
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 August 6, 1998, PSI had 10 series of senior preferred stock outstanding.
In all respects, each of the series of senior preferred stock ranks on a parity
with each other. 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, provides for cumulative quarterly dividends
calculated as a percentage of the stated value (ranging from 8% to 10% per year
in the case of the nine series of fixed rate senior 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 senior 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 senior 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 senior 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, liquidating distributions in the amount or
equivalent 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.
EQUITY STOCK
PSI is authorized to issue 200,000,000 shares of equity stock, $.01 par
value per share. At August 6, 1998, PSI had 225,000 outstanding shares of
equity stock which rank on a parity with the PSI common stock. PSI's articles
of incorporation provide that the equity 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, redemption
provisions and liquidation rights of each series of equity stock. Holders of
equity stock have no preemptive rights. The shares of equity stock will be,
when issued, fully paid and nonassessable.
EFFECTS OF ISSUANCE OF CAPITAL STOCK
The issuance of PSI common stock and the issuance of preferred stock or
equity 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 or equity stock for such purposes.
59
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations that are generally applicable to the public limited partners as a
result of the merger and as a result of the subsequent ownership and disposition
of shares of PSI common stock for limited partners that do not make a cash
election. This discussion is not exhaustive of all possible tax considerations
and does not give a detailed description of any state, local, or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a limited partner in light of his or her
particular circumstances or to certain types of limited partners who are subject
to special treatment under federal income tax laws (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States).
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), including the provisions of the IRS Restructuring and Reform Act
(the "1998 Reform Act"), the Taxpayer Relief Act of 1997 (the "1997 Act"),
applicable Treasury Regulations, judicial decisions, and Internal Revenue
Service ("IRS") rulings, certain factual assumptions related to the ownership
and operation of PSI and the Partnership and certain representations made by PSI
and the Partnership. 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 circumstances of PSI or the Partnership that would
affect this discussion. Neither the Partnership nor PSI plans to obtain any
rulings from the IRS concerning tax issues with respect to the merger or the
continued qualification of PSI as a REIT. Thus, no assurance can be provided
that the statements set forth in this discussion (which do not bind the IRS or
the courts) will not be challenged by the IRS or will be sustained if so
challenged.
BECAUSE THIS DISCUSSION DOES NOT DEAL WITH ALL ASPECTS OF FEDERAL TAXATION,
AND THE TAX CONSEQUENCES WILL NOT BE THE SAME FOR ALL PUBLIC LIMITED PARTNERS,
PUBLIC LIMITED PARTNERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL, AND FOREIGN TAX LAWS.
OPINION OF COUNSEL
A. Timothy Scott, tax counsel and senior vice president of PSI, has
reviewed the following discussion and is of the opinion that this discussion
fairly summarizes the material federal income tax considerations to the public
limited partners as a result of the merger and as a result of the subsequent
ownership of PSI common stock for limited partners that do not make a cash
election, and that PSI is organized and operated so as to meet the requirements
for qualification as a REIT. As is noted below, PSI's qualification and
taxation as a REIT depends upon both PSI's satisfaction in the past, and PSI's
ability to meet on a continuing basis in the future, through actual annual
operating and other results, the various requirements under the Code with regard
to, among other things, the sources of its gross income, the lack of "C"
corporation earnings and profits, the composition of its assets, the levels of
distributions to shareholders, and the diversity of its stock ownership. Tax
counsel has relied upon representations of management with respect to these
matters and has not reviewed or audited, and will not review or audit,
compliance with these requirements and does not express an opinion about those
representations. Accordingly, no assurance can be given that the actual results
of PSI's operations, the sources of its income, the lack of "C" corporation
earnings and profits, the nature of its assets, the level of its distributions
to shareholders and the diversity of its share ownership for any given taxable
year have satisfied or will satisfy the requirements under the Code for
qualification and taxation as a REIT. The opinion is not binding upon the IRS
or the courts, and there can be no assurance that the IRS 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 or the
discussion set forth below. Finally, the opinion is expressly limited to the
specific conclusions described in the first sentence of this section and does
not purport to address any other federal, state, local or foreign tax
consequences that may result from the merger or any other transaction.
THE MERGER
The merger will be treated for federal income tax purposes as a taxable
sale of the Partnership Units held by public limited partners, both for limited
partners electing to receive cash and for those electing to receive PSI
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common stock. Taxable public limited partners will be taxed on the difference
between the adjusted basis of their units and the amount of cash received or the
fair market value of the PSI common stock received. PSI estimates that taxable
public limited partners who acquired their units in the original offering will
recognize a capital gain of approximately $500 per unit as a result of the
merger (assuming that the merger is effective at the end of the third quarter of
1998 and based on PSI's estimate of the Partnership's results of operations
during the first three quarters of 1998). The particular tax consequences of the
merger for a public limited partner will depend upon a number of factors related
to his or her tax situation, including the tax basis of the limited partner's
units and the tax impact could be quite different for public limited partners
who acquired their units after the original offering.
To the extent that a taxable public limited partner recognizes a capital
loss as a result of the merger, the loss generally can be applied to offset
capital gain from other sources. Individuals may use capital losses in excess
of capital gains to offset up to $3,000 of ordinary income in any single year
($1,500 for a married individual filing a separate return). Any capital losses
that are not used currently can be carried forward for use in subsequent years.
A corporation's capital losses in excess of current capital gains generally may
be carried back three years, with any remaining unused portion available to be
carried forward for five years.
The merger is not expected to be a taxable event for PSI, which will retain
its existing interests in the Partnership and will be treated as having
purchased the interests of the public limited partners.
GENERAL TAX TREATMENT OF PSI
If certain detailed conditions imposed by the Code and the related Treasury
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 continues in effect until it is revoked or
terminated. PSI believes that it has qualified since its election, and
currently qualifies, as a REIT, and PSI expects to continue to be taxed as a
REIT for federal income tax purposes. 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 that PSI will so qualify for any particular year.
Technical Requirements for Taxation as a REIT. The following is a very
brief overview of certain of the technical requirements that PSI must meet on an
ongoing basis in order to continue to qualify as a REIT. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations of those
provisions.
The Code defines a REIT as a corporation, trust or association: (1) that
is managed by one or more trustees or directors, (2) the beneficial ownership of
which is evidenced by transferable shares of stock, or by transferable
certificates of beneficial interest, (3) that would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Code, (4) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code, (5) the beneficial ownership of which is held by 100 or more persons,
(6) that during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities and
applying certain ownership attribution rules)(the "5/50 Test"), and (7) that
meets certain other tests, described below, regarding the nature of its income
and assets and the amount of its distributions.
PSI's articles of incorporation and bylaws contain restrictions regarding
the transfer of its capital stock that are intended to assist PSI in continuing
to satisfy the stock ownership requirements described in conditions (5) and (6).
See "Description of PSI Capital Stock -- Ownership Limitations." The ownership
restrictions in PSI's articles of incorporation and bylaws generally prohibit
the actual or constructive ownership of more than 2% of the outstanding shares
of common stock (excluding the interest held by the Hughes family) or more than
9.9% of the outstanding shares of each class or series of shares of preferred
stock or equity stock, unless an exception is
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established by the Board of Directors. The restrictions provide that if, at any
time, for any reason, those ownership limitations are violated or 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 stock necessary to cure the
violation will automatically and irrevocably be transferred from the person
causing the violation to a designated charitable beneficiary.
The ownership restrictions are modeled after certain arrangements that the
IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the REIT ownership tests so long as the 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 and PSI
has not obtained and will not seek a private ruling on this issue) or contend
that PSI failed to enforce these arrangements.
Pursuant to the 1997 Act, for PSI's taxable years commencing on or after
January 1, 1998, if PSI complies with regulatory rules pursuant to which it is
required to send annual letters to holders of its capital stock requesting
information regarding the actual ownership of the capital stock, and PSI does
not know, or exercising reasonable diligence would not have known, whether it
failed to meet the 5/50 Test (requirement (6) above), PSI will be treated as
having met the 5/50 Test. PSI believes that it has issued and outstanding
sufficient shares with sufficient diversity of ownership to allow it to satisfy
the REIT ownership requirements, and PSI intends to comply with the regulatory
rules to be issued pursuant to the 1997 Act. See "- Consequences of the PSMI
Merger on PSI's Qualification as a REIT -- Violation of Ownership Requirements."
A REIT is not allowed to have accumulated earnings and profits attributable
to non-REIT years. A REIT has until the close of its first taxable year in
which it has non-REIT earnings and profits to distribute any such accumulated
earnings and profits. In a corporate reorganization qualifying as a tax free
statutory merger (such as the PSMI Merger), the acquired corporation's current
and accumulated earnings and profits are carried over to the surviving
corporation. Under Treasury Regulations, any non-REIT 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.
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."
Income Tests. In order to maintain qualification as a REIT, PSI must
satisfy certain gross income requirements, which are applied on an annual basis.
First, at least 75% of PSI's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of PSI's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from the same items which qualify under the
75% income test, and from dividends, interest and gain from the sale or
disposition of stock or securities, or from any combination of the foregoing.
For taxable years ending on or before December 31, 1997, REITs were subject to a
third gross income test providing that short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property) must have
represented less than 30% of the REIT's gross income (including gross income
from prohibited transactions). Pursuant to the 1997 Act, PSI will not have to
meet this 30% gross income test in 1998 and subsequent years.
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. PSI does not anticipate that it will receive income from such 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
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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" ("Permissible
Services"). 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."
Pursuant to the 1997 Act, for PSI's taxable years commencing on or after
January 1, 1998, rents received generally will qualify as rents from real
property even if PSI were to provide services that are not Permissible Services
so long as the amount received for such "impermissible services" meets a de
minimis standard. The amount received for impermissible services with respect
to a property will be de minimis so long as such amount does not exceed one
percent of all amounts received, directly or indirectly, by PSI with respect to
such property. In computing any such amounts, the amount that PSI would be
deemed to have received for performing impermissible services will be the
greater of the actual amount so received or 150% of the direct cost to PSI of
providing the impermissible services.
See "- 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" for a
discussion of specific aspects of the PSMI Merger that may affect PSI's ability
to satisfy the 95% gross income test.
If PSI fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if
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 operate so that, in the event it were to fail to meet
the gross income tests, it would satisfy the "good cause" exception. It is not
possible, however, to state whether in all circumstances PSI would be entitled
to the benefit of this relief provision. Even if the relief provision were to
apply, PSI 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.
Asset Tests. Generally, to maintain REIT qualification, 75% of the value
of PSI's total assets must be represented by real estate, mortgages secured by
real estate, cash, or government securities (including its allocable share of
real estate assets held by any partnerships in which 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 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), PSPUD (a
subsidiary of the Lock/Box Company) or PS Clearing Company, Inc. ("PSCC") (in
which PSI owns a less than 10% voting 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.
See "- Recent Administration Proposal" for a discussion of a proposal that,
if enacted, would limit PSI's ability to derive economic benefits from the
activities of the Lock/Box Company and PSPUD.
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets and to earn a
proportionate share of the income of any partnership in which it holds
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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."
Annual Distribution Requirements. In order to qualify as a REIT, 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).
In years prior to 1990, PSI made distributions in excess of its REIT
taxable income. During 1990, PSI reduced its distributions to its 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 1996 by attributing distributions in 1991 through 1997 to the
prior year's taxable income, and PSI expects to satisfy the distribution
requirement for 1997 by attributing distributions in 1998 to its 1997 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 except for under certain circumstances as
described below under the heading "Taxation of Taxable Domestic Holders of PSI
Common Stock -- Distributions by PSI." The extent to which PSI will be required
to attribute distributions to the prior year will depend on PSI's operating
results 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 addition, 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 sum of
amounts actually distributed during the calendar year by the REIT and the
amount, if any, on which the REIT paid income tax for such year.
PSI intends to make timely distributions sufficient to satisfy its annual
distribution requirements. It is expected that PSI's REIT taxable income will
be less than its cash flow due to the allowance of depreciation and other non-
cash charges in computing REIT taxable income. Accordingly, PSI anticipates
that it will generally have sufficient cash or liquid assets to enable it to
satisfy the distribution requirements described above. It is possible, however,
that PSI, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements perhaps due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at taxable income of PSI. In such circumstances, in order to meet the
distribution requirements, PSI may find it necessary to arrange for short-term,
or possibly long-term, borrowings or to pay dividends in the form of taxable
stock dividends.
Under certain circumstances, PSI may be able to rectify a failure to meet
the 95% distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in PSI's deduction for
dividends paid for the earlier year. Thus, PSI may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, PSI will be required to
pay interest to the IRS based upon the amount of any deduction taken for
deficiency dividends. 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."
Applicable Federal Income Tax. If PSI qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net income
that it distributes currently to shareholders. However, PSI will be subject to
federal income tax in the following circumstances.
(1) PSI will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
(2) Under certain circumstances, PSI may be subject to the "alternative
minimum tax" on its items of tax preference.
(3) If PSI has (i) net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by foreclosure
or otherwise on default of a lease or a loan secured by the property) that is
held primarily for sale to customers in the ordinary course of business or
(ii) other
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nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income.
(4) If PSI has net income from prohibited transactions (which are, in
general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax.
(5) If PSI should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed above), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which PSI fails the 75% or 95% gross income test.
(6) If PSI should fail to distribute during each calendar year at least
the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its
REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, it would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed.
(7) Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486,
PSI generally will be subject to a corporate level tax if it disposes in a
taxable transaction of any of the assets acquired from a C corporation (i.e.,
a corporation generally subject to full corporate level tax) in a transaction
in which the basis of the asset in PSI's hands is determined by reference to
the basis of the asset (or any other asset) in the hands of the C corporation,
if the disposition occurs at any time during the 10-year period beginning on
the date of the acquisition (the "Restriction Period"). This tax would be
imposed pursuant to anticipated Treasury Regulations that have not yet been
promulgated at the top regular corporate rate (currently 35%) in effect at the
time of the disposition on any "Built-in Gain" which represents the excess of
(i) the lesser of (a) the fair market value at the time of the acquisition 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 acquisition by PSI.
PSI made an election pursuant to IRS Notice 88-19 with respect to the PSMI
Merger. Accordingly, PSI will be subject to a corporate level tax with
respect to the assets acquired in the PSMI Merger only if it disposes of any
Built-in Gain assets acquired in the PSMI Merger at any time during the
applicable Restriction Period. PSI currently does not intend to dispose any
material portion 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.
Failure to Qualify as a REIT. For any taxable year that PSI fails to
qualify as a REIT and 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 distributions to its shareholders or for reinvestment.
As a result, failure of PSI to qualify as a REIT during any taxable year could
have a material adverse effect upon PSI and its shareholders.
