<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
PUBLIC STORAGE, INC.
(Exact name of registrant as specified in its charter)
California 6798 95-3551121
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
701 Western Avenue Harvey Lenkin
Glendale, California 91201-2397 Public Storage, Inc.
(818) 224-8080 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)
Copies To:
David Goldberg Edward J. Schneidman
Public Storage, Inc. Michael L. Hermsen
701 Western Avenue Mayer, Brown & Platt
Glendale, California 91201-2397 190 South LaSalle Street
(818) 244-8080 Chicago, Illinois 60603
(312) 782-0600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the 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 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. [_]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
==========================================================================================================
Title of each Proposed Proposed
class of maximum maximum
securities to be Amount to be offering price aggregate Amount of
registered registered per share(1) offering price(1) registration fee(1)
==========================================================================================================
<S> <C> <C> <C> <C>
Common stock, $0.10 par value..... 14,837,575 $26.126 $387,653,164 $114,357.69
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee.
Calculated pursuant to Rule 457(f)(1) under the Securities Act of 1993,
as amended based on the market value of the Storage Trust shares on
December 1, 1998 to be acquired in the merger. Includes 13,825,612 shares
issuable to holders of Storage Trust common shares pursuant to the Merger
Agreement and 1,011,963 shares issuable to holders of units of limited
partnership interest of Storage Trust Properties, L.P., upon conversion
of their units.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Proposed Merger of
STORAGE TRUST REALTY
with
PUBLIC STORAGE, INC.
TO THE SHAREHOLDERS OF STORAGE TRUST REALTY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held
_____________, ______________ __, 1999
_______a.m.
__________________________
__________________________
__________________________
The Storage Trust Board of Trustees asks you to attend this meeting to vote on
the following:
1. Proposed Merger. Your vote on the agreement describing Storage Trust's
proposed merger with a subsidiary of Public Storage is important. In
the merger, Storage Trust shareholders will be entitled to receive 0.86
of a share of Public Storage common stock for each Storage Trust common
share. After the merger, Storage Trust will be a subsidiary of Public
Storage. The Agreement and Plan of Merger providing for the merger,
which describes the terms of the merger in great detail, is attached to
the accompanying Proxy Statement/Prospectus as Annex A; and
2. Other Business. To consider and vote on any other matters that properly
come before the meeting or any adjournments or postponements.
Only shareholders who hold their Storage Trust common shares at the close of
business on ________ __, 1999 are entitled to notice of and to vote at the
special meeting or any adjournments or postponements of the meeting.
By the Order of the Board of Trustees,
Michael G. Burnam
Chief Executive Officer
_________________ __, 1999
Columbia, Missouri
Your Board of Trustees unanimously recommends that you vote for the merger.
We invite you to attend the special meeting because it is important that your
shares be represented at the meeting. Please sign, date and return the enclosed
proxy card in the accompanying postage-paid envelope. If you attend the meeting,
you may personally vote, which will revoke your signed proxy. You may also
revoke your proxy at any time before the meeting either in writing or by
personal notification.
<PAGE>
The information in this Proxy Statement and Prospectus is not complete and may
be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This Proxy
Statement and Prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
PROSPECTUS OF
PUBLIC STORAGE, INC.
COMMON STOCK
The Board of Trustees of Storage Trust Realty and the Board of Directors of
Public Storage have agreed to merge Storage Trust with a subsidiary of Public
Storage. Storage Trust would become a subsidiary of Public Storage. Storage
Trust shareholders will be entitled to receive 0.86 of a share of Public Storage
common stock for each Storage Trust common share that they own. We estimate that
the shares of Public Storage common stock to be issued to Storage Trust
shareholders will represent approximately 10% of the outstanding Public Storage
common stock after the merger.
PROXY STATEMENT
FOR
SPECIAL MEETING OF
SHAREHOLDERS
OF
STORAGE TRUST REALTY
TO BE HELD ON , 1999
---------- --
The merger cannot be completed unless Storage Trust shareholders holding two-
thirds of the outstanding common shares approve it. The Storage Trust Board has
scheduled a special meeting for Storage Trust shareholders to vote on the merger
as follows:
, , 1999
- ---------- ------ --
a.m.
- -------
- --------------------------
- ---------------
- -------------
This document gives you detailed information about the proposed merger. Public
Storage has provided the information concerning Public Storage, and Storage
Trust has provided the information concerning Storage Trust. Please see "Where
You Can Find More Information" on page 16 for additional information about
Storage Trust and Public Storage on file with the Securities and Exchange
Commission.
This Proxy Statement/Prospectus and proxy are being mailed to shareholders of
Storage Trust beginning about , 1998.
----------- --
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE PUBLIC STORAGE COMMON STOCK TO
BE ISSUED UNDER THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1998.