Termination of REIT Election. PSI's election to be treated as a REIT will
terminate automatically if PSI fails to meet the REIT qualification requirements
described above. If a termination (or a voluntary revocation) occurs, 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'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 under
Notice 88-19 to have any gains taken into account only as and when they actually
are recognized upon sales of the appreciated property occurring within the 10-
year Restriction Period after return to REIT status.) PSI would not receive the
benefit of a dividends paid deduction to reduce any such taxable gains. Thus,
any such gains on appreciated assets would be subject to double taxation, at the
corporate as well as the shareholder level.
CONSEQUENCES OF THE PSMI MERGER ON PSI'S QUALIFICATION AS A REIT
In light of the unique federal income tax requirements applicable to REITs,
PSI's continued qualification as a REIT could have been adversely affected by
the PSMI Merger, as discussed in greater detail below.
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Nonqualifying Income. As described above, 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." After the PSMI Merger, PSI assumed property management activities
for entities in which PSI had an interest, as well as for other entities in
which PSI did not have an interest. PSI receives management fees from these
owners in exchange for the performance of the management activities, and the
income generally is treated as income not qualifying under the 95% test
("Nonqualifying Income"). See "- Acquisition of Affiliated Partnership
Interests," discussing the treatment of such income earned from partnerships in
which PSI owns an interest.
In order to reduce the amount of Nonqualifying Income that otherwise might
have been recognized in 1996 (the year following the PSMI Merger), the owners of
certain properties pre-paid to PSI in December 1995 approximately $4.5 million
of management fees that PSI otherwise would have been expected to receive for
1996, discounted to compensate for early payment. At the time, PSI received an
opinion of outside tax counsel that it was more likely than not that the IRS
would respect the inclusion of the prepaid management fees in the gross income
of PSI when they were received, although the opinion noted the existence of
arguably contrary authorities. There can be no assurance that the IRS might not
assert that such management fees should have been included in the gross income
of PSI as the related management services were provided in 1996, rather than
being included in the gross income when they were received in 1995. If the IRS
were to challenge on this issue successfully, PSI's REIT status may have been
terminated unless PSI satisfied the "good cause" exception to the income test.
There can be no assurance, however, that if PSI failed to satisfy the 95% test,
the IRS would necessarily agree that PSI had operated in a manner that qualifies
for the "good cause" exception.
In connection with the PSMI Merger, PSI and the various other owners of
mini-warehouses and business parks for which PSI performs management activities
(the "Owners") 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. The
services include the provision of corporate office space and certain equipment,
personnel required for the operation and maintenance of the properties, and
corporate or partnership administration. Each of the Owners and PSI pay 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 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.
Violation of Ownership Requirements. For PSI to qualify as a REIT under
the Code it must satisfy the 5/50 Test during the last half of each taxable
year: 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).
Following the PSMI Merger, the value of the outstanding capital stock held by
the Hughes family was estimated to be approximately 45% of the value of all
outstanding PSI stock (the Hughes family's interest has subsequently come to
represent less than 30% at July 1, 1998). In order to assist PSI in meeting
these ownership restrictions, the PSI articles of incorporation and bylaws
generally 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,
as was described above. (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, a violation of the
ownership restrictions was still possible 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 at the time of the PSMI Merger
entered into an agreement with PSI for the benefit of PSI and certain designated
charitable beneficiaries 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 would automatically and
irrevocably be transferred to a designated charitable beneficiary. These
provisions, like PSI's ownership limitations, were modeled after certain
arrangements that the IRS has ruled in private letter rulings will preclude a
REIT from being
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considered to violate the REIT ownership tests 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 would 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 and PSI
did not seek any such ruling) or contend that PSI failed to enforce these
various arrangements and, as a result, there can be no assurance that these
arrangements necessarily preserve PSI's REIT status.
Elimination of Any Accumulated Earnings and Profits Attributable to Non-
REIT Years. As was noted earlier, a REIT is not allowed at the end of any
taxable year to have accumulated earnings and profits attributable to non-REIT
years. In a corporate reorganization qualifying as a tax free statutory merger,
the acquired corporation's current and accumulated earnings and profits are
carried over to the surviving corporation. 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. 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 PSMI had no such
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 that 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 the amount of 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), 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. If such an issue were to be presented, 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 occurred) or, alternatively, that
even if the procedure is available, PSI cannot qualify as a REIT for the taxable
year in which the merger occurred (but it could qualify as a REIT for subsequent
years).
Acquisition of Affiliated Partnership Interests. In the PSMI Merger and in
subsequent transactions, PSI has acquired interests in various partnerships that
own and operate properties. PSI, for purposes of satisfying the REIT asset and
gross 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 ownership of these partnership interests creates 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 the portion of the
management fee that corresponds to the REIT's 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
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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, 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," which could adversely affect PSI's ability to satisfy the 95% gross
income test.
TAXATION OF TAXABLE DOMESTIC HOLDERS OF PSI COMMON STOCK
As used below, the term "U.S. Shareholder" means a holder of shares of PSI
common stock who (for United States federal income tax purposes): (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
any political subdivision of the United States, (iii) is an estate the income of
which is subject to United States federal income taxation regardless of its
source or (iv) is a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust.
Distributions by PSI. As long as PSI qualifies as a REIT, distributions
made to PSI's taxable U.S. Shareholders (and not designated as capital gain
dividends) will generally be taxable to such shareholders as ordinary income to
the extent of PSI's earnings and profits. 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 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. As described below in "- Recent
Legislation," the 1997 Act changed significantly the taxation of capital gains
by taxpayers who are individuals, estates, or trusts. On November 10, 1997, the
IRS issued IRS Notice 97-64, which provides generally that a REIT may classify
portions of its designated capital-gain dividend as (i) a 20% rate gain
distribution (which would be taxed as long-term capital gain in the 20% group),
(ii) an unrecaptured Section 1250 gain distribution (which would be taxed as
long-term capital gain in the 25% group), or (iii) a 28% rate gain distribution
(which would be taxed as long-term capital gain in the 28% group). If no
designation is made, the entire designated capital gain dividend will be treated
as a 28% rate gain distribution. IRS Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. The Notice has not been updated to reflect the provisions of the
1998 Reform Act. The Notice further provided that designations made by the REIT
will only be
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effective to the extent that they comply with Revenue Ruling 89-81, which
requires that distributions made to different classes of shares be composed
proportionately of dividends of a particular type.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of PSI. Instead, such losses would be
carried over by PSI for potential offset against future income (subject to
certain limitations). Distributions made by PSI and gain arising from the sale
or exchange by a U.S. Shareholder of PSI common stock will not be treated as
passive activity income, and, as a result, shareholders generally will not be
able to apply any "passive losses" against such income or gain. In addition,
taxable distributions from PSI will be treated as investment income for purposes
of the investment interest limitations. Capital gain dividends and capital
gains from the disposition of shares (including distributions treated as such),
however, will be treated as investment income only if the U.S. Shareholder so
elects, in which case such capital gains will be taxed at ordinary income rates.
PSI will notify shareholders after the close of its taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital and capital gain.
Distributions by PSI, whether characterized as ordinary income or as
capital gain, are not eligible for the 70% dividends received deduction for
corporations. 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 designate (by written notice to shareholders) its retained net
capital gain (i.e., net capital gain that is not actually distributed as capital
gain dividends, as described above) as undistributed capital gains in respect of
shareholders' shares. Pursuant to such a designation by PSI, a U.S. Shareholder
would include its proportionate share of such retained net capital gains in
income as capital gain, and would be treated as having paid its proportionate
share of the tax paid by the REIT with respect to the gain. The U.S.
Shareholder's basis in its shares would be increased by its share of such gain
and decreased by its share of such tax. With respect to such capital gain of a
U.S. Shareholder that is an individual or an estate or trust, the IRS has
authority to issue regulations that could apply the special tax rate applicable
generally to the portion of the long term capital gains of an individual or an
estate or trust attributable to deductions for depreciation taken with respect
to depreciable real property.
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 U.S. 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 U.S.
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.
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.
Sales of PSI Common Stock. In general, a U.S. Shareholder will realize
gain or loss upon the sale of PSI common stock equal to the difference between
(i) the amount of cash and the fair market value of any property received on
such disposition and (ii) the shareholder's adjusted basis of such shares of PSI
common stock. With respect to dispositions occurring on or after January 1,
1998, such gain or loss will be long-term capital gain or loss if such shares
have been held for more than one year. If a shareholder receives a long-term
capital gain dividend from PSI and has held the capital stock for six months or
less, any loss incurred on the sale or exchange of the capital stock is treated
as a long-term capital loss, to the extent of the corresponding long-term
capital gain dividend received.
Backup Withholding. If a U.S. Shareholder is subject to "backup
withholding," PSI will be required to deduct and withhold a tax of 31% from any
dividends payable to the shareholder. 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.
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Taxation of Tax Exempt Shareholders. In general, a tax exempt entity that
is a U.S. 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 entities should consult their own tax advisors concerning the
applicable "set aside" and reserve requirements. In addition, certain
distributions by a REIT to a tax-exempt employee's pension trust that owns more
than 10% of the REIT will, in certain circumstances, be treated as "unrelated
business taxable income."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of non-U.S. Shareholders
are complex, and the following discussion is intended only as a summary of
certain of those rules. Non-U.S. shareholders should consult with their tax
advisors to determine the impact of U.S. federal, state, and local income tax
laws on an investment in PSI, including any reporting requirements, as well as
the tax treatment of such an investment under their home country laws.
Distributions by PSI. Distributions to a non-U.S. Shareholder will
generally be subject to tax as ordinary income to the extent of PSI's current or
accumulated earnings and profits as determined for U.S. federal income tax
purposes. Such distributions will generally be subject to withholding of that
income tax at a 30% rate, unless reduced by an applicable tax treaty or unless
the dividends are treated as effectively connected with a United States trade or
business. If the amount distributed exceeds a non-U.S. Shareholder's allocable
share of such earnings and profits, the excess will be treated as a tax-free
return of capital to the extent of such shareholder's adjusted basis in the
common stock. To the extent that such distributions exceed the adjusted basis
of a non-U.S. Shareholder's common stock, such distributions will generally be
subject to tax if such shareholder would otherwise be subject to tax on any gain
from the sale or disposition of its common stock, as described below. Under
current law, it appears that PSI will be required to withhold 10% of any
distribution to a non-U.S. Shareholder in excess of PSI's current and
accumulated earnings and profits. Consequently, although PSI intends to
withhold at a rate of 30% on the entire amount of any distribution to a non-U.S.
Shareholder (or lower applicable treaty rate), to the extent PSI does not do so,
any portion of such a distribution not subject to withholding at a rate of 30%
(or lower applicable treaty rate) will be subject to withholding at a rate of
10%. However, the non-U.S. Shareholder may seek a refund of such amounts from
the IRS if it subsequently determined that such distribution was, in fact, in
excess of current or accumulated earnings and profits of PSI, and the amount
withheld exceeded the non-U.S. Shareholder's United States tax liability, if
any, with respect to the distribution. A Non-U.S. shareholder who is a
shareholder of record and is eligible for reduction or elimination of
withholding must file an appropriate form with PSI in order to claim such
treatment.
Distributions to a non-U.S. Shareholder that are designated by PSI at the
time of distribution as capital gains dividends (other than those arising from
the disposition of a United States real property interest) generally will not be
subject to United States federal income taxation, unless (i) the investment in
the common stock is effectively connected with the non-U.S. Shareholder's United
States trade or business, in which case the non-U.S. Shareholder will be subject
to the same treatment as domestic shareholders with respect to such gain (except
that a shareholder that is a foreign corporation may also be subject to the 30%
branch profits tax) or (ii) the non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and certain other requirements are met, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a non-U.S. Shareholder that are attributable to gain from sales
or exchanges by PSI of United States real property interests (whether or not
designated as a capital gain dividend) will be treated as income effectively
connected with a United States trade or business. Non-U.S. Shareholders would
thus generally be taxed at the same rates applicable to domestic shareholders
(subject to a special alternative minimum tax in the case of nonresident alien
individuals). Also, such gain may be subject to a 30% branch profits tax in the
hands of a non-U.S. Shareholder that is a corporation. PSI is required to
withhold 35% of any such distribution. That amount is creditable against the
non-U.S. Shareholder's United States federal income tax liability.
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Although the law is not entirely clear on the matter, it appears that
amounts designated by PSI pursuant to the 1997 Act as undistributed capital
gains in respect of shares of common stock (see "Taxation of Taxable Domestic
Holders of Common Stock" above) would be treated with respect to non-U.S.
Shareholders in the manner outlined in the preceding paragraph for actual
distributions by PSI of capital gain dividends. Under that approach, the non-
U.S. Shareholders would be able to offset as a credit against their United
States federal income tax liability resulting therefrom their proportionate
share of the tax paid by PSI on such undistributed capital gains (and to receive
from the IRS a refund to the extent their proportionate share of such tax paid
by PSI were to exceed their actual United States federal income tax liability).
Sale of Common Stock. Gain recognized by a non-U.S. Shareholder upon a
sale of its common stock will generally not be subject to tax under FIRPTA if
PSI is a "domestically controlled REIT," which is defined generally as a REIT in
which at all times during a specified testing period less than 50% in value of
its shares were held directly or indirectly by non-U.S. persons. Because only a
minority of PSI's shareholders are believed to be non-U.S. Shareholders, PSI
expects to qualify as a "domestically controlled REIT." Accordingly, a non-U.S.
Shareholder should not be subject to U.S. tax from gains recognized upon
disposition of the common stock, provided that such gain is not effectively
connected with the conduct of a United States trade or business and, in the case
of an individual shareholder, such holder is not present in the United States
for 183 days or more during the year of sale and certain other requirements are
met.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at a rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends, or
(iii) distributions attributable to gain from the sale or exchange by PSI of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of common stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of common stock by a foreign office of a broker that (a) is a
United States person, (b) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (c) is a
"controlled foreign corporation" (generally a foreign corporation controlled by
United States shareholders) for United States tax purposes, unless the broker
has documentary evidence in its records that the holder is a non-U.S.
Shareholder and certain other conditions are met, or the shareholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of a sale of common stock is subject to both backup
withholding and information reporting unless the shareholder certifies under
penalty of perjury that the shareholder is a non-U.S. Shareholder, or otherwise
establishes an exemption. A non-U.S. Shareholder may obtain a refund of any
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
OWNERSHIP RECORDS
To monitor PSI's compliance with the REIT share ownership requirements, 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.
RECENT LEGISLATION
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates and further changes relating to capital gains were made by the 1998
Reform Act.