--------- --
<PAGE>
Combined Assets (Post Merger)
[Map of United States appears here
illustrating Public Storage, Inc. and
Storage Trust Realty Shared Markets and
Public Storage, Inc. Non-shared Markets.]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY.................................................................... 3
The Companies........................................................... 3
The Merger.............................................................. 4
SUMMARY SELECTED HISTORICAL AND UNAUDITED CONDENSED FINANCIAL INFORMATION.. 8
STORAGE TRUST REALTY AND PREDECESSOR COMPANY
HISTORICAL FINANCIAL DATA............................................... 9
PUBLIC STORAGE HISTORICAL FINANCIAL DATA................................... 11
UNAUDITED PRO FORMA FINANCIAL DATA......................................... 13
PRO FORMA PER SHARE DATA................................................... 15
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............................ 16
ABOUT THIS PROXY STATEMENT AND PROSPECTUS.................................. 16
WHERE YOU CAN FIND MORE INFORMATION........................................ 16
RISK FACTORS............................................................... 19
Risk Factors Relating to the Merger..................................... 19
Risk Factors Relating to Ownership of Public Storage Common Stock....... 20
General Risks Relating to Real Estate Investments and Public
Storage's Business.................................................... 21
PUBLIC STORAGE............................................................. 24
Description of Business................................................. 24
Facilities.............................................................. 24
STORAGE TRUST.............................................................. 27
Description of Business................................................. 27
THE COMBINED COMPANY....................................................... 30
General................................................................. 30
Strategies.............................................................. 31
Common Markets.......................................................... 33
THE MERGER................................................................. 34
Terms of the Merger..................................................... 34
Background of the Merger................................................ 34
Recommendations of the Storage Trust Board of Trustees;
Reasons for the Merger................................................ 43
Opinion of Storage Trust's Financial Advisor............................ 45
Interests of Certain Parties............................................ 50
Accounting Treatment.................................................... 51
Restrictions on Sales by Affiliates..................................... 51
Federal Income Tax Consequences......................................... 51
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THE MERGER AGREEMENT.................................................................. 52
Storate Trust Board Recommendation................................................ 52
General........................................................................... 52
Effective Time of the Merger...................................................... 52
Exchange of Storage Trust Share Certificates...................................... 52
Conditions to the Merger.......................................................... 53
Storage Trust Options............................................................. 54
The Retention Bonus Plan.......................................................... 55
Representations and Warranties.................................................... 55
Certain Covenants................................................................. 56
Distributions..................................................................... 58
No Solicitation of Transactions................................................... 58
Termination....................................................................... 59
Break-Up Payment.................................................................. 59
Indemnification................................................................... 60
Amendment and Waiver.............................................................. 61
THE SPECIAL MEETING OF STORAGE TRUST SHAREHOLDERS..................................... 62
COMPARISON OF SHAREHOLDER RIGHTS...................................................... 64
Authorized Shares................................................................. 64
Special Meetings of Shareholders.................................................. 64
Limitation of Personal Liability of Directors/Trustees............................ 65
Classified Board of Directors/Trustees............................................ 65
Election of Directors/Trustees.................................................... 65
Removal of Directors/Trustees..................................................... 65
Standard of Conduct for Directors/Trustees........................................ 66
Board Committees.................................................................. 66
Amendment of Storage Trust Declaration or the Public Storage Articles............. 66
Shareholder Inspection of Books and Records....................................... 66
Dividends and Other Distributions................................................. 67
Maryland Asset Requirements....................................................... 67
Action by Written Consent of Shareholders......................................... 67
Appraisal Rights.................................................................. 67
Indemnification................................................................... 68
Business Combinations............................................................. 68
Control Share Acquisitions........................................................ 70
DESCRIPTION OF PUBLIC STORAGE CAPITAL STOCK........................................... 72
Common Stock...................................................................... 72
Ownership Limitations............................................................. 72
Class B Common Stock.............................................................. 73
Preferred Stock................................................................... 74
Equity Stock...................................................................... 75
Effects of Issuance of Capital Stock.............................................. 75
INVESTMENT POLICIES................................................................... 76
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.............................................. 77
The Merger........................................................................ 77
General Tax Treatment of Public Storage........................................... 78
Consequences of the PSMI Merger on Public Storage's Qualification as a REIT....... 83
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Taxation of Taxable Domestic Holders of Public Storage Common Stock...... 86
Taxation of Non-U.S. Shareholders........................................ 88
Ownership Records........................................................ 90
Recent Legislation....................................................... 91
Recent Administration Proposal........................................... 91
STATE AND LOCAL TAXES........................................................ 92
PLAN OF DISTRIBUTION......................................................... 92
LEGAL MATTERS................................................................ 92
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS................................... 92
EXPENSES OF SOLICITATION..................................................... 93
SHAREHOLDER PROPOSALS........................................................ 93
ANNEXES
Agreement and Plan of Merger Annex A
Opinion of Merrill Lynch & Co. Annex B
</TABLE>
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed information
appearing elsewhere or incorporated in this Proxy Statement and Prospectus. We
urge you to review the entire Proxy Statement and Prospectus including the
Annexes.
THE COMPANIES
STORAGE TRUST REALTY
2407 Rangeline Street
Columbia, Missouri 65202
(573) 499-4799
Storage Trust, a real estate investment trust ("REIT"), owns, manages, leases,
acquires and develops self-storage facilities in 16 states in the Southern, Mid-
Atlantic, Midwestern and Western regions of the United States. It was formed as
a Maryland real estate investment trust in July 1994 to continue and expand the
self-storage facility business conducted by Burnam Holding Companies Co.
PUBLIC STORAGE, INC.
701 Western Avenue
Glendale, California 91221
(818) 244-8080
Public Storage, a REIT, owns, manages, leases, acquires and develops self-
storage facilities in 37 states in all regions of the United States. Public
Storage is the nation's largest owner and operator of self-storage facilities.