Capital Gain Rates. Under the 1997 Act as modified by the 1998 Reform Act
beginning January 1, 1998, individuals, trusts and estates that hold certain
investments for more than one year may be taxed at a maximum long-term capital
gain rate of 20% on the sale or exchange of those investments. The 1997 Act
also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5 year gain," and
other changes to prior law. The 1997 Act allows the IRS to prescribe
regulations on
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how the 1997 Act's new capital gain rates will apply to sales of capital assets
by "pass-through entities," including REITs and to sales of interests in "pass-
through entities." For a discussion of new rules under the 1997 Act that apply
to the taxation of distributions by PSI to its shareholders that are designated
by PSI as "capital gain dividends," see "- Taxation of Taxable Domestic Holders
of PSI Common Stock -- Distributions by PSI" above. Shareholders are urged to
consult with their tax advisors with respect to the new rules contained in the
1997 Act and the 1998 Reform Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that PSI will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which PSI can meet the REIT qualification
requirements. These provisions are effective for PSI's taxable years commencing
on or after January 1, 1998.
RECENT ADMINISTRATION PROPOSAL
The administration's budget proposal announced on February 2, 1998 included
a proposal to amend the REIT asset tests with respect to non-qualified REIT
subsidiaries, such as the Lock/Box Company. The proposal would require a REIT
to own no more than 10% of the vote or value of the outstanding stock of any
non-qualified REIT subsidiary. Stock interests held by a REIT in existing non-
qualified REIT subsidiaries would be grandfathered, and therefore subject only
to the existing test that restricts a REIT from owning more than 10% of the
voting securities of an issuer (see "- General Tax Treatment of PSI"), except
that such grandfathered status would terminate if the non-qualified REIT
subsidiary engaged in a new trade or business or acquired substantial new assets
on or after the effective date of the proposal. As a result, if the legislation
were enacted and the Lock/Box Company were to commence new trade or business
activities or acquire substantial new assets after the effective date of the
proposal, the Lock/Box Company would lose its grandfathered status and PSI would
be subject to the new 10% of the vote or value limitation with respect to its
ownership interest in the Lock/Box Company (which PSI does not now satisfy).
Accordingly, the proposal, if enacted, could materially impede PSI's ability to
expand the business activities of the Lock/Box Company and to engage in other
activities through non-qualified REIT subsidiaries without jeopardizing PSI's
REIT status. This would limit PSI's ability to derive economic benefit from
engaging in activities which were related to PSI's businesses, but which were
not qualified REIT activities.
A second proposed provision would tax immediately the built-in gains of C
corporations merging into REITs in tax-free reorganizations. Under current law,
C corporations can defer a portion of this tax. Accordingly, if enacted as
currently drafted, this provision could impede PSI's ability to acquire
additional properties through mergers with C corporations.
STATE AND LOCAL TAXES
The tax treatment of limited partners, PSI and PSI's shareholders in states
having taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of limited partners,
PSI or PSI's shareholders is provided nor is any representation made as to the
tax status of PSI in such states. All limited partners should consult their own
tax advisors as to the treatment 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 merger will be validly issued, fully paid and nonassessable. Mr.
Goldberg owns 89,547 shares of PSI common stock and 600 shares of PSI senior
preferred stock and has options to acquire an additional 160,834 shares of PSI
common stock. A. Timothy Scott, senior vice president and tax counsel of PSI,
has rendered an opinion to the effect that the discussion under "Federal Income
Tax Considerations" fairly summarizes the material federal income tax
considerations to a limited partner as a result of the merger, and the
subsequent ownership of PSI common stock. Mr. Scott owns 3,367 shares of PSI
common stock and has options to acquire an additional 55,000 shares of PSI
common stock.
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EXPERTS
The consolidated financial statements of PSI at December 31, 1997 and 1996
and for the three years in the period ended December 31, 1997 which are included
in PSI's Annual Report on Form 10-K have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of the Partnership at December 31,
1997 and 1996 and for the three years in the period ended December 31, 1997
appearing herein and in the Annual Report on Form 10-K of the Partnership have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports included herein. Such consolidated financial statements are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
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GLOSSARY
The following are definitions of certain terms used in this statement:
"General Partners." The general partners of the Partnership.
"Hughes." B. Wayne Hughes, a general partner of the Partnership.
"Limited Partners." The limited partners of the Partnership.
"Merger." The merger of a subsidiary of PSI with and into the Partnership.
"Partnership." PS Partners, Ltd., a California limited partnership.
"Partnership Agreement." The amended and restated agreement of limited
partnership of the Partnership.
"Partnership Units." Units of limited partnership interest in the
Partnership.
"PSBP." PS Business Parks, L.P.
"PSI." Public Storage, Inc., a REIT organized as a California corporation
(formerly Storage Equities, Inc.). PSI is a general partner of the Partnership.
"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 14th day of July, 1998, by and among PUBLIC STORAGE, INC., a California
corporation ("PSI"), PS Partners Merger Co., Inc., a California corporation
("Sub") and PS Partners, Ltd., a California limited partnership ("PSP").
A. This Agreement provides for the merger of Sub, a wholly-owned, second
tier subsidiary of PSI, with and into PSP in accordance with the applicable
provisions of the California Revised Limited Partnership Act (the "CRLPA") and
the Certificate of Merger in the form prescribed by the California Secretary of
State as provided in Section 15678.4 of the CRLPA (the "Certificate of Merger").
B. The Board of Directors of PSI and the general partners of PSP believe
that it is in the best interests of PSI and PSP 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), Sub will be merged with and into PSP (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Certificate of
Merger. The Merger shall become effective at the time at which the Certificate
of Merger is filed with the California Secretary of State in accordance with the
CRLPA, except that if the Certificate of Merger specifies a date subsequent to
the date of such filing on which the Merger is to become effective, the Merger
shall be effective on such specified subsequent date (the "Effective Time").
Sub and PSP are sometimes collectively referred to herein as the "Constituent
Entities" and PSP, as the surviving entity in the Merger, is sometimes referred
to herein as the "Surviving Entity."
2.2 EFFECT OF THE MERGER. At the Effective Time:
2.2.1 CONSTITUENT ENTITIES. The separate corporate existence
of Sub shall cease and the Surviving Entity shall thereupon succeed, without
other transfer, to all the rights and property of Sub and shall be subject to
all the debts and liabilities of Sub in the same manner as if the Surviving
Entity had itself incurred them; all rights of creditors and all liens upon the
property of each of the Constituent Entities shall be preserved unimpaired,
provided that such liens upon property of Sub shall be limited to the property
affected thereby immediately prior to the Effective Time; and any action or
proceeding pending by or against Sub may be prosecuted to judgment, which shall
bind the Surviving Entity, or the Surviving Entity may be proceeded against or
substituted in its place.
2.2.2 PARTNERSHIP AGREEMENT. The partnership agreement of PSP
in effect at the Effective Time shall continue in full force and effect until
amended or terminated as provided in such partnership agreement or as provided
by law.
2.2.3 GENERAL PARTNERS. The general partners of PSP shall
remain as its general partners with the same interests in PSP that they owned at
the Effective Time.
2.3 CONVERSION OF PARTNERSHIP UNITS. The manner of converting the
outstanding units of limited partnership interest of PSP (the "Units") into cash
and/or shares of Common Stock ($.10 par value) of PSI (the "PSI Shares") shall
be as follows:
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2.3.1 CASH ELECTION. At the Effective Time, each Unit 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 Units") shall be converted into and shall represent
the right to receive $713 in cash (the "Cash Election Price"). As soon as
practicable after the Effective Time, the registered holders of Cash Election
Units shall be paid the cash to which they are entitled hereunder in respect of
such Cash Election Units.
2.3.2 SHARE EXCHANGE. At the Effective Time, subject to Sections
2.4 and 2.5 hereof, each Unit (other than Cash Election Units and Units owned by
the parent of Sub) shall be converted into that number of PSI Shares equal to,
rounded to the nearest thousandth, the quotient (the "Conversion Number")
derived by dividing $713 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 Effective
Time. 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 Merger.
In lieu of any such fractional share interests, each holder of Units who would
otherwise be entitled to such fractional share will, upon surrender of the
certificate representing such Units, 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 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
Information Statement provided for in Section 6.5 hereof, PSI will send to each
holder of record of Units 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 Units. Any such
election to receive the cash payment contemplated by Section 2.3.1 hereof shall
have been properly made only if BankBoston N.A. (the "Exchange Agent") shall
have received at its designated office, by 5:00 p.m., New York time, on the last
business day preceding the Effective Time, a Form of Election properly
completed, as set forth in such Form of Election. Any Form of Election may be
revoked by the person submitting the same to the Exchange Agent only by written
notice received by the Exchange Agent prior to 5:00 p.m., New York time, on the
last business day before the Effective Time. In addition, all Forms of Election
shall automatically be revoked if the Exchange Agent is notified in writing by
the parties hereto that the Merger have been abandoned. The Exchange Agent may
determine whether or not elections to receive cash have been properly made or
revoked pursuant to this Section 2.5, and any such determination shall be
conclusive and binding. If the Exchange Agent determines that any election to
receive cash was not properly or timely made, the Units covered thereby shall
not be treated as Cash Election Units, and shall be converted in the Merger as
provided in Section 2.3.2 hereof. The Exchange Agent may, with the agreement of
PSI and PSP, establish such procedures, not inconsistent with this Section 2.5,
as may be necessary or desirable to implement this Section 2.5.
2.6 CONVERSION OF SHARES. At the Effective Time, the shares of capital
stock of Sub shall be converted into an aggregate of 66,000 Units.
2.7 CANCELLATION OF UNITS OWNED BY PARENT OF SUB. At the Effective
Time, any Units owned by the parent of Sub (other than Units acquired pursuant
to Section 2.6 hereof) shall be cancelled and retired and no shares shall be
issuable, and no cash shall be exchangeable, with respect thereto.
2.8 DELIVERY OF CERTIFICATES. After the Effective Time, each holder of
Units which were converted into PSI Shares pursuant to Section 2.3.2 shall be
entitled to receive a certificate representing the number of whole PSI
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Shares into which such Units 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.
2.9 TRANSFER OF UNITS. After the Effective Time, there shall be no
further registration of transfers of Units on the records of PSP.
3. CLOSING.
3.1 TIME AND PLACE OF CLOSING. If this Agreement is approved by the
limited partners of PSP, 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 CERTIFICATE OF MERGER. At or before the
Closing and after approval of the limited partners of PSP, the applicable
parties shall execute the Certificate of Merger for filing with the California
Secretary of State. The Certificate of Merger shall be duly filed with the
California Secretary of State in accordance with the CRLPA.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSP. PSP represents,
warrants and agrees with PSI that:
4.1 AUTHORIZATION. Subject to approval of this Agreement by the
limited partners of PSP, (i) the execution, delivery and performance of this
Agreement by PSP has been duly authorized and approved by all necessary action
of PSP, and (ii) PSP has necessary power and authority to enter into this
Agreement, to perform its obligations hereunder and to complete the transactions
contemplated hereby.
4.2 ORGANIZATION AND RELATED MATTERS. PSP is a limited partnership
duly organized, existing and in good standing under the laws of the State of
California with all requisite 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 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 its business, properties, results of operations or financial
condition.
4.3 UNITS. PSP has outstanding 66,000 Units, all of which have been
duly and validly authorized and issued, and are fully paid and nonassessable.
There are no options or agreements to which PSP is a party or by which it is
bound calling for or requiring the issuance of additional Units.
4.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of the
Merger and of this Agreement by the limited partners of PSP, neither the
execution and delivery of this Agreement nor the consummation by PSP of the
transactions contemplated hereby will: (i) conflict with or result in any
breach of any provision of its partnership agreement; (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 Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) 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 PSP or adversely affect the ability of PSP 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 PSP 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 PSP or adversely affect the ability of PSP to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications
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referred to in this Section 4.4 are duly and timely obtained or made, violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
PSP or its properties or assets, except for violations which would not in the
aggregate have a material adverse effect on PSP or adversely affect the ability
of PSP to consummate the transactions contemplated hereby.
4.5 LITIGATION. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSP, threatened against PSP or
involving any of its properties or assets.
4.6 SEC REPORTS. Since January 1, 1995, PSP 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 "PSP SEC Reports"). None
of the PSP SEC Reports, including without limitation any financial statements or
schedules included therein, at the time filed contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 FINANCIAL STATEMENTS. The financial statements included in the
PSP 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 PSP as
of their respective dates, and the results of operations of PSP for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1998, the
business of PSP has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 REGISTRATION STATEMENT AND INFORMATION STATEMENT. None of the
information supplied or to be supplied by PSP for inclusion or incorporation by
reference in the S-4 Registration Statement or the Information Statement (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 Information
Statement, at the time of the mailing of the Information Statement 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, in light of the circumstances under which they are made,
not misleading.
4.10 INSURANCE. All material insurance of PSP is currently in full
force and effect and PSP has reported all claims and occurrences to the extent
required by such insurance.
4.11 DISCLOSURE. The representations and warranties by PSP 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 PSP 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.
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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 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), 105,102,145
of which were issued and outstanding as of December 31, 1997, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of December 31, 1997, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 13,261,884 of which were issued and outstanding as of December
31, 1997 and (iv) 200,000,000 shares of Equity Stock ($.01 par value), 225,000
of which were issued and outstanding at December 31, 1997. All of the issued and
outstanding shares of Common Stock, Class B Common Stock, Preferred Stock and
Equity 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 Merger 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 Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) 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, 1995, 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
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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).
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1998, 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 INFORMATION STATEMENT. 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 Information Statement (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 Information
Statement, at the time of the mailing of the Information Statement 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, 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 and PSP 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. PSP will not issue
any Units or debt securities convertible into Units. PSI and PSP will promptly
notify the other of any event or occurrence not in the ordinary and usual course
of business or which may have a material adverse effect on the properties or
financial condition of such party.
6.2 ACTION BY PSP. PSP will take all action necessary in accordance
with applicable law as promptly as practicable to secure approval of this
Agreement, it being understood that the principal terms of the Agreement must be
approved by the affirmative vote of a majority of the outstanding Units.
6.3 VOTE BY PSI. PSI agrees to cause its subsidiary to vote its
Units in favor of the Merger prior to the mailing of the Information Statement.
6.4 ACQUISITION PROPOSALS. PSP 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 PSP, or any purchase of all or any significant portion of its assets,
or any equity interest in it, 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 PSP's
general partners 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 general
partners of PSP to breach their fiduciary duty to the limited partners of PSP
under applicable law as advised by counsel. PSP will
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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 PSP, and will keep PSI informed of the
status and terms of any such proposals and any such negotiations or discussions.
6.5 REGISTRATION AND INFORMATION STATEMENT. PSP will promptly
prepare and file with the SEC a preliminary information statement and notice of
action without a meeting in connection with the approval of the Merger by the
limited partners of PSP. 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 an information statement, notice of action without a
meeting and 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 Units in the Merger (such information statement, notice of action
without a meeting and prospectus, together with any amendments thereof or
supplements thereto, in each case in the form or forms to be mailed to the
limited partners of PSP, being herein called the "Information Statement"). PSI
and PSP 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 PSP will use its best efforts to cause the Information Statement to be
mailed to its limited partners at the earliest practicable date. PSP agrees that
if at any time prior to the Effective Time any event with respect to PSP should
occur which is required to be described in an amendment of, or a supplement to,
the Information Statement 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 limited partners of PSP and
(ii) the Information Statement will (with respect to PSP) 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 Information Statement 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 limited partners of PSP and (ii) the Information Statement 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 and PSP shall: (i) promptly make its
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best efforts to promptly take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 REGISTRATION AND LISTING OF 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. PSP will not, at any time prior to the Effective
Time, declare or pay any cash distributions to its limited partners, except (i)
regular quarterly distributions at a quarterly rate not in excess of $10.80 per
Unit and (ii) distributions to limited partners of record immediately prior to
the Effective Time in an aggregate amount equal to the amount by which the
estimated Net Asset Value of PSP (as defined below) as of the Effective Time
exceeds the estimated Net Asset Value of PSP as of March 31, 1998. For this
purpose, the Net Asset Value of PSP is the sum of (a) the fair market value of
PSP's real estate assets as determined by appraisal by The Nicholson Group, Ltd.
as of March 31, 1998 and (b) the book value of PSP's non-real estate assets as
of the date of determination and less (c) PSP's liabilities as of the date of
determination. The determination of book value and liabilities shall be from
PSP'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:
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7.1.1 LIMITED PARTNER APPROVAL. This Agreement and the
transactions contemplated hereby shall have been duly approved by the limited
partners of PSP as contemplated by Section 6.2.
7.1.2 GOVERNMENTAL AND REGULATORY CONSENTS. All filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from, governmental and regulatory authorities in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the expiration of the waiting period
requirements of the HSR Act) shall have been made or obtained (as the case may
be) without material restrictions, except where the failure to obtain such
consents, approvals, permits and authorizations could not reasonably be expected
to have a material adverse effect on PSI or PSP.
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 and no legal action challenging such transactions shall be pending.
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. PSP shall have received the opinion of
Robert A. Stanger & Co., Inc. in form and substance satisfactory to it to the
effect that the consideration to be received by the public limited partners of
PSP in the Merger is fair to such public limited partners from a financial point
of view, and such opinion shall not have been withdrawn or revoked.
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 PSP 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 PSP 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 GENERAL PARTNERS. PSI shall have received
such certificates of the general partners of PSP as PSI may reasonably request
in connection with the Closing, to the effect that, to the best of their
knowledge, all representations and warranties of PSP 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 PSP has performed or complied with
all agreements and covenants required by this Agreement to be performed or
complied with by PSP 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 PSP.
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 Effective Time (the "Average
PSI Share Price") shall be not less than $25.
A-8
<PAGE>
7.3 CONDITIONS TO OBLIGATIONS OF PSP. The obligations of PSP 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 PSP to the extent permitted by applicable law.
7.3.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSP 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. PSP shall have received such
certificates of officers of PSI as PSP may reasonably request in connection with
the Closing, including upon request a certificate satisfactory to PSP 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.
8. TERMINATION.
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after limited partner approval, by the mutual written consent of PSI and PSP.
8.2 TERMINATION BY PSI OR PSP. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of PSI or by the
general partners of PSP if (i) the Merger shall not have been consummated by
June 30, 1999 (provided that the right to terminate this Agreement under this
Section 8.2 shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the failure
of the Merger to occur on or before such date); (ii) any court of competent
jurisdiction in the United States or some other governmental body or regulatory
authority shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or other action shall have become final and nonappealable;
or (iii) the limited partners of PSP shall have failed to approve this Agreement
and the transactions contemplated hereby.
8.3 TERMINATION BY PSI. This Agreement may be terminated by PSI,
and the Merger may be abandoned at any time prior to the Effective Time, as to
the defaulting party if (i) PSP 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 PSP contained in this Agreement shall not be
true in all material respects when made, which inaccuracy or breach (if capable
of cure) has not been cured within five business days following notice to PSP 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 PSP. This Agreement may be terminated by PSP and
the Merger may be abandoned at any time prior to the Effective Time, before or
after limited partner 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 Merger pursuant to this
Section 8, no party (or any directors, officers, employees, agents or
representatives of any party) shall have any liability or further obligation to
any other party or any person who controls
A-9
<PAGE>
a party within the meaning of the Securities Act, except as provided in Section
9.1 and except that nothing herein will relieve any party from liability for any
breach of this Agreement.
9. MISCELLANEOUS.
9.1 PAYMENT OF EXPENSES. If the Merger is consummated, PSI shall pay
all the expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby. If the
Merger is not consummated, each of PSI and PSP shall pay its own expenses,
except that any expenses incurred in connection with the printing of the S-4
Registration Statement and the Information Statement, the real estate appraisals
and environmental audits of the properties of PSP 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 50%
by PSP.
9.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
respective representations and warranties of PSI and PSP contained herein or in
any certificate or document delivered pursuant hereto shall expire with and be
terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 MODIFICATION OR AMENDMENT. The parties may modify or amend this
Agreement by written agreement authorized by the Board of Directors of PSI and
the general partners of PSP and executed and delivered by the parties; provided,
however, that after approval of this Agreement by the limited partners of PSP,
no amendment shall be made which changes any of the principal terms of the
Merger or this Agreement, without the approval of such limited partners.
9.4 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the principles of conflict of laws thereof.
9.6 INTERPRETATION. This Agreement has been negotiated by the parties
and is to be interpreted according to its fair meaning as if the parties had
prepared it together and not strictly for or against any party. Each of the
capitalized terms defined in this Agreement shall, for all purposes of this
Agreement (and whether defined in the plural and used in the singular, or vice
versa), have the respective meaning assigned to such term in the Section in
which such meaning is set forth. References in this Agreement to "parties" or a
"party" refer to parties to this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation."
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:
A-10
<PAGE>
If to PSI or to Sub:
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PSP:
PS Partners, Ltd.
c/o Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
9.11 ASSIGNMENT. No rights, interests or obligations of either party
under this Agreement may be assigned or delegated without the prior written
consent of the other party.
9.12 ENTIRE AGREEMENT. This Agreement 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.
A-11
<PAGE>
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.
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
PS PARTNERS, LTD.
By: Public Storage, Inc.,
General Partner
By: /s/ HARVEY LENKIN
---------------------------
Harvey Lenkin
President
By: /s/ B. WAYNE HUGHES
--------------------------------
B. Wayne Hughes
General Partner
PS PARTNERS MERGER CO., INC.
By: /s/ HARVEY LENKIN
--------------------------------
Harvey Lenkin
President
A-12
<PAGE>
[THE NICHOLSON GROUP LETTERHEAD]
Appendix B
July 30, 1998
PS Partners, Ltd. & Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Subject: PS PARTNERS, LTD.: A 28 PROPERTY PORTFOLIO
(27 SELF STORAGE PROPERTIES AND 1 BUSINESS PARK PROPERTY)
Gentlemen:
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 acquisition
of the limited partnership interests of PS Partners, Ltd. by a subsidiary of
Public Storage, Inc. through a merger and may be included or referred to in
solicitation materials filed with the Securities and Exchange Commission and
distributed to limited partners of PS Partners, Ltd. PS Partners, Ltd. has an
ownership interest in each of the properties in the subject property portfolio.
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.
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. We have relied primarily on the Income
Capitalization Approach to value as this approach is deemed most relevant by
today's investors. 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 generally do not rely upon the
Cost Approach to arrive at their portfolio acquisition pricing. 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.
For the Self-Storage Properties, the general analytical process that was
undertaken included site inspections and local market inquires, 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 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 throughout the nation in the last several years.
Based upon a correlation of these methodologies, we arrived at an opinion of
value for each property as well as 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
transactions of self-storage property portfolios, some of which involved Public
Storage, Inc. as a party to the transaction.
<PAGE>
For the Business Park Property, the general analytical process that was
undertaken included site inspections and local market inquires, a review of the
property's rent roll and historical financial statements. Following this
review, a stabilized level of operating performance was projected and the value
estimate was made using direct capitalization. Considering the relatively
stable income level and the short-term nature of the existing leases, the direct
capitalization technique provided a reliable method of estimating market value
for this property.
Historical operating statements, unit mix, net rentable area, rental rates and
other property-specific data 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.
Market value is generally 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 March 31, 1998,
that the market value of the fee simple interest in the PS Partners, Ltd.
twenty-eight property portfolio, is:
SEVENTY-EIGHT MILLION SEVEN HUNDRED THOUSAND DOLLARS
($78,700,000)
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>
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that he has the professional qualifications and
competency necessary to complete this appraisal assignment in an appropriate
manner.
Respectfully submitted,
THE NICHOLSON GROUP, LTD.
/s/ LAWRENCE R. NICHOLSON
Lawrence R. Nicholson, MAI
Professional Assistance By:
John S. Trabold, III, MAI
Jimmy Pat James, MAI
Michael J. Tompkins
Ann M. Donohoo
attachments
<PAGE>
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. Although the Departure Provision
has been invoked and may impact the reliability of the value conclusion, it is
our opinion that we have performed actions necessary to develop a reliable
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 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.
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.
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.
<PAGE>
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.
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 The Nicholson Group, Ltd.
<PAGE>
EXHIBIT B
APPRAISAL CERTIFICATION
I certify that, to the best of my 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 my personal,
unbiased professional analyses, opinions, and conclusions.
. I have no present or prospective interest in the properties that are the
subject of this report, and I have no personal interest or bias with
respect to the parties involved.
. my 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.
. my 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.
. I certify that the use of this report is subject to the requirements of
the Appraisal Institute relating to review by its duly authorized
individuals.
. Each of the properties was inspected by a representative of The
Nicholson Group, Ltd., however, I have not made a personal inspection of
the properties that are the subject of this report.
. unless noted in this report, no one else has provided significant
professional assistance to the person signing this report.
. I certify that as of the date of this report, I have completed the
requirements under the continuing education program of the Appraisal
Institute.
. this appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
/s/ LAWRENCE R. NICHOLSON
Lawrence R. Nicholson, MAI
<PAGE>
[ROBERT A. STANGER & CO. LETTERHEAD]
Appendix C
PS Partners Ltd.
701 Western Avenue, Suite 200
Glendale, CA 91201
Gentlemen:
We have been advised that PS Partners, Ltd. (the "Partnership"), a
California Limited Partnership, is entering into a transaction (the
"Transaction") in which the Partnership will be merged with a subsidiary of
Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the limited partners of the Partnership
(the "Limited Partners") will be offered the option of converting their
interests in the Partnership (the "Units") into $713 of cash per Unit or shares
of PSI Common Stock with an equivalent market value based upon the average
closing prices on the New York Stock Exchange during the twenty consecutive
trading days ending five days prior to the closing date of the Transaction
(collectively, the "Consideration"). We have been further advised that the Unit
price offered to the Limited Partners is equivalent to the net asset value per
Unit based in part on an independent appraisal of the Partnership's properties.
We also have been advised that additional distributions will be made to the
Limited Partners prior to the consummation of the Transaction to the extent
required to cause the Partnership's net asset value as of the closing date of
the Transaction to be substantially equivalent to the estimate of the
Partnership's net asset value as of March 31, 1998 contained in the Information
Statement to be filed with the Securities and Exchange Commission.
The Partnership has requested that Robert A. Stanger & Co., Inc.
("Stanger") provide its opinion as to the fairness to the Limited Partners
(excluding PSI or its affiliates), from a financial point of view, of the
Consideration to be received in the Transaction.
In the course of our review to render this opinion, we have, among other
things:
. Reviewed the Information Statement related to the Transaction to be
filed with the Securities and Exchange Commission (the "SEC");
. Reviewed the Partnership's and PSI's annual reports to shareholders
filed with the SEC on Form 10-K for the fiscal years ending December
31, 1995, 1996 and 1997, and the Form 10-Q filed as of March 31, 1998,
which reports the Partnership's management and PSI's management have
indicated to be the most current financial statements available;
. Reviewed the MAI-certified portfolio appraisal of the properties owned
by the Partnership as of March 31, 1998 performed by The Nicholson
Group, Ltd. (the "Appraisal"), and discussed with management of the
Partnership and the appraiser the methodologies and procedures employed
in preparing the Appraisal;
1
<PAGE>
. 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 the
Partnership, and based in part on the Appraisal, of the current net
liquidation value per Unit of the Partnership's assets and projections
of cash flow from operations, cash flow distributions and going-concern
values per Unit for the Partnership, including the Partnership's
calculation of the allocation of such values among the joint venture
partners and between the limited and general partners;
. Discussed with members of senior management of the Partnership and PSI
conditions in self-storage property markets, conditions in the market
for sales/acquisitions of properties similar to those owned by the
Partnership, current and projected operations and performance,
financial condition and future prospects of the Partnership and PSI;
. Reviewed historical market prices, trading volume and dividends for PSI
Common Stock, and secondary market transactions involving interests in
the Partnership; 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 the Information Statement or that was
furnished or otherwise communicated to us by the Partnership and PSI. We have
not performed an independent appraisal of the assets and liabilities of the
Partnership or PSI and have relied upon and assumed the accuracy of the
appraisals performed by The Nicholson Group, Ltd. We have also relied on the
assurance of the Partnership and PSI that any pro forma financial statements,
projections, budgets, estimates of environmental liability, or value estimates
contained in the Information Statement 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 to the Limited Partners has been determined by
the Partnership in accordance with the provisions of the Joint Venture Agreement
and Partnership Agreement; 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 the Partnership 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 Limited Partners of the Partnership as to 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 or relating to
PSI's continued qualification as a REIT. Our opinion is based on business,
economic, real estate and
2
<PAGE>
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 Limited Partners of the Partnership 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 Partnership 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
August 7, 1998
3
<PAGE>
Appendix D
PROPOSED AMENDMENT TO PARTNERSHIP AGREEMENT
Add a new section 13.5 to the partnership agreement of PS Partners, Ltd.
that would read in its entirety as follows:
13.5 MERGER. Notwithstanding anything in the Agreement to the
contrary, the Partnership may merge with PSI or a subsidiary, provided that
such merger is approved by a Majority Vote.
<PAGE>
PS PARTNERS, LTD.
FINANCIAL STATEMENTS OF THE PARTNERSHIP
APPENDIX E
<PAGE>
PS PARTNERS, LTD.