THE COMBINED COMPANY (SEE PAGE 30)
Upon completion of the merger, Public Storage will have a pro forma total market
capitalization of approximately $5 billion and 1,313 self-storage facilities in
37 states. Public Storage believes that Storage Trust has a high quality
portfolio of properties which fit strategically in many of Public Storage's
target markets.
RECOMMENDATION OF THE STORAGE TRUST BOARD OF TRUSTEES; REASONS FOR THE MERGER
(SEE PAGE 44)
THE STORAGE TRUST BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT STORAGE TRUST SHAREHOLDERS VOTE "FOR" THE MERGER. The
affirmative vote of the holders of two-thirds of the outstanding Storage Trust
common shares is required to approve this proposal.
In its decision to recommend the merger, the Storage Trust Board considered the
following positive factors for the Storage Trust shareholders:
. The combined company will own the same type of facilities as Storage
Trust, but with the advantage of increased geographic diversification.
Storage Trust has an interest in 224 facilities in 16 states compared
with an interest in 1,313 facilities in 37 states for the combined
company;
. The combined company will be able to capitalize on Public Storage's name
recognition from 25 years of operating experience and its position as
the largest operator of self-storage facilities in the United States;
3
<PAGE>
. The combined company should provide Storage Trust shareholders with a
more active trading market and increased liquidity for the Public
Storage common stock they receive in the merger;
. The combined company should be able to raise capital more cheaply and
easily with its large market capitalization, low level of debt and
conservative distribution policy. Storage Trust has a total market
capitalization of approximately $600 million and a ratio of debt-to-
total market capitalization at September 30, 1998 of 32% compared with a
total market capitalization of approximately $5 billion and a ratio of
debt-to-total market capitalization at September 30, 1998 of 5.9% for
the combined company;
. The combined company should benefit from Public Storage's national
telephone reservation system, presenting an opportunity for increased
revenues through higher occupancies;
. The combined company will eliminate duplicative general and
administrative expenses, and should eliminate certain other duplicative
expenses, such as yellow page advertisements, casualty and liability
insurance, supervisory payroll, and media advertising, resulting in
economies of scale and cost efficiencies;
. The merger has been structured as tax-free to Storage Trust
shareholders; and
. The opinion, analysis and presentation of Storage Trust's financial
advisor, Merrill Lynch & Co., as to the fairness of the exchange ratio.
In its decision to recommend the merger, the Storage Trust Board considered the
following potential detriments:
. The exchange ratio is fixed, but the market price of Public Storage
common stock may change. Accordingly, the Public Storage common stock
that Public Storage will issue for the Storage Trust common shares may
have a greater or lower aggregate value than the value contemplated at
the time the merger agreement was signed.
. Because Public Storage currently distributes a smaller share of its
funds from operations than does Storage Trust, the initial level of
regular cash distributions to a Storage Trust shareholder is expected to
be significantly lower after the merger than before. A portion of the
Storage Trust distribution has been a return of capital. Public Storage
intends to make a special cash distribution after the merger in 1999
assuming a continuation of its increasing level of taxable income.
. The size of the transaction may make rapid integration of Public Storage
and Storage Trust difficult.
. Storage Trust shareholders will become subject to the risks of the real
estate markets in which Public Storage currently operates, but Storage
Trust does not.
THE MERGER
TERMS OF THE MERGER (SEE PAGE 34)
The Public Storage Board of Directors (the "Public Storage Board") and the
Storage Trust Board of Trustees (the "Storage Trust Board") have each approved
the merger. Upon satisfaction (or waiver) of certain conditions, when the merger
becomes effective:
4
<PAGE>
1. A subsidiary of Public Storage will merge into Storage Trust. Storage
Trust will be the surviving entity and will become a subsidiary of
Public Storage; and
2. Each Storage Trust common share will convert into the right to receive
0.86 shares of Public Storage common stock.
Based upon the number of Storage Trust common shares outstanding on November 30,
1998, the holders of Storage Trust common shares immediately prior to the merger
will hold, immediately after the merger, approximately 10% of the aggregate
number of shares of Public Storage common stock expected to be outstanding after
the merger (11% on a fully diluted basis assuming conversion of all interests in
the operating partnership of Storage Trust).
OPINION OF STORAGE TRUST'S FINANCIAL ADVISOR (SEE PAGE 45)
Merrill Lynch has delivered its written opinion, dated November 12, 1998, to the
Storage Trust Board to the effect that the exchange ratio of 0.86 shares of
Public Storage common stock to be paid for each Storage Trust common share is
fair from a financial point of view to the holders of Storage Trust common
shares other than Public Storage. The full text of the Merrill Lynch opinion,
which sets forth the assumptions made, matters considered and limitations of the
review undertaken, is attached as Annex B to this document. We urge you to read
the opinion of Merrill Lynch in its entirety.
THE MERGER AGREEMENT
We encourage you to read the merger agreement, attached as Annex A to this
document (the "Merger Agreement"), in its entirety.
EFFECTIVE TIME OF THE MERGER
Subject to the satisfaction (or waiver) of certain conditions, we currently
expect the merger to be completed in the first quarter of 1999.
CONDITIONS TO THE MERGER (SEE PAGE 53)
The completion of the merger depends upon meeting or waiving a number of
conditions, including:
1. Approval of the merger by shareholders holding two-thirds of the
outstanding common shares of Storage Trust;
2. The authorization for listing on the New York Stock Exchange and the
Pacific Exchange of the Public Storage common stock issuable as a result
of the merger; and
3. The receipt of legal opinions regarding the impact of the merger on
Public Storage's REIT status and the treatment of the merger as a tax-
free reorganization.