FINANCIAL STATEMENTS OF THE PARTNERSHIP
APPENDIX E
<TABLE>
<S> <C>
FINANCIALS AT MARCH 31, 1998:
- -----------------------------
Condensed Consolidated Balance Sheets at
March 31, 1998 (Unaudited) and December 31, 1997.................................................... 1
For the Three Months Ended March 31, 1998 and 1997 (Unaudited):
Condensed Consolidated Statements of Income...................................................... 2
Condensed Consolidated Statements of Cash Flow................................................... 3 - 4
Notes to Condensed Consolidated Financial Statements............................................. 5
FINANCIALS AT DECEMBER 31, 1997:
- --------------------------------
Report of Independent Auditors...................................................................... 6
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................ 7
For the years ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Income................................................................ 8
Consolidated Statements of Partners' Equity...................................................... 9
Consolidated Statements of Cash Flows............................................................ 10 - 11
Notes to Consolidated Financial Statements....................................................... 12 - 15
</TABLE>
<PAGE>
PS PARTNERS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,088,000 $ 819,000
Rent and other receivables 58,000 65,000
Real estate facilities, at cost:
Land 10,660,000 10,660,000
Buildings and equipment 44,893,000 44,834,000
-------------- --------------
55,553,000 55,494,000
Less accumulated depreciation (25,993,000) (25,402,000)
-------------- --------------
29,560,000 30,092,000
Investment in real estate entity 2,822,000 2,830,000
Other assets 138,000 136,000
-------------- --------------
$ 33,666,000 $ 33,942,000
============== ==============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 668,000 $ 686,000
Advance payments from renters 407,000 374,000
Minority interest in general partnerships 19,394,000 19,727,000
Partners' equity:
Limited partners' equity, $500 per unit, 66,000
units authorized, issued and outstanding 13,022,000 12,980,000
General partner's equity 175,000 175,000
-------------- --------------
Total partners' equity 13,197,000 13,155,000
-------------- --------------
$ 33,666,000 $ 33,942,000
============== ==============
</TABLE>
See Accompanying Notes
Appendix E - Page 1
<PAGE>
PS PARTNERS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
REVENUE:
Rental income $ 2,874,000 $ 2,688,000
Equity in income of real estate entity 54,000 38,000
Interest income 12,000 7,000
-------------- --------------
2,940,000 2,733,000
-------------- --------------
COSTS AND EXPENSES:
Cost of operations 904,000 923,000
Management fees 172,000 161,000
Depreciation and amortization 591,000 577,000
Administrative 17,000 16,000
-------------- --------------
1,684,000 1,677,000
-------------- --------------
Income before minority interest 1,256,000 1,056,000
Minority interest in income (414,000) (371,000)
-------------- --------------
NET INCOME $ 842,000 $ 685,000
============== ==============
Limited partners' share of net income
($11.44 per unit in 1998 and
$9.08 per unit in 1997) $ 755,000 $ 599,000
General partner's share of net income 87,000 86,000
-------------- --------------
$ 842,000 $ 685,000
============== ==============
</TABLE>
See Accompanying Notes
Appendix E - Page 2
<PAGE>
PS PARTNERS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 842,000 $ 685,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 591,000 577,000
Decrease in rent and other receivables 7,000 34,000
(Increase) decrease in other assets (2,000) 67,000
Decrease in accounts payable (18,000) (35,000)
Increase in advance payments from renters 33,000 30,000
Equity in income of real estate entity (54,000) (38,000)
Minority interest in income 414,000 371,000
-------------- --------------
Total adjustments 971,000 1,006,000
-------------- --------------
Net cash provided by operating activities 1,813,000 1,691,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from real estate entity 62,000 -
Investment in real estate entity - (3,000)
Additions to real estate facilities (59,000) (237,000)
-------------- --------------
Net cash provided by (used in) investing activities 3,000 (240,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to holder of minority interest (747,000) (596,000)
Distributions to partners (800,000) (800,000)
-------------- --------------
Net cash used in financing activities (1,547,000) (1,396,000)
-------------- --------------
Net increase in cash and cash equivalents 269,000 55,000
Cash and cash equivalents at the beginning of the period 819,000 506,000
-------------- --------------
Cash and cash equivalents at the end of the period $ 1,088,000 $ 561,000
============== ==============
</TABLE>
See Accompanying Notes
Appendix E - Page 3
<PAGE>
PS PARTNERS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Investment in real estate entity $ - $ (2,725,000)
Transfer of real estate facilities for interest in real estate entity, - 2,725,000
net
</TABLE>
See Accompanying Notes
Appendix E - Page 4
<PAGE>
PS PARTNERS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. The accompanying unaudited condensed consolidated 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 consolidated financial statements
should be read in conjunction with the financial statements and related
notes appearing in the Partnership's Form 10-K for the year ended December
31, 1997.
2. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of
only normal accruals, necessary to present fairly the Partnership's
financial position at March 31, 1998, the results of operations for the
three months ended March 31, 1998 and 1997 and cash flows for the three
months then ended.
3. The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
4. In January 1997, the Partnership and PSI and other related partnerships
transferred a total of 35 business parks to PS Business Parks, LP
("PSBPLP"), an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the properties
transferred was the Partnership's Signal Hill, California business park in
exchange for a partnership interest in PSBPLP. The general partner of PSBPLP
is PS Business Parks, Inc. Since January 1997, PSBPLP manages the commercial
operations of the Partnership's Webster, Texas Property pursuant to the
Management Agreement.
Appendix E - Page 5
<PAGE>
Report of Independent Auditors
The Partners
PS Partners, Ltd.
We have audited the consolidated balance sheets of PS Partners, Ltd. as of
December 31, 1997 and 1996 and the related consolidated statements of income,
partners' equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership'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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PS
Partners, Ltd. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
February 23, 1998
Los Angeles, California
Appendix E - Page 6
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 819,000 $ 506,000
Rent and other receivables 65,000 89,000
Real estate facilities, at cost:
Land 10,660,000 11,855,000
Buildings and equipment 44,834,000 46,862,000
-------------- --------------
55,494,000 58,717,000
Less accumulated depreciation (25,402,000) (24,576,000)
-------------- --------------
30,092,000 34,141,000
Investment in real estate partnership 2,830,000 -
Other assets 136,000 205,000
-------------- --------------
$ 33,942,000 $ 34,941,000
============== ==============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 686,000 $ 654,000
Advance payments from renters 374,000 366,000
Minority interest in general partnerships 19,727,000 20,668,000
Partners' equity:
Limited partners' equity, $500 per unit, 66,000
units authorized, issued and outstanding 12,980,000 13,077,000
General partner's equity 175,000 176,000
-------------- --------------
Total partners' equity 13,155,000 13,253,000
-------------- --------------
$ 33,942,000 $ 34,941,000
============== ==============
</TABLE>
See Accompanying Notes
Appendix E - Page 7
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
Rental income $11,253,000 $11,227,000 $10,905,000
Equity in income of real estate partnership 181,000 - -
Interest income 33,000 31,000 93,000
------------- ------------- -------------
11,467,000 11,258,000 10,998,000
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of operations 3,532,000 3,640,000 3,378,000
Management fees 675,000 668,000 649,000
Depreciation and amortization 2,348,000 2,401,000 2,263,000
Administrative 102,000 87,000 84,000
Environmental costs - - 216,000
------------- ------------- -------------
6,657,000 6,796,000 6,590,000
------------- ------------- -------------
Income before minority interest 4,810,000 4,462,000 4,408,000
Minority interest in income (1,708,000) (1,862,000) (2,341,000)
------------- ------------- -------------
NET INCOME $ 3,102,000 $ 2,600,000 $ 2,067,000
============= ============= =============
Limited partners' share of net income
($41.73, $34.20, and $23.77 per unit in
1997, 1996, and 1995, respectively) $ 2,754,000 $ 2,257,000 $ 1,569,000
General partner's share of net income 348,000 343,000 498,000
------------- ------------- -------------
$ 3,102,000 $ 2,600,000 $ 2,067,000
============= ============= =============
</TABLE>
See Accompanying Notes
Appendix E - Page 8
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
------------- ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1994 $16,399,000 $ 210,000 $16,609,000
Net income 1,569,000 498,000 2,067,000
Distributions (4,297,000) (526,000) (4,823,000)
------------- ------------- -------------
Balances at December 31, 1995 13,671,000 182,000 13,853,000
Net income 2,257,000 343,000 2,600,000
Distributions (2,851,000) (349,000) (3,200,000)
------------- ------------- -------------
Balances at December 31, 1996 13,077,000 176,000 13,253,000
Net income 2,754,000 348,000 3,102,000
Distributions (2,851,000) (349,000) (3,200,000)
------------- ------------- -------------
Balances at December 31, 1997 $12,980,000 $ 175,000 $13,155,000
============= ============= =============
</TABLE>
See Accompanying Notes
Appendix E - Page 9
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,102,000 $ 2,600,000 $ 2,067,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,348,000 2,401,000 2,263,000
Decrease (increase) in rent and other receivables 24,000 32,000 (64,000)
Decrease (increase) in other assets 69,000 (76,000) (7,000)
Increase (decrease) in accounts payable 32,000 (92,000) 260,000
Increase (decrease) in advance payments from renters 8,000 (25,000) (14,000)
Equity in income of real estate partnership (181,000) - -
Minority interest in income 1,708,000 1,862,000 2,341,000
------------- ------------- -------------
Total adjustments 4,008,000 4,102,000 4,779,000
------------- ------------- -------------
Net cash provided by operating activities 7,110,000 6,702,000 6,846,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from real estate partnership 79,000 - -
Investment in real estate partnership (3,000) - -
Additions to real estate facilities (1,024,000) (996,000) (803,000)
------------- ------------- -------------
Net cash used in investing activities (948,000) (996,000) (803,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to holder of minority interest (2,649,000) (2,511,000) (2,564,000)
Distributions to partners (3,200,000) (3,200,000) (4,823,000)
------------- ------------- -------------
Net cash used in financing activities (5,849,000) (5,711,000) (7,387,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 313,000 (5,000) (1,344,000)
Cash and cash equivalents at the beginning of the period 506,000 511,000 1,855,000
------------- ------------- -------------
Cash and cash equivalents at the end of the period $ 819,000 $ 506,000 $ 511,000
============= ============= =============
</TABLE>
See Accompanying Notes
Appendix E - Page 10
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Investment in real estate partnership $(2,725,000) $ - $ -
Transfer of real estate facilities for interest in real estate
partnership, net 2,725,000 - -
</TABLE>
See Accompanying Notes
Appendix E - Page 11
<PAGE>
PS PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
Description of Partnership
--------------------------
PS Partners, Ltd. (the "Partnership") was formed with the proceeds of
an interstate public offering. PSI Associates II, Inc. ("PSA"), an
affiliate of Public Storage Management, Inc., organized the Partnership
along with B. Wayne Hughes ("Hughes"). In September 1993, Storage
Equities, Inc., now known as Public Storage, Inc. ("PSI") acquired the
interest of PSA relating to its general partner capital contribution in the
Partnership and was substituted as a co-general partner in place of PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership'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. In the PSMI Merger, Storage Equities, Inc. was
renamed Public Storage, Inc. and it acquired substantially all of PSMI's
United States real estate operations and became the operator of the
Partnership's mini-warehouse properties.
The Partnership has invested in existing mini-warehouse storage
facilities which offer self-service storage spaces for lease, usually on a
month-to-month basis, to the general public and, to a lesser extent, in
existing business park facilities which offer industrial and office space
for lease.
The Partnership has ownership interests in 27 properties in 13 states,
which exclude a property transferred to PS Business Parks, L.P. ("PSBPLP")
in January 1997. All of the properties are owned jointly through 22
general partnerships (the "Joint Ventures") with PSI. For tax
administrative efficiency, the Joint Ventures were subsequently
consolidated into a single general partnership. The Partnership is the
managing general partner of the Joint Ventures, with ownership interests in
the Joint Ventures ranging from 30% to 72.5%.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Partnership and the Joint Ventures. PSI's ownership interest in the Joint
Ventures is shown as minority interest in general partnerships in the
accompanying consolidated balance sheets. All significant intercompany
balances and transactions have been eliminated.
Minority interest in income represents PSI's share of net income with
respect to the Joint Ventures. Under the terms of the partnership
agreements all depreciation and amortization with respect to each Joint
Venture is allocated solely to the Partnership until the limited partners
recover their initial capital contribution. Thereafter, all depreciation
and amortization is allocated solely to PSI until it recovers its initial
capital contribution. All remaining depreciation and amortization is
allocated to the Partnership and PSI in proportion to their ownership
percentages.
Depreciation and amortization allocated to PSI was $1,358,000 in 1997,
$1,029,000 in 1996 and $465,000 in 1995. The allocation of depreciation
and amortization to PSI has the effect of reducing minority interest in
income and has no effect on the reported depreciation and amortization
expense.
Appendix E - Page 12
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
(Continued)
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
(continued)
-----------
Basis of Presentation (continued)
----------------------------------
Under the terms of the partnership agreements, for property
acquisitions in which PSI issued convertible securities to the sellers for
its interest, PSI's rights to receive cash flow distributions from the
partnerships for any year after the first year of operation are
subordinated to cash distributions to the Partnership equal to a cumulative
annual 7% of its cash investment (not compounded). These agreements also
specify that upon sale or refinancing of a property for more than its
original purchase price, distribution of proceeds to PSI is subordinated to
the return to the Partnership of the amount of its cash investment and the
7% distribution described above.
In addition to the above provisions, PSI has the right to compel the
sale of each property in the general partnerships at any time after seven
years from the date of acquisition at not less than its independently
determined fair market value provided the Partnership receives its share of
the net sales proceeds solely in cash. PSI's right to require the
Partnership to sell all of its properties became exercisable in 1990.
Real Estate Facilities
----------------------
The Partnership depreciates the buildings and equipment on a straight-
line method over estimated useful lives of 25 and 5 years, respectively.
Leasing commissions relating to business park properties are expensed when
incurred.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the method of accounting for long-lived assets that are expected
to be disposed. The Partnership adopted Statement 121 in 1996 and the
adoption had no effect.
In January 1997, the Partnership and PSI and other related
partnerships transferred a total of 35 business parks to PSBPLP, an
operating partnership formed to own and operate business parks in which PSI
has a significant interest. Included among the properties transferred was
the Partnership's Signal Hill, California business park in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc. Since January 1997, PSBPLP manages the commercial
operations of the Partnership's Webster, Texas Property pursuant to the
Management Agreement.
Revenue Recognition
-------------------
Property rents are recognized as earned.
Allocation of Net Income
------------------------
The General Partners' share of net income consists of an amount
attributable to their 1% capital contribution and an additional percentage
of cash flow (as defined, see Note 3) which relates to the General
Partners' share of cash distributions as set forth in the Partnership
Agreement. All remaining net income is allocated to the limited partners.
Appendix E - Page 13
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
(Continued)
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
(continued)
-----------
Per Unit Data
-------------
Per unit data is based on the number of limited partnership units
(66,000) outstanding during the year.
Cash Distributions
------------------
The Partnership Agreement provides for quarterly distributions of cash
flow from operations (as defined). Cash distributions per unit were $43.20
for 1997, $43.20 for 1996 and $65.10 for 1995.
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Partnership considers all highly
liquid investments purchased with a maturity of three months or less to be
cash equivalents.