TERMINATION (SEE PAGE 59)
Public Storage and Storage Trust can agree to terminate the Merger Agreement at
any time, even if Storage Trust's shareholders have approved the merger. Also,
either company can decide, without the consent of the other, to terminate the
Merger Agreement if:
1. The merger has not been completed on or before June 30, 1999;
5
<PAGE>
2. The other party materially fails to perform under the Merger Agreement;
3. A judgment, injunction, order, decree or action by a governmental entity
preventing the merger has become final and nonappealable; and
4. Prior to the meeting of the Storage Trust shareholders, the Storage
Trust Board withdraws or modifies its recommendation that its
shareholders approve the Merger Agreement because Storage Trust has
received a superior acquisition proposal.
BREAK-UP PAYMENT (SEE PAGE 60)
Storage Trust will be required to pay a break-up payment to Public Storage under
the following circumstances:
1. If the Merger Agreement is terminated by Public Storage or Storage Trust
after the Storage Trust Board withdraws or modifies its recommendation
that shareholders approve the Merger Agreement because Storage Trust has
received a superior acquisition proposal, Storage Trust must pay Public
Storage $12 million plus Public Storage's out-of-pocket expenses not to
exceed $500,000.
2. If the Merger Agreement is terminated by Public Storage because of a
material breach of a condition by Storage Trust and at the time of the
termination of the Merger Agreement Storage Trust has received an
alternative acquisition proposal and Storage Trust enters into a written
agreement with another person relating to an alternative acquisition
transaction within 12 months after the termination of the Merger
Agreement, Storage Trust must pay Public Storage $12 million plus Public
Storage's out-of-pocket expenses not to exceed $500,000.
DISTRIBUTIONS (SEE PAGE 58)
Prior to the merger, Storage Trust will pay a distribution of $0.46 per share on
January 15, 1999 to shareholders of record as of December 15, 1998. Beginning
with the first quarter of 1999, Storage Trust will adopt the Public Storage
distribution policy, multiplied by the exchange ratio of 0.86.
Public Storage expects to continue its present distribution policy after the
merger. The current regular quarterly distribution on Public Storage common
stock is $0.22 per share. As a result, the regular distribution to each Storage
Trust shareholder will be $0.1892 per share beginning in the first quarter of
1999. Public Storage intends to make a special cash distribution after the
merger in 1999 assuming a continuation of its increasing level of taxable
income.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 77)
In the opinion of Mayer, Brown & Platt, counsel to Storage Trust, and A. Timothy
Scott, senior vice president and tax counsel of Public Storage, based on certain
representations of Public Storage and Storage Trust, the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. Accordingly,
. no gain or loss will be recognized by Storage Trust shareholders except
to the extent of cash received for fractional shares,
. no gain or loss will be recognized by Public Storage shareholders, and
. no gain or loss will be recognized by Storage Trust or Public Storage.
6
<PAGE>
In the opinion of Mr. Scott, based on certain representations of Public Storage
and Storage Trust, Public Storage is organized in conformity with the
requirements for qualification as a REIT and its proposed method of operation
following the merger will enable Public Storage to continue to meet the
requirements for qualification as a REIT.
THE STORAGE TRUST SPECIAL MEETING
. The Storage Trust special meeting of shareholders is scheduled to be
held at : .m., central standard time, on , , 1999 at
_____________________.
. The Storage Trust Board has fixed the close of business on __________
__, 1999 as the record date for the determination of holders of Storage
Trust common shares entitled to notice of and to vote at the Storage
Trust special meeting of shareholders.
. The proposal to approve the merger must be approved by the affirmative
vote of the holders of two-thirds of the votes entitled to be cast by
holders of Storage Trust common shares.
RISK FACTORS
Please read the Risk Factors beginning on page 19 for a discussion of the
material risks you should consider in evaluating whether to approve the merger.
7
<PAGE>
SUMMARY SELECTED HISTORICAL
AND UNAUDITED CONDENSED FINANCIAL INFORMATION
The following historical financial data for Storage Trust and Public Storage on
pages 9 through 12 is provided in order to help you evaluate the financial
aspects of the merger. This information is derived from the audited financial
statements from 1993 to 1997, and the unaudited financial statements for the
nine months ended September 30, 1997 and 1998. This information is a summary and
you should read it in conjunction with the historical financial statements filed
by Storage Trust and Public Storage included on their Annual Reports on Form 10-
K for the year ended December 31, 1997 (the "1997 Form 10-K's") and their
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30,
1998 and September 30, 1998 (collectively, the "1998 Form 10-Q's"). Please read
"Where You Can Find More Information" beginning on page 16 for instructions on
obtaining copies of these filings.
Both Storage Trust and Public Storage report quarterly and annual earnings
results in their Commission filings using methods required by generally accepted
accounting principles ("GAAP"). These financial results include unusual or
infrequent events and factors. In reviewing the financial information, you
should consider the following:
. Storage Trust was formed on July 12, 1994 as a Maryland REIT to continue the
self-storage business of the Burnam Holding Companies Co. and certain of its
affiliates (the "Predecessor Company") in owning, operating, and managing
self storage facilities. Storage Trust began operating on November 16, 1994.
Storage Trust's table reflects financial data on a historical basis for the
consolidated financial statements of Storage Trust and its subsidiaries and
the combined financial statements of the Predecessor Company. Before November
16, 1994, this information is taken from the combined financial statements of
the Predecessor Company. After November 16, 1994, the information is taken
from the consolidated financial statements of Storage Trust.
. Storage Trust has completed significant property acquisitions during 1996,
1997 and 1998. These transactions are described more completely in Storage
Trust's 1997 Form 10-K and in its Current Reports on Form 8-K, dated March
23, 1998 (two reports filed on this date, each as amended), April 23, 1998,
June 15, 1998 and August 14, 1998 (collectively, the "1998 Storage Trust Form
8-K's"), and the Pro Forma Financial Statements filed in Public Storage's
Current Report on Form 8-K dated December 7, 1998 (the "1998 Public Storage
Form 8-K"). The impact of these transactions are reflected in the "Storage
Trust--Pre-Merger Pro Forma" amounts on page 14 as if they had occurred on
January 1, 1997. Please read "Where You Can Find More Information" beginning
on page 16 for instructions on obtaining copies of these documents.
. Public Storage completed several significant business combinations and equity
transactions in 1995, 1996, 1997. Please read Notes 3 and 10 to Public
Storage's consolidated financial statements contained in its 1997 Form 10-K.
. Public Storage incurred significant startup operating losses with respect to
its portable self-storage operations in the amount of $31.7 million for the
year ended December 31, 1997 and $25.2 million for the nine months ended
September 30, 1998. Please read Public Storage's Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in its
1997 Form 10-K and its 1998 Form 10-Q's for further discussion of this item.
8
<PAGE>
STORAGE TRUST REALTY AND PREDECESSOR COMPANY
HISTORICAL FINANCIAL DATA
(Amount in thousands, except for per share information)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, For the Year Ended December 31,
------------------------ --------------------------------------------------------------
1998(1) 1997(1) 1997(1) 1996 1995 1994(2) 1993(2)
------------------------ ------- ---------- --------- --------- ---------
REVENUES: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income-real estate......... $ 56,561 $ 42,623 $ 57,859 $ 42,499 $ 22,916 $ 7,245 $ 4,909
Equity in earnings of
joint ventures................... 65 69 93 100 118 24 16
Management income................. 159 193 236 168 339 320 375
Interest and other income......... 1,750 927 1,518 675 466 444 143
-------- -------- -------- -------- -------- -------- --------
58,535 43,812 59,706 43,442 23,839 8,033 5,443
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Cost of operations-real........... 18,051 13,020 17,236 13,251 6,798 2,310 1,560
estate
Depreciation and.................. 9,985 7,279 10,002 6,565 4,106 1,019 839
amortization
General and administrative........ 3,094 2,302 3,152 2,549 1,573 617 404
Strategic evaluation costs........ 212 -- -- -- -- -- --
Interest expense.................. 8,530 5,596 7,646 4,190 1,334 1,823 1,918
Hedging loss...................... 5,464 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
45,336 28,197 38,036 26,555 13,811 5,769 4,721
-------- -------- -------- -------- -------- -------- --------
Income before minority
interest......................... 13,199 15,615 21,670 16,887 10,028 2,264 722
Minority interest in income....... (893) (1,011) (1,293) (1,091) (471) (1,234) --
-------- -------- -------- -------- -------- -------- --------
Net income........................ $ 12,306 $ 14,604 $ 20,377 $ 15,796 $ 9,557 $ 1,030 $ 722
======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE (3)
Distributions..................... $ 1.3800 $1 .3050 $ 1.7650 $ 1.6650 $ 1.5725 $ 0.1940 $ --
Net income - Basic................ $ 0.78 $ 1.13 $ 1.52 $ 1.46 $ 1.30 $ 0.18 $ --
Net income - Diluted.............. $ 0.77 $ 1.12 $ 1.51 $ 1.46 $ 1.30 $ 0.18 $ --
Weighted average common
shares - Basic................... 15,816 12,901 13,378 10,804 7,324 5,859 --
Weighted average common
shares - Diluted................. 17,027 13,897 14,373 11,572 7,722 5,859 --
BALANCE SHEET DATA (at
end of period):
Total assets...................... $512,116 $371,349 $400,295 $ 308,725 $194,655 $104,965 $ 22,511
Total debt........................ $183,470 $123,820 $100,000 $ 63,255 $ 39,285 $ 8,766 $ 24,532
Total liabilities................. $211,257 $141,093 $111,786 $ 76,559 $ 47,779 $ 13,229 $ 24,899
Minority interest................. $ 23,426 $ 16,114 $ 15,905 $ 16,470 $ 7,837 $ 4,313 $ --
Shareholders' equity
(deficit)........................ $277,433 $214,142 $272,604 $ 215,696 $139,039 $ 87,423 $ (2,388)
OTHER DATA:
Net cash provided by
operating activities............. $ 31,497 $ 26,801 $ 35,624 $ 25,553 $ 14,211 $ 5,861 $ 1,296
Net cash used in investing
activities....................... $(79,710) $(66,222) $(95,512) $(106,951) $(84,953) $(77,345) $ (1,757)
Net cash provided by
financing activities............. $ 46,329 $ 40,094 $ 62,480 $ 81,359 $ 69,378 $ 74,919 $ 495
Funds from operations
(2)(4)........................... $ 28,535 $ 22,374 $ 30,973 $ 22,937 $ 13,204 $ 1,348 $ --
</TABLE>
______________
9
<PAGE>
(1) Storage Trust has completed significant property acquisitions and debt and
equity issuances in 1996 and 1997 and the first nine months of 1998. See
Storage Trust's 1997 Form 10-K, its 1998 Form 10-Q's, and the 1998 Storage
Trust Form 8-K's for further discussion. Please see "Where You Can Find
More Information" beginning on page 16 for instructions on obtaining copies
of filings incorporated by reference into this document.