Environmental Cost
------------------
Substantially all of the Partnership's facilities were acquired prior
to the time that it was customary to conduct extensive environmental
investigations in connection with the property acquisitions. During the
fourth quarter of 1995, an independent environmental consulting firm
completed environmental assessments on the Partnership's properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. Based on the assessments, the Partnership
believes that it is probable that it will incur costs totaling $124,000
after December 31, 1997 for known environmental remediation requirements.
During 1997, 1996, and 1995, the Partnership paid $22,000, $33,000, and
$37,000, respectively, in connection with the environmental remediations.
Although there can be no assurance, the Partnership is not aware of any
unaccrued environmental contamination of its facilities which individually
or in the aggregate would be material to the Partnership's overall
business, financial condition, or results of operations.
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. General Partners' Equity
------------------------
The General Partners have a 1% interest in the Partnership. In
addition, the General Partners have a 10% interest in cash distributions
attributable to operations, exclusive of distributions attributable to
sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed entirely to
the limited partners until the limited partners recover their investment
plus a cumulative 8% annual return (not compounded); thereafter, the
General Partners have a 15% interest in remaining proceeds.
Appendix E - Page 14
<PAGE>
PS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
(Continued)
3. Related Party Transactions
--------------------------
The Partnership has a management agreement with PSI whereby PSI
operates the Partnership's mini-warehouse facilities for a fee equal to 6%
of the facilities' monthly gross revenue (as defined).
The Partnership's commercial property is managed by PSBPLP pursuant to
a management agreement which provides for a fee equal to 5% of the
facility's gross revenues.
In January 1997, the Partnership transferred its Signal Hill,
California business park facility to PSBPLP in exchange for a partnership
interest in PSBPLP.
PSI has a significant economic interest in PSBPLP and PSBP.
4. Leases
------
The Partnership has invested primarily in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease to the
general public. Leases for such space are usually on a month-to-month
basis.
5. Taxes Based on Income
---------------------
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's consolidated financial
statements do not reflect a provision for such taxes.
Taxable net income was $4,470,000, $3,385,000 and $3,415,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The difference
between taxable income and book income is primarily related to timing
differences in depreciation expense.
Appendix E - Page 15
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
APPENDIX F
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
APPENDIX F
<TABLE>
<S> <C>
FINANCIALS AT MARCH 31, 1998:
- -----------------------------
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997.............................. 1
Liquidity and Capital Resources.................................... 2
FINANCIALS AT DECEMBER 31, 1997:
- --------------------------------
Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996................................... 3 - 4
Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995................................... 5 - 6
Liquidity and Capital Resources.................................... 7 - 8
Impact of Year 2000................................................ 9
</TABLE>
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997:
- --------------------------------------------------------------------------------
The Partnership's net income was $842,000 and $685,000 for the three months
ended March 31, 1998 and 1997, respectively, representing an increase of
$157,000, or 23%. The increase was primarily due to an increase in property
operations at the Partnership's real estate facilities, partially offset by an
increase in minority interest in income for those properties held jointly with
PSI.
Rental income for the Partnership's mini-warehouse operations was
$2,823,000 compared to $2,641,000 for the three months ended March 31, 1998 and
1997, respectively, representing an increase of $182,000, or 7%. The increase
in rental income was primarily attributable to increases in rental rates and
occupancy levels. The monthly average realized rent per square foot for the
mini-warehouse facilities was $.64 compared to $.62 for the three months ended
March 31, 1998 and 1997, respectively. The weighted average occupancy levels at
the mini-warehouse facilities was 91% compared to 87% for the three months ended
March 31, 1998 and 1997, respectively. Cost of operations (including management
fees) for the mini-warehouses decreased $3,000 to $1,053,000 from $1,056,000 for
the three months ended March 31, 1998 and 1997, respectively. Accordingly, for
the Partnership's mini-warehouse operations, property net operating income
increased $185,000, or 12%, from $1,585,000 to $1,770,000 for the three months
ended March 31, 1997 and 1998, respectively.
Rental income for the Partnership's business-park operations was $51,000
compared to $47,000 for the three months ended March 31, 1998 and 1997,
respectively, representing an increase of $4,000, or 9%. The increase in rental
income was primarily attributable to increases in both occupancy levels and
rental rates. The weighted average occupancy level at the Partnership's
Webster, Texas business park facilities was 92% compared to 90% for the three
months ended March 31, 1998 and 1997, respectively. The monthly average
realized rent per square foot for the Webster facility was $.73 compared to $.70
for the three months ended March 31, 1998 and 1997, respectively. Cost of
operations (including management fees) for the business parks decreased $5,000,
or 18%, to $23,000 from $28,000 for the three months ended March 31, 1998 and
1997, respectively. Accordingly, for the Partnership's business park
facilities, property net operating income increased by $9,000, or 47%, from
$19,000 to $28,000 for the three months ended March 31, 1997 and 1998,
respectively.
Minority interest in income increased $43,000 to $414,000 from $371,000 for
the three months ended March 31, 1998 and 1997, respectively. This increase was
primarily attributable to an increase in operations at the Partnership's real
estate facilities owned jointly with PSI, partially offset by an allocation of
depreciation and amortization expense (pursuant to the partnership agreement
with respect to those real estate facilities which are jointly owned with PSI)
to PSI of $372,000 for the three months ended March 31, 1998 compared to
$311,000 for the same period in 1997.
Appendix F - Page 1
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and long-term basis, primarily from internally generated
cash from property operations and cash reserves. Cash generated from operations
($1,813,000 for the three months ended March 31, 1998) has been sufficient to
meet all current obligations of the Partnership.
During 1998, the Partnership anticipates approximately $867,000 of capital
improvements (of which $369,000 represents PSI's joint venture share). Total
capital improvements were $59,000 for the three months ended March 31, 1998 of
which $35,000 represents the Partnership's share.
The Partnership paid distributions to the limited and general partners
totaling $713,000 ($10.80 per unit) and $87,000, respectively, during the first
three months of 1998. Future distribution rates may be adjusted to levels which
are supported by operating cash flow after capital improvements and any other
necessary obligations.
Appendix F - Page 2
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996:
- ----------------------------------------------------------------------
The Partnership's net income was $3,102,000 in 1997 compared to $2,600,000
in 1996, representing an increase of $502,000, or 19%. The increase was
primarily due to an increase in property operations at the Partnership's real
estate facilities, combined with reduced minority interest in income for those
properties held jointly with PSI.
Net property income (rental income less cost of operations and management
fees and excluding depreciation) increased approximately $127,000, or 2%, in
1997 compared to 1996 as rental income increased $26,000 and cost of operations
(including management fees and excluding depreciation expense) decreased
$101,000, or 2%. Net property income in 1997 excludes property operations for
the Signal Hill, California business park facility, which was transferred to
PSBPLP in January 1997. Excluding Signal Hill operations, net property income
in 1997 increased $387,000, or 6%, compared to 1996 as rental income increased
$481,000, or 4%, and cost of operations increased $94,000, or 2%.
Rental income for the Partnership's mini-warehouse operations was
$11,056,000 in 1997 compared to $10,561,000 in 1996, representing an increase of
$495,000, or 5%. The increase in rental income was primarily attributable to
increased rental rates. The monthly average realized rent per square foot for
the mini-warehouse facilities was $.63 in 1997 compared to $.60 in 1996. The
weighted average occupancy levels at the mini-warehouse facilities remained
increased slightly from 89% in 1996 to 90% in 1997. Cost of operations
(including management fees) for the mini-warehouses increased $106,000, or 3%,
to $4,119,000 during 1997 from $4,013,000 in 1996, respectively. The increase
in cost of operations was primarily attributable to an increase in advertising
expense, partially offset by a decrease in repairs and maintenance expenses.
Accordingly, for the Partnership's mini-warehouse operations, property net
operating income increased $389,000, or 6%, from $6,548,000 in 1996 to
$6,937,000 in 1997.
Rental income for the Partnership's business-park operations was $197,000
in 1997 compared to $666,000 in 1996, representing a decrease of $469,000, or
70%. Excluding the operations of the Signal Hill property, rental income
decreased $14,000, or 7%, to $197,000 in 1997 from $211,000 in 1996. The
decrease in rental income was primarily attributable to a decrease in rental
rates. The monthly average realized rent per square foot for the Webster
facility was $.71 for 1997 compared to $.76 in 1996. The weighted average
occupancy level at the Partnership's Webster, Texas business park facility
remained stable at 93% during 1997 and 1996. Cost of operations (including
management fees) for the business parks decreased $207,000, or 70%, to $88,000
during 1997 from $295,000 in 1996. Excluding the operations of the Signal Hill
property, cost of operations decreased $12,000, or 12%, to $88,000 in 1997 from
$100,000 during 1996. Accordingly, for the Partnership's business park
facilities,
Appendix F - Page 3
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
property net operating income decreased by $262,000, or 71%, from $371,000
during 1996 to $109,000 in 1997. Excluding the operations for the Signal Hill
property, property net operating income decreased by $2,000, or 2%, from
$111,000 in 1996 to $109,000 in 1997.
The following table summarizes the Partnership's operating income, net of
depreciation, from its investment in PSBPLP during 1997 compared to that of the
Signal Hill, California business park facility during 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Equity in earnings of real estate partnership $181,000 $ -
Rental income - 455,000
Cost of operations - 195,000
-------- --------
Net operating income 181,000 260,000
Depreciation - 169,000
-------- --------
Operating income, net of depreciation $181,000 $ 91,000
======== ========
</TABLE>
The difference between the operating income, net of depreciation, in 1997
and 1996 is primarily due to the effect of depreciation and an improvement in
property operations.
Minority interest in income decreased $154,000 to $1,708,000 in 1997 from
$1,862,000 in 1996. This decrease was primarily attributable to the allocation
of depreciation and amortization expense (pursuant to the partnership agreement
with respect to those real estate facilities which are jointly owned with PSI)
to PSI of $1,358,000 in 1997 compared to $1,029,000 in 1996, partially offset by
an increase in operations at the Partnership's real estate facilities owned
jointly with PSI.
Appendix F - Page 4
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
- ----------------------------------------------------------------------
The Partnership's net income in 1996 was $2,600,000 compared to $2,067,000
in 1995, representing an increase of $533,000. The increase was primarily due
to improved property operations at the Partnership's real estate facilities and
a reduction in environmental costs, combined with reduced minority interest in
income for those properties held jointly with PSI, partially offset by an
increase in depreciation expense and a decrease in interest income.
Property net operating income (rental income less cost of operations and
management fees and excluding depreciation expense) increased approximately
$41,000 in 1996 compared to 1995, as rental income increased by $322,000, or 3%,
and cost of operations (including management fees) increased by $281,000, or 7%.
Rental income for the Partnership's mini-warehouse operations was
$10,561,000 in 1996 compared to $10,256,000 in 1995, representing an increase of
$305,000, or 3%. The increase in rental income was primarily attributable to
increased rental rates. The monthly average realized rent per square foot for
the mini-warehouse facilities was $.60 in 1996 compared to $.59 in 1995. The
weighted average occupancy levels at the mini-warehouse facilities remained
stable at 89% for both 1996 and 1995. Costs of operations (including management
fees) for the mini-warehouses increased $278,000, or 7%, to $4,013,000 in 1996
from $3,735,000 in 1995. This increase was primarily attributable to increases
in repairs and maintenance, property tax, and advertising expenses.
Accordingly, for the Partnership's mini-warehouse operations, property net
operating income increased by $27,000 to $6,548,000 in 1996 from $6,521,000 in
1995.
Rental income for the Partnership's business park operations was $666,000
in 1996 compared to $649,000 in 1995, representing an increase of $17,000, or
3%. The increase in rental income was primarily attributable to increased
occupancy levels, partially offset by decreased rental rates. The weighted
average occupancy levels at the business park facilities were 93% in 1996
compared to 91% in 1995. The monthly average realized rent per square foot for
the business park facilities was $.64 in 1996 compared to $.65 in 1995. Cost of
operations (including management fees) for the business parks increased $3,000
to $295,000 in 1996 from $292,000 in 1995. Accordingly, for the Partnership's
business park facilities, property net operating income increased by $14,000, or
4%, to $371,000 in 1996 from $357,000 in 1995.
Interest income decreased in 1996 over 1995 as a result of a decrease in
average invested cash balances.
Depreciation and amortization increased $138,000 to $2,401,000 in 1996 from
$2,263,000 in 1995. This increase is principally attributable to depreciation
of capital expenditures made during 1995 and 1996.
Appendix F - Page 5
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Minority interest in income decreased by $479,000 in 1996 compared to 1995.
This decrease was primarily attributed to the allocation of depreciation and
amortization expense (pursuant to the partnership agreement with respect to
those real estate facilities which are jointly owned with PSI) to PSI of
$1,029,000 compared to $465,000 for 1996 and 1995, respectively, partially
offset by an increase in operations at the Partnership's real estate facilities
owned jointly with PSI.
Appendix F - Page 6
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and long-term basis, primarily by internally generated cash
from property operations combined with cash on-hand at December 31, 1997 of
approximately $819,000.
Cash flows from operating activities ($7,110,000 for the year ended
December 31, 1997) have been sufficient to meet all current obligations of the
Partnership. Total capital improvements were $1,024,000, $996,000 and $803,000
in 1997, 1996 and 1995, respectively. During 1998, the Partnership anticipates
approximately $867,000 of capital improvements (of which $369,000 represents
PSI's joint venture share). During 1995, the Partnership's property manager
commenced a program to enhance the visual appearance of the mini-warehouse
facilities. Such enhancements include new signs, exterior color schemes, and
improvements to the rental offices.
The Partnership expects to continue making quarterly distributions. Total
distributions paid to the General Partners and the limited partners (including
per Unit amounts) for 1997 and prior years were as follows:
<TABLE>
<CAPTION>
Total Per Unit
----------- ----------
<S> <C> <C>
1997 $3,200,000 $43.20
1996 3,200,000 43.20
1995 4,823,000 65.10
1994 2,371,000 32.00
1993 1,850,000 25.00
1992 1,850,000 25.00
1991 2,522,000 34.04
1990 347,000 4.70
1989 2,223,000 30.00
1988 2,222,000 30.00
1987 2,222,000 30.00
1986 2,407,000 32.50
1985 2,963,000 40.00
1984 2,963,000 40.00
1983 2,407,000 32.50
</TABLE>
Distributions were reduced significantly in 1990 in order to pay off short-
term borrowings as well as the prepayment of long-term borrowings. In 1991, the
General Partners distributed a portion of the operating cash reserve of the
Partnership. The operating reserve that was distributed was estimated at $8.10
per unit. During 1992, 1993 and 1994, the distribution level was adjusted to a
level supported by property operations after reduction for funds needed for
capital improvements, debt service and necessary cash reserves. The 1995
distribution includes a portion of the operating cash reserve of the
Partnership, estimated to be $22.95 per Unit. Future distribution levels
Appendix F - Page 7
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
will be based upon cash flows available for distributions (cash flows from
operations less capital improvements, distributions to minority interest and
necessary cash reserves).