(2) Funds from operations and earnings per share information are for periods
after November 16, 1994 (when Storage Trust became a public company). All
other amounts for the period prior to November 16,1994 reflect the combined
financial statements of the Predecessor Company.
(3) The net income per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("FASB 128"). For further discussion of earnings
per share and the impact of FASB 128, please read the notes to the
consolidated financial statements included in Storage Trust's 1997 Form
10-K.
(4) Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as net income (loss) before minority interest
computed in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of property, provision for losses and real estate
related depreciation and amortization (excluding amortization of financing
costs). Effective in 1996, the definition of funds from operations was
modified by NAREIT to exclude the add-back of the amortization of deferred
financing fees and depreciation of non real estate assets. Storage Trust
has adopted this new definition. The NAREIT definition does not
specifically address the treatment of strategic evaluation costs or hedging
losses in the determination of funds from operations. In the case of
Storage Trust, funds from operations represents amounts without reductions
for either strategic evaluation costs or hedging losses. Amounts for prior
years have been revised to conform to the new definition. Storage Trust
believes that funds from operations is helpful to investors as a measure of
the operations of an equity REIT because, along with cash flows from
operating activities, investing activities and financing activities, it
provides investors with an understanding of the ability of Storage Trust to
incur and service debt and to make capital expenditures. Funds from
operations is not to be considered as an alternative to net income or any
other GAAP measurement as a measure of operating performance and is not
necessarily indicative of cash available to fund all cash needs.
10
<PAGE>
PUBLIC STORAGE
HISTORICAL FINANCIAL DATA
(Amounts in thousands, except for per share information)
<TABLE>
<CAPTION>
Nine Months
September 30, For the Year Ended December 31,
----------------------- ------------------------------------------------------------
1998 1997(1) 1997(1) 1996(1) 1995(1) 1994 1993
----------------------- ------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income--real estate................. $ 382,179 $ 301,492 $ 426,115 $ 294,005 $ 202,134 $ 141,845 $ 109,203
Rental income--portable self-storage....... 18,069 4,140 7,893 421 -- -- --
Equity in earnings of real estate entities. 16,598 14,652 17,569 22,121 3,763 764 563
Facility management fees................... 4,805 8,319 10,141 14,428 2,144 -- --
Interest and other income.................. 11,925 7,489 9,126 7,976 4,509 4,587 4,914
---------- ---------- ---------- ---------- ---------- --------- ---------
433,576 336,092 470,844 338,951 212,550 147,196 114,680
---------- ---------- ---------- ---------- ---------- --------- ---------
Expenses:
Cost of operations--real estate............ 115,780 93,426 134,628 93,244 72,247 52,816 42,116
Cost of operations--portable self-storage.. 43,226 25,325 39,558 1,247 -- -- --
Cost of facility management................ 780 1,300 1,793 2,575 352 -- --
Depreciation and amortization.............. 79,628 64,141 91,356 64,967 40,760 28,274 24,998
General and administrative................. 7,246 5,185 6,384 5,524 3,982 2,631 2,541
Interest expense........................... 2,926 5,821 6,792 8,482 8,508 6,893 6,079
Environmental cost......................... -- -- -- -- 2,741 -- --
Advisory fee............................... -- -- -- -- 6,437 4,983 3,619
---------- ---------- ---------- ---------- ---------- --------- ---------
249,586 195,198 280,511 176,039 135,027 95,597 79,353
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before minority interest............ 183,990 140,894 190,333 162,912 77,523 51,599 35,327
Minority interest in income................ (16,141) (7,777) (11,684) (9,363) (7,137) (9,481) (7,291)
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income................................. $ 167,849 $ 133,117 $ 178,649 $ 153,549 $ 70,386 $ 42,118 $ 28,036
========== ========== ========== ========== ========== ========= =========
PER COMMON SHARE (2):
Distributions.............................. $ 0.66 $ 0.66 $ 0.88 $ 0.88 $ 0.88 $ 0.85 $ 0.84
Net income--Basic.......................... $ 0.96 $ 0.67 $ 0.92 $ 1.10 $ 0.96 $ 1.05 $ 0.98
Net income--Diluted........................ $ 0.95 $ 0.67 $ 0.91 $ 1.10 $ 0.95 $ 1.05 $ 0.98
Weighted average common shares--Basic...... 113,311 96,586 98,446 77,117 41,039 23,978 17,483
Weighted average common shares--Diluted.... 113,762 97,154 98,961 77,358 41,171 24,077 17,558
BALANCE SHEET DATA (at end of period)
Total assets............................... $3,411,833 $3,101,814 $3,311,645 $2,572,152 $1,937,461 $ 820,309 $ 666,133
Total debt................................. $ 85,617 $ 100,349 $ 103,558 $ 108,443 $ 158,052 $ 77,235 $ 84,076
Minority interest.......................... $ 150,532 $ 143,678 $ 288,479 $ 116,805 $ 112,373 $ 141,227 $ 193,712
Shareholders' equity....................... $3,098,304 $2,791,819 $2,848,960 $2,305,437 $1,634,503 $ 587,786 $ 376,066
OTHER DATA:
Net cash provided by operating activities.. $ 273,520 $ 214,212 $ 293,163 $ 245,329 $ 123,579 $ 79,180 $ 59,477
Net cash used in investing activities...... $ (300,899) $ (303,093) $ (408,313) $ (479,626) $ (248,672) $(169,590) $(137,429)
Net cash provided by financing activities.. $ 40,874 $ 144,686 $ 129,749 $ 180,717 $ 185,378 $ 100,029 $ 80,100
Funds from operations (3).................. $ 247,955 $ 200,106 $ 272,234 $ 224,476 $ 105,199 $ 56,143 $ 35,830
</TABLE>
11
<PAGE>
- ---------------
(1) During 1997, 1996 and 1995, Public Storage completed several significant
business combinations and equity transactions. Please read Notes 3 and 10
to Public Storage's consolidated financial statements contained in its 1997
Form 10-K. Please read "Where You Can Find More Information" beginning on
page 16 for instructions on obtaining copies of filings incorporated by
reference into this document.
(2) The net income per share amounts prior to 1997 have been restated as
required to comply with FASB 128. For further discussion of net income per
share and the impact of FASB 128, see Note 2 to Public Storage's
consolidated financial statements contained in its 1997 Form 10-K.
(3) Funds from operations for this table, 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 Public Storage's pro-rata share of depreciation and amortization
of unconsolidated equity interests and amortization of assets acquired in a
November 1995 reorganization, including property management agreements and
excess purchase cost over net assets acquired), and (ii) less funds from
operation attributable to minority interest. Funds from operation is a
supplemental performance measure for equity REITs as defined by NAREIT. The
NAREIT definition does not specifically address the treatment of minority
interest in the determination of funds from operations or the treatment of
the amortization. In the case of Public Storage, funds from operations
represents amounts attributable to its shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of intangible assets. Funds from operations is presented
because many analysts consider funds from operations to be one measure of
the performance of Public Storage and it is used in certain aspects of the
terms of the Class B common stock. Funds from operations does not take into
consideration scheduled principal payments on debt, capital improvements
distributions and other obligations of Public Storage. Accordingly, funds
from operations is not a substitute for Public Storage's cash flow or net
income as a measure of Public Storage's liquidity or operating performance
or ability to pay distributions.
12
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following table summarizes the unaudited pro forma financial information
included in the 1998 Public Storage Form 8-K. The unaudited pro forma financial
statements are prepared to reflect (i) Storage Trust's acquisition of facilities
and issuances of equity and debt in 1997 and 1998, and (ii) the impact of the
merger with Storage Trust, as if these transactions occurred on January 1, 1997.
You should read this table with the historical and unaudited pro forma financial
statements and accompanying notes of Public Storage and Storage Trust contained
in their 1997 Form 10-K's, their Quarterly Reports on Form 10-Q for the quarter
ended September 30, 1998, the 1998 Storage Trust Form 8-K's and the 1998 Public
Storage Form 8-K. Please read "Where You Can Find More Information" beginning on
page 16 for instructions on obtaining copies of filings incorporated by
reference into this document.
Pro forma adjustments have been made to reflect reductions in certain general
and administrative expense resulting from the elimination of duplicate personnel
and costs associated with maintaining Storage Trust as a public company.
However, no adjustments have been made for any cost reductions that may result
from the merger, as the result of the elimination of certain duplicative
expenses, such as yellow pages advertising, casualty and liability insurance,
supervisory payroll, and media advertising, resulting from economies of scale
and cost efficiencies. In addition, no adjustments were made to reflect the
merged company's expected reduced borrowing cost with respect the borrowings on
its line of credit. During the year ended December 31, 1997 and the nine months
ended September 30, 1998, Public Storage's average interest rate on line of
credit borrowings was approximately LIBOR plus 0.40% per annum compared to
Storage Trust's average interest rates of approximately LIBOR plus 1.45% per
annum for the year ended December 31, 1997 and LIBOR plus 1.20% per annum for
the nine months ended September 30, 1998.
The pro forma financial information does not purport to represent what Storage
Trust's or the merged company's results of operations would actually have been
had the transactions had in fact occurred as of January 1, 1997 or to project
the merged company's results of operations for any future date or period.