Appendix F - Page 8
<PAGE>
PS PARTNERS, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact of Year 2000
- -------------------
PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of
these computer programs and systems has been evaluated to be upgraded or
replaced as part of PSI's Year 2000 project.
The cost of the Year 2000 project will be allocated to all entities that
use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Partnership is approximately $81,000. The cost
of new software will be capitalized and the cost of maintenance to existing
systems will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is prior to
any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Partnership.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
Appendix F - Page 9
<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 3.21) 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, 1997 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 7th day of August, 1998.
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 August 7, 1998
________________________ Officer and Director (principal executive
B. Wayne Hughes officer)
HARVEY LENKIN President and Director August 7, 1998
________________________
Harvey Lenkin
JOHN REYES Senior Vice President and Chief August 7, 1998
________________________ Financial Officer (principal financial
John Reyes officer and principal accounting officer)
ROBERT J. ABERNETHY Director August 7, 1998
________________________
Robert J. Abernethy
DANN V. ANGELOFF Director August 7, 1998
________________________
Dann V. Angeloff
WILLIAM C. BAKER Director August 7, 1998
________________________
William C. Baker
URI P. HARKHAM Director August 7, 1998
________________________
Uri P. Harkham
B. WAYNE HUGHES, JR. Vice President and Director August 7, 1998
________________________
B. Wayne Hughes, Jr.
Director
________________________
Thomas J. Barrack, Jr.
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization among Registrant, PS Partners
Merger Co., Inc. and PS Partners, Ltd. dated as of July 14, 1998 (filed
as Appendix A to the Information 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 Certificate of Determination for 8 5/8% Cumulative Preferred Stock,
Series I. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8 5/8% Cumulative Preferred Stock, Series I and
incorporated herein by reference.
3.17 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 333-18395 and incorporated
herein by reference.
3.18 Certificate of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference.
3.19 Certificate of Determination for 8% Cumulative Preferred Stock, Series
J. Filed with Registrant's Form 8-A/A Registration Statement relating to
the 8% Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.20 Certificate of Correction of Certificate of Determination for the 8.25%
Convertible Preferred Stock. Filed herewith.
3.21 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.22 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.23 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.24 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.25 Amendment to Bylaws adopted on February 10, 1998. Filed with
Registrant's Current Report on Form 8-K dated February 10, 1998 and
incorporated herein by reference.
5.1 Opinion on legality. Filed herewith.
8.1 Opinion on tax matters. 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 Second Amended and Restated Credit Agreement by and among Registrant,
Wells Fargo Bank, National Association, as agent, and the financial
institutions party thereto dated as of February 25, 1997. Filed with
Registrant's Registration Statement No. 333-22665 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, 1997 and
incorporated herein by reference.
S-5
<PAGE>
*10.7 Registrant's 1996 Stock Option and Incentive Plan. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997 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 A. Timothy Scott (included in Exhibit 8.1).
23.4 Consent of The Nicholson Group, Ltd. Filed herewith.
23.5 Consent of Robert A. Stanger & Co., Inc. Filed herewith.
99.1 Cash Election Form. Filed herewith.
99.2 Real Estate Appraisal Report by The Nicholson Group, Ltd. dated July 30,
1998 (filed as Appendix B to the Information Statement and Prospectus).
99.3 Opinion of Robert A. Stanger & Co., Inc. dated August 7, 1998 (filed as
Appendix C to the Information Statement and Prospectus).
_______________
* Compensatory benefit plan.
S-6
<PAGE>
Exhibit 3.20
CERTIFICATE OF CORRECTION OF
CERTIFICATE OF DETERMINATION OF PREFERENCES OF
8.25% CONVERTIBLE PREFERRED STOCK OF
PUBLIC STORAGE, INC.
[As Filed in the Office of the Secretary of State of the State of California
June 5, 1998]
Harvey Lenkin and Sarah Hass certify that:
1. They are the President and Secretary, respectively, of PUBLIC STORAGE,
INC., a California corporation.
2. The name of the corporation is PUBLIC STORAGE, INC., and it is a
California corporation.
3. The instrument being corrected is entitled "CERTIFICATE OF
DETERMINATION OF PREFERENCES OF 8.25% CONVERTIBLE PREFERRED STOCK OF STORAGE
EQUITIES, INC." and said instrument was filed with the Secretary of State of the
State of California on July 13, 1993. At the time said instrument was filed the
name of the corporation was STORAGE EQUITIES, INC.
4. Paragraph "(1)" under "(c) Redemption" of the RESOLUTION OF THE BOARD
----------
OF DIRECTORS OF STORAGE EQUITIES, INC. ESTABLISHING A SERIES OF 8.25%
CONVERTIBLE PREFERRED STOCK attached to, and incorporated by reference into,
said Certificate of Determination, as corrected, should read in its entirety as
follows:
Except as provided in clause (11) below, the shares of this Series
are not redeemable prior to July 1, 1998 and are not redeemable for
cash. On and after such date, the shares of this Series are redeemable
at the option of the Corporation for Common Stock, by resolution of the
Board of Directors, in whole or in part, from time to time, only if for
20 Trading Days, within any period of 30 consecutive Trading Days,
including the last Trading Day of such period, the Closing Price of the
Common Shares on each of such 20 Trading Days exceeds 100% of the
Redemption Price in effect on such Trading Day. In order to exercise
its redemption option, the Corporation must issue a press release
announcing the redemption (the "Press Release") prior to the opening of
business on the second Trading Day after the last Trading Day of any
such 30 consecutive Trading Day period. The Corporation's right to
exercise its redemption option will not be affected by any changes in
the Closing Price of the Common Shares subsequent to such 30 consecutive
Trading Day period. The Corporation may not issue a Press Release prior
to June 1, 1998. The Press Release shall announce the redemption and
set forth the number of shares of this Series which the Corporation
intends to redeem. The redemption date shall not be less than 30 days
nor more than 60 days after the date on which the Corporation issues the
Press Release and gives notice pursuant to clause (5) below.
<PAGE>
5. That said paragraph "(1)", as corrected, conforms the wording of the
resolution, to that adopted by the Board of Directors.
IN WITNESS WHEREOF, the undersigned have executed this Certificate on June
1, 1998.
/s/ Harvey Lenkin
----------------------------
Harvey Lenkin
President
/s/ Sarah Hass
----------------------------
Sarah Hass
Secretary
Each of the undersigned declares under penalty of perjury under the laws of
the State of California that the matters set forth in the foregoing Certificate
are true and correct of his own knowledge.
Executed on June 1, 1998.
/s/ Harvey Lenkin
----------------------------
Harvey Lenkin
/s/ Sarah Hass
----------------------------
Sarah Hass
2
<PAGE>
Exhibit 5.1
DAVID GOLDBERG
Senior Vice President and General Counsel
701 Western Avenue, Suite 200
Glendale, California 91201-2397
August 7, 1998
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 up to 650,000 shares 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>
Exhibit 8.1
A. Timothy Scott
Senior Vice President and Tax Counsel of Public Storage, Inc.
701 Western Ave. Glendale, CA 91201
(818) 244-8080 x286 (voice)
(818) 548-9288 (fax)
August 7, 1998
PS Partners, Ltd.
701 Western Avenue
Glendale, California 91201
Re: Merger Transaction Tax Opinion
------------------------------
Ladies & Gentlemen:
As Senior Vice President and Tax Counsel of Public Storage, Inc.
("PSI"), I have examined the registration statement expected to be filed by PSI
on Form S-4 with the Securities and Exchange Commission on or about the date of
this opinion (the "Registration Statement"). Unless otherwise defined in this
opinion letter, capitalized terms used below have the same meaning as set forth
in the Registration Statement. The Registration Statement serves as the
definitive information statement relating to PSI's acquisition of the interests
held by the public limited partners of PS Partners, Ltd. ("Partners"), pursuant
to a proposed merger of PS Partners Merger Co., Inc. ("Merger Sub," which is a
second tier subsidiary of PSI) with and into Partners (the "Merger"). In the
Merger, each Partners partnership unit (other than the partnership units held by
PSI and its subsidiaries) will be converted into the right to receive PSI common
stock with a value of $713, or at the election of a limited partner, $713 in
cash. PSI is a general partner of Partners and now owns approximately 70% of
the outstanding limited partnership interests in Partners.
In connection with your participation in the Merger, you have
requested my opinion that the discussion in the Registration Statement under the
heading "Federal Income Tax Considerations" fairly summarizes the material
federal income tax considerations to the public limited partners as a result of
the Merger and the subsequent ownership of PSI common stock for limited partners
who do not make a cash election, and that PSI is organized and operated so as to
meet the requirements for qualification as a real estate investment trust
("REIT") as defined in Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the "Code").
In preparing this opinion, I examined such documents as I considered
necessary or appropriate for purposes of issuing this opinion, including the
following: (1) the Registration Statement (including related appendices and
exhibits, such as the Agreement and Plan of Reorganization dated as of July 14,
1998 between PSI, Merger Sub, and Partners); (2) PSI's Restated Articles of
Incorporation; (3) the organizational
<PAGE>
PS Partners, Ltd.
701 Western Avenue
Glendale, California 91201
Page 2
documents and stock ownership information of various PSI subsidiaries; (4)
documents relating to the November 1995 "PSMI Merger;" and (5) the private
letter rulings issued to PSI dated October 4, 1995 and May 16, 1997, and the
related ruling request letters submitted to the IRS on behalf of PSI in seeking
those rulings.
I also relied upon certain representations, including representations
set forth in a certificate of an officer of PSI regarding the assets, operations
and activities of PSI in the past and as to the contemplated assets, operations
and activities of PSI in the future. I have assumed that each representation
and all other information that I reviewed is true and correct in all material
respects and will remain true and correct, that all obligations imposed by any
documents on the parties have been or will be performed, and that the
Registration Statement and the other information fairly describes the past and
expected future actions of the parties as relevant to this opinion. I have not
made an independent investigation of the accuracy or completeness of those
matters. For example, I have not undertaken to review and determine whether
each limited partnership or limited liability company in which PSI owns an
interest properly has been classified as a "partnership" for federal income tax
purposes. Instead, I have relied upon representations as to the status of these
entities for federal income tax purposes. If any one or more of these entities
were to be classified as an association taxable as a corporation for federal
income tax purposes, that would preclude PSI from qualifying as a REIT for
federal income tax purposes and therefore would have a material adverse impact
on this opinion.
Based on the facts and representations and subject to the assumptions,
qualifications and limitations referred to in this letter and in the
Registration Statement, I am of the opinion that:
(1) the discussion in the Registration Statement under the heading
"Federal Income Tax Considerations" fairly summarizes the material federal
income tax considerations to the public limited partners as a result of the
Merger and the subsequent ownership of PSI common stock for limited
partners who do not make a cash election, and
(2) PSI is organized and operated so as to meet the requirements for
qualification as a REIT as defined in Sections 856 to 860 of the Internal
Revenue Code.
PSI's qualification and taxation as a REIT depends upon both PSI's
satisfaction in the past, and PSI's ability to meet on a continuing basis in the
future, through actual annual operating and other results, the various
requirements under the Code with regard to, among other things, the sources of
its gross income, the composition
<PAGE>
PS Partners, Ltd.
701 Western Avenue
Glendale, California 91201
Page 3
of its assets, the levels of distributions to shareholders, the diversity of its
stock ownership, and the lack of C corporation earnings and profits. As is
noted above, I have relied upon representations with respect to these matters
and will not review or audit PSI's compliance with these requirements and am not
rendering an opinion on those underlying matters. For example, I am not
rendering an opinion as to whether PSI satisfied or continued to satisfy the
stock ownership and gross income requirements applicable to REITs following the
PSMI Merger, or whether PSI had current or accumulated earnings and profits
following the PSMI Merger. (For a discussion of certain considerations related
to these particular issues, see the discussion in the Registration Statement
under the caption "Federal Income Tax Considerations -- Consequences of the PSMI
Merger on PSI's Qualification as a REIT.") Accordingly, no assurance can be
given that the actual results of PSI's operations, the sources of its income,
the nature of its assets, the level of its distributions to shareholders, the
diversity of its share ownership, and the absence of any C corporation earnings
and profits for any given taxable year have satisfied or will satisfy the
requirements under the Code for qualification and taxation as a REIT.
This opinion is based on my interpretation of the federal income tax
laws of the United States of America as they exist on the date of this letter
and does not cover any state, local or foreign tax issues. I express no opinion
regarding any tax or other issues except as is specifically set forth above.
The federal income tax laws, the regulations, and the judicial and
administrative interpretation and application of those laws is subject to change
at any time. Some issues under existing law that could significantly affect
this opinion have not been authoritatively addressed by the IRS or the courts.
Of course, any developments or changes in the law, including those reflected in
future regulations, court decisions or administrative pronouncements, may affect
the conclusions set forth in this letter, perhaps on a retroactive basis. This
opinion is also expressly conditioned upon the truth and accuracy of the
representations, warranties, assumptions, and facts upon which I have relied in
issuing this opinion.
This opinion represents my legal judgment as to the matters set forth
above. An opinion of counsel does not have any binding effect and is not a
guarantee that the IRS will agree with the assumptions, analysis, or conclusions
of counsel. Neither PSI nor has requested or will request any ruling from the
IRS about any issues presented by the Merger. The IRS may assert contrary
positions, and a court may sustain such a contrary position if asserted by the
IRS.
<PAGE>
PS Partners, Ltd.
701 Western Avenue
Glendale, California 91201
Page 4
This opinion is rendered to you in connection with your participation
in the Merger and is solely for your benefit in connection with that
transaction. This opinion may not be relied upon by you for any other purpose,
or relied upon by any other person, firm, corporation or other entity for any
purpose, without my prior written consent. Unless required by applicable law,
this opinion may not be disclosed to or otherwise made available to any other
person, firm, corporation or other entity for any purpose, without my prior
written consent. I disclaim any obligation to advise you of any change of law
that occurs, or any facts of which I become aware, after the date of this
opinion.
I 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 to the Registration Statement. In
giving this consent, however, I do not admit that I am an "expert" within the
meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ A. Timothy Scott
A. Timothy Scott
<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 Information
Statement and Prospectus of Public Storage, Inc. and PS Partners, Ltd. and to
the incorporation by reference therein of our report dated February 23, 1998
with respect to the consolidated financial statements and schedule of Public
Storage, Inc. in its Annual Report on Form 10-K for the year ended December 31,
1997 filed with the Securities and Exchange Commission, and to the use of our
report dated February 23, 1998 with respect to the consolidated financial
statements of PS Partners, Ltd. included in the Registration Statement and
Information Statement and Prospectus.
/s/ ERNST & YOUNG LLP
Los Angeles, California
August 7, 1998
<PAGE>
Exhibit 23.4
CONSENT OF THE NICHOLSON GROUP, LTD.
We hereby consent to the references to our firm under "The Merger -- Real
Estate Portfolio Appraisal by TNG" in the Information Statement and Prospectus
which is a part of this Registration Statement and to the other references to
our firm therein.
/s/ THE NICHOLSON GROUP, LTD.
August 7, 1998
Hartland, Wisconsin
<PAGE>
Exhibit 23.5
CONSENT OF ROBERT A. STANGER & CO., INC.
We hereby consent to the references to our firm under "The Merger --
Fairness Opinion from Stanger" in the Information Statement and Prospectus which
is a part of this Registration Statement and to the other references to our firm
therein.
/s/ ROBERT A. STANGER & CO., INC.
August 7, 1998
Shrewsbury, New Jersey
<PAGE>
Exhibit 99.1
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS, LTD.
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 units of
limited partnership interest ("Units") of PS Partners, Ltd. (the "Partnership")
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, MUST BE RECEIVED BY BANKBOSTON
N.A. (THE "EXCHANGE AGENT") 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 EXCHANGE AGENT SET
FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES, AND THE EXCHANGE AGENT WILL NOT
BE RESPONSIBLE THEREFOR.
HOLDERS OF UNITS WHO INTEND TO RECEIVE PUBLIC STORAGE, INC. ("PSI")
COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
This Cash Election Form is to be executed and returned to the Exchange
Agent at one of the following addresses:
<TABLE>
<CAPTION>
By Mail By Hand By Overnight Courier For Assistance For Information
------- ------- -------------------- -------------- ---------------
<S> <C> <C> <C> <C>
BankBoston N.A. Securities Transfer & BankBoston N.A. BankBoston N.A. Public Storage, Inc.
c/o Boston EquiServe Reporting Services c/o Boston EquiServe c/o Boston EquiServe Investor Services Department
P.O. Box 8029 c/o Boston EquiServe Corporate Agency Shareholder Services 701 Western Avenue
Boston, MA 02266-8029 55 Broadway & Reorganization (781) 575-3120 Glendale, CA 91201-2397
3rd Floor 150 Royall Street (800) 807-3055
New York, NY 10006 Mail Stop 45-01-40 (800) 421-2856
Canton, MA 02021 (818) 244-8080
</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
acquisition by Public Storage, Inc. ("PSI") of all of the Units not currently
owned by PSI through the merger of a PSI subsidiary into the Partnership (the
"Merger"), pursuant to the Agreement and Plan of Reorganization dated as of July
14, 1998, among PSI, PS Partners Merger Co., Inc. and the Partnership (the
"Merger Agreement").
The undersigned, subject to the Election 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 elects (an
"Election"), as indicated below, upon consummation of the Merger to have each of
the Units owned by the Unitholder converted into the right to receive $713 in
cash, without interest (a "Cash Election").
If the Exchange Agent has not received your properly completed Cash
Election Form by the Election Deadline (as defined in Instruction A), you will
receive PSI Common Stock in the Merger.
The undersigned hereby certifies that this Election covers all of the
Units 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 Unitholder may not make a cash election as to less than all of the Units
beneficially owned by such Unitholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Information Statement and Prospectus dated August __,
1998 (the "Information Statement and Prospectus") furnished to limited partners
of the Partnership, in connection with the Merger, all of which are incorporated
herein by reference. Receipt of the Information Statement and Prospectus,
including the Merger Agreement attached as Appendix A thereto, is hereby
acknowledged. Copies of the Information Statement and Prospectus are available
from the Exchange Agent upon request (see Instruction G(9)).
The Election by each holder of Units, including this Election by the
undersigned, will be subject to the election procedures set forth in the Merger
Agreement and described in the Information Statement and Prospectus (the
"Election Procedures").
1
<PAGE>
INSTRUCTIONS
The Execution Section of this Cash Election Form should be properly
filled in, dated and signed, torn off and delivered to the Exchange Agent at the
appropriate address set forth on the first page 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 UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER
SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
A. TIME IN WHICH TO ELECT
IN ORDER FOR AN ELECTION TO BE EFFECTIVE, THE EXCHANGE AGENT MUST RECEIVE
A PROPERLY COMPLETED CASH ELECTION FORM NO LATER THAN 5:00 P.M., NEW YORK CITY
TIME, ON SEPTEMBER 11, 1998 (THE "ELECTION DEADLINE"). If all conditions set
forth in the Merger Agreement have been met or, if permissible, waived, the
Merger will be effective on September 14, 1998.
IF THE EXCHANGE AGENT HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH
ELECTION FORM BY THE ELECTION DEADLINE, YOU WILL RECEIVE PSI COMMON STOCK IN THE
MERGER.
For instructions regarding changes or revocations of Elections and the
time in which such changes or revocations can be made, see Instructions F(1) and
F(2) below.
B. ELECTIONS
This Cash Election Form provides for your Election, subject to the
Election Procedures and the other terms and conditions set forth hereunder and
in the documents incorporated herein by reference, upon consummation of the
Merger to have each of the Units covered by this Cash Election Form converted
into the right to receive $713 in cash, 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
Information Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Information Statement and Prospectus. Copies of the
Information Statement and Prospectus may be requested from the Exchange Agent at
the address and telephone number set forth on the first page of this Cash
Election Form (see Instruction G(9)). The delivery of this Cash Election Form
to the Exchange Agent constitutes acknowledgement of the receipt of the
Information Statement and Prospectus. EACH HOLDER OF UNITS IS STRONGLY
ENCOURAGED TO READ THE INFORMATION STATEMENT AND PROSPECTUS IN ITS ENTIRETY AND
TO DISCUSS THE CONTENTS THEREOF, THE MERGER AND THIS CASH ELECTION FORM WITH HIS
OR HER PERSONAL FINANCIAL AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO ELECT
CASH. THE TAX CONSEQUENCES TO A HOLDER OF UNITS WILL VARY DEPENDING UPON A
NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF AN ELECTION, SEE "FEDERAL INCOME TAX CONSIDERATIONS -- THE
MERGER" IN THE INFORMATION STATEMENT AND PROSPECTUS.
C. CASH ELECTION
By completing and submitting the Cash Election Form, you are electing,
subject to the Election 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 Units covered by this Cash Election
Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER
SHOULD NOT SUBMIT THIS CASH ELECTION FORM. After the Merger, holders of Units
that were converted into shares of PSI Common Stock, without any further action,
will be entitled to receive certificates representing the number of whole shares
of PSI Common Stock into which Units will have been converted and cash payment
in lieu of fractional share interests, if applicable. As soon as practicable
after the Merger, the Exchange Agent will send the certificates for the PSI
Common Stock to each holder of Units whose Units have been converted into shares
of PSI Common Stock. HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN
THE MERGER DO NOT NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE
CERTIFICATES REPRESENTING THE PSI COMMON STOCK.
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 Exchange Agent or PSI to be defective in any way, you will
receive PSI Common Stock in the Merger.
F. SPECIAL CONDITIONS
(1) REVOCATION OF ELECTION. An election may be revoked by the person or
persons making such election by a written notice signed and dated by such person
or persons and received by the Exchange Agent prior to the Election Deadline,
identifying the name of the registered holder of the Units subject to such
Election and the total number of Units owned by the beneficial owner.
(2) NULLIFICATION OF ELECTION. All Cash Election Forms will be void and of
no effect if the Merger is not consummated.
(3) ELECTIONS SUBJECT TO ELECTION PROCEDURES. All Elections are subject to
the Election Procedures set forth in the Merger Agreement and described in the
Information Statement and Prospectus under the caption "The Merger -- Cash
Election Procedure" and to the other terms and conditions set forth thereunder
and hereunder, including the documents incorporated herein by reference.
(4) UNITS HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of
record of Units who hold such Units 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 Units 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
2
<PAGE>
the Units 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 Exchange Agent with such documents and/or additional certifications,
if requested, in order to satisfy the Exchange Agent that such Representative
holds such Units for a particular beneficial owner of such Units. If any Units
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 to the Exchange
Agent at the address set forth on the first page 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.
(2) SIGNATURES. Except as otherwise permitted below, you must sign this Cash
Election Form exactly the way your name appears on the label in Box A
(Registered Holder Information). If the Units are owned by two or more persons,
each must sign exactly as his or her name appears on the label in Box A
(Registered Holder Information). If the Units 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 transfer documents. See
Instruction G(5)(a).
(3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. None of the Partnership, PSI
and the Exchange Agent will be under any obligation to notify you or anyone else
that the Exchange Agent 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 Units (including but not limited to matters relating to the
Election Deadline, time limits, effectiveness of any Elections, will be resolved
by PSI and its decision will be conclusive and binding on all concerned. PSI
may delegate this function to the Exchange Agent in whole or in part. PSI or
the Exchange Agent shall have the absolute right in its sole discretion to
reject any and all Cash Election Forms which are deemed by either of them to be
not in proper form or to waive any immaterial irregularities in any Cash
Election Form.
(4) ISSUANCE OF PAYMENT CHECK(S). If the Payment Check(s) are to be issued
in the name of the registered holder(s) as it appears on the label in Box A
(Registered Holder Information), 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)(b).
(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) as
it appears on the label in Box A (Registered Holder Information), you must
follow the guidelines below. Note that in each circumstance listed below,
unitholder(s) must have signature(s) guaranteed in Box C (Signature Guarantee)
and complete Box E (Special Payment Instructions).
(a) TRANSFEREE'S SIGNATURE AND GUARANTEE. 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 below.
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally an eligible guarantor institution, as defined in Rule 17Ad-15
of the regulations of the Securities and Exchange Commission, means: (i)
banks (as that term is defined in Section 3(a) of the Federal Deposit
Insurance Act); (ii) brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, and government
securities brokers, as those terms are defined under the Securities Exchange
Act of 1934; (iii) credit unions (as that term is defined in Section
19(b)(1)(A) of the Federal Reserve Act); (iv) national securities exchanges,
registered securities associations, clearing agencies, as those terms are
used under the Securities Exchange Act of 1934; and (v) savings associations
(as that term is defined in Section 3(b) of the Federal Deposit Insurance
Act).
(b) 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 E (Special Payment Instructions) 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 Units.
(6) SUPPORTING EVIDENCE. In case any Cash Election Form 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)
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 Units. Such documentary evidence of authority must be in form
satisfactory to the Exchange Agent.
(7) SPECIAL MAILING INSTRUCTIONS. The Payment Check(s) will be mailed to the
address of the registered holder(s) as indicated in Box A (Registered Holder
Information), unless instructions to the contrary are given in Box F (Special
Mailing Instructions).
(8) FEDERAL INCOME TAX WITHHOLDING. Under Federal income tax law, the
Exchange Agent is required to file a report with the Internal Revenue Service
disclosing any payments of cash being made to each holder of Units pursuant to
the Merger Agreement. In order to avoid backup withholding of Federal income
tax on any cash received upon the surrender of Units, a holder thereof must,
unless an exemption applies, provide the Exchange Agent 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
3
<PAGE>
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 Units 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 Units at the effective time of the Merger. The TIN
for an individual is his or her social security number. The box in Part II of
the Substitute Form W-9 may be checked if the person surrendering the Units 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 Units 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 Exchange Agent will
withhold 31% on all cash payments with respect to surrendered Units 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 Exchange Agent. A unitholder 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.
(9) ASSISTANCE AND INFORMATION. If you need assistance to complete this Cash
Election Form or wish to obtain additional copies of the Cash Election Form and
the Information Statement and Prospectus, please contact the Exchange Agent at
the addresses and telephone number set forth on the first page of this Cash
Election Form. If you have questions, please contact PSI, Investor Services
Department, at the address 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 Merger becomes effective, the Exchange
Agent will make the payments of cash to be received by holders of Units or their
designees in accordance with the Election Procedures. The Exchange Agent will
thereafter issue and mail to you a check for any cash to which you are entitled.
After the Merger, holders of Units that were converted into shares of
PSI Common Stock, without any further action, will be entitled to receive
certificates representing the number of whole shares of PSI Common Stock into
which Units will have been converted and cash payment in lieu of fractional
share interests, if applicable. As soon as practicable after the Merger, the
Exchange Agent will send the certificates for the PSI Common Stock to each
holder of Units whose Units have been converted into shares of PSI Common Stock.
HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER DO NOT
NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE CERTIFICATES REPRESENTING
THE PSI COMMON STOCK.
4
<PAGE>
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS, LTD.
EXECUTION SECTION
BOX A
- --------------------------------------------------------------------------------
REGISTERED HOLDER INFORMATION
The following label indicates the Unitholder's name and address and the number
of Units (in the upper right corner of the label) to which this Cash Election
Form relates.
- --------------------------------------------------------------------------------
UNITHOLDER(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
surrender for cancellation the above-described Units and that the rights
represented by the Units 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 above-described Units surrendered hereby. 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. This surrender of the above-described Units may be revoked only in
accordance with Instruction F(1).
BOX B
- --------------------------------------------------------------------------------
SIGN HERE
To be completed by all person(s) executing this Cash Election Form.
Signature(s): _______________________________________________________________
_______________________________________________________________
Date: __________________________ Telephone Number: ________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on the
label in Box A (Registered Holder Information) or by person(s) authorized to
become registered holders by documents transmitted herewith. If signature is by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or in any other fiduciary or representative capacity, please
provide the following information. (See Instruction G(6)).
Name(s): ______________________________________________________
______________________________________________________
Capacity (Full Title): ______________________________________________________
Address: ______________________________________________________
______________________________________________________
- --------------------------------------------------------------------------------
BOX C
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEE
To be completed only if required by Instruction G(5). Your signature must be
MEDALLION GUARANTEED by an eligible financial institution. Note: a notarization
by a notary public is not acceptable.
FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW.
- --------------------------------------------------------------------------------
E-1
<PAGE>
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS, LTD.
EXECUTION SECTION (CONTINUED)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF
AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED.
BOX D
<TABLE>
<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
Department of the Treasury interest or dividends or (2) the Internal Revenue Service has notified you that you are no
Internal Revenue Service longer subject to backup withholding. [_]
--------------------------------------------------------------------------------------------------
Payer's Request for Taxpayer Certification - Under penalties of perjury, I certify PART 3 -
Identification Number (TIN) that the 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: ________________________
- --------------------------------------------------------------------------------
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 Units
surrendered will be issued in the same name(s) as on the label in Box A
(Registered Holder Information) and will be mailed to the address of the
registered holder(s) indicated above, unless otherwise indicated in Box E
(Special Payment Instructions) or Box F (Special Mailing Instructions) below.
If Box E (Special Payment Instructions) is completed, the signature of the
undersigned must be guaranteed as set forth in Instruction G(5).
BOX E
- --------------------------------------------------------------------------------
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 F
- --------------------------------------------------------------------------------
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 EXCHANGE AGENT
[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 EXCHANGE AGENT