13
<PAGE>
PUBLIC STORAGE
PRO FORMA FINANCIAL DATA
(Amounts in thousands, except for per share information)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 Year Ended December 31, 1997
------------------------------------------ -------------------------------------------
Public Storage Trust Merged Public Storage Trust Merged
Storage (Pre Merger Company Storage (Pre Merger Company
(Historical) Pro Forma)(1) Pro Forma(2) (Historical) Pro Forma)(1) Pro Forma(2)
------------------------------------------ ----------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income-real estate................. $ 382,179 $ 59,169 $ 441,348 $426,115 $74,511 $500,626
Rental income-portable self-storage....... 18,069 -- 18,069 7,893 -- 7,893
Equity in earnings of real estate
entities................................ 16,598 65 15,881 17,569 93 17,662
Facility management fees.................. 4,805 151 4,956 10,141 225 10,366
Interest and other income................. 11,925 1,762 12,632 9,126 1,957 9,963
------------------------------------------ ----------------------------- ------------
433,576 61,147 492,886 470,844 76,786 546,510
------------------------------------------ ----------------------------- ------------
Expenses:
Cost of operations-real estate............ 115,780 18,915 134,357 134,628 23,935 158,112
Cost of operations-portable self-
storage................................. 43,226 -- 43,226 39,558 -- 39,558
Cost of facility management............... 780 -- 805 1,793 -- 1,833
Depreciation and amortization............. 79,628 10,499 94,439 91,356 13,680 111,381
General and administrative................ 7,246 3,306 7,963 6,384 3,152 7,243
Interest expense.......................... 2,926 9,505 12,431 6,792 12,715 19,507
Hedging loss.............................. -- 5,464 5,464 -- -- --
------------------------------------------ ----------------------------- ------------
249,586 47,689 298,685 280,511 53,482 337,634
------------------------------------------ ----------------------------- ------------
Income before minority interest........... 183,990 13,458 194,201 190,333 23,304 208,876
Minority interest in income............... (16,141) (864) (17,087) (11,684) (1,610) (12,674)
------------------------------------------ ----------------------------- ------------
Net income................................ $ 167,849 $ 12,594 $ 177,114 $178,649 $21,694 $196,202
========== ======== ========== ======== ======= ========
Per Common Share:
Net income -- basic....................... $0.96 $0.78 $0.93 $0.92 $1.35 $0.97
Net income -- diluted..................... $0.95 $0.78 $0.93 $0.91 $1.34 $0.96
Weighted average common shares
-- basic................................ 113,311 16,070 126,302 98,446 16,049 111,419
Weighted average common shares
-- diluted.............................. 113,762 17,352 127,767 98,961 17,374 112,957
Balance Sheet Data (at end of
period):
Total assets.............................. $3,411,833 $512,116 $3,993,380
Total debt................................ $ 85,617 $183,470 $ 269,087
Total liabilities......................... $ 162,997 $211,257 $ 374,254
Shareholder's equity...................... $3,098,304 $277,433 $3,445,168
</TABLE>
(1) These amounts reflect Storage Trust's historical amounts, adjusted as if
the facility acquisitions and issuances of equity and debt which were
completed during 1997 and 1998 occurred on January 1,1997. The adjustments
made to Storage Trust's historical amounts for the property acquisitions
reflect the actual revenues and cost of operations for the acquired
facilities prior to their acquisition, additional costs to finance these
acquisitions prior to their acquisition, and additional depreciation
expense.
(2) These amounts reflect the impact of the merger as if it occurred on January
1, 1997. They reflect the Public Storage (Historical) and Storage Trust
(Pre merger pro forma) amounts, adjusted as follows: (i) reduced interest
income due to lower available cash used for the expenses of the merger,
(ii) additional depreciation and amortization expenses required to reflect
the total merger cost relative to Storage Trust's real estate facilities,
(iii) reductions to reflect certain duplicate administrative costs that
will be eliminated as a result of the merger, and (iv) reclassifications of
certain items in Storage Trust's amounts in order to conform to Public
Storage's presentation.
14
<PAGE>
PRO FORMA PER SHARE DATA
The following table further summarizes the historical and pro forma information
that may be useful in evaluating the impact of the merger on a summary per-share
basis.
The amounts included for earnings, distributions, and book value per common
share are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
Public Storage(3) Storage Trust Public Storage(3) Storage Trust
----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Basic Earnings per Share:
Historical............................................. $ 0.96 $ 0.78 $0.92 $ 1.52
Pre-Merger pro forma(1)................................ $ 0.96 $ 0.78 $0.92 $ 1.35
Merged Company pro forma (2)........................... $ 0.93 $ 0.80 $0.97 $ 0.83
Diluted Earnings per Share:
Historical............................................. $ 0.95 $ 0.77 $0.91 $ 1.51
Pre-Merger pro forma(1)................................ $ 0.95 $ 0.78 $0.91 $ 1.34
Merged Company pro forma(2)............................ $ 0.93 $ 0.80 $0.96 $ 0.83
Distributions per Common Share:
Historical............................................. $ 0.66 $ 1.38 $0.88 $1.765
Pre-Merger pro forma (1)............................... $ 0.66 $ 0.57 $0.88 $0.757
Book value per common share (at September 30, 1998):
Historical............................................. $19.26 $17.26
Merged Company pro forma (2)........................... $20.01 $17.21
- -----------
</TABLE>
(1) Reflects historical amounts and the pro forma effect of acquisitions and
debt and equity issuances by Storage Trust (Storage Trust Pre-Merger pro
forma) as described in pro forma financial statements included in the 1998
Public Storage Form 8-K. In the case of Public Storage, data reflects
historical amounts.
(2) Reflects pro forma post-merger amounts as described in the pro forma
financial statements included in the 1998 Public Storage Form 8-K. Amounts
with respect to Storage Trust have been adjusted based on the conversion
ratio of 0.86 to reflect the post merger amounts for each previously held
Storage Trust common share.
(3) For the year ended December 31, 1997 and the nine months ended September
30, 1998, Public Storage incurred start-up operating losses related to its
portable self-storage operations of approximately $.32 and $.22 per common
share, respectively.
15
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Proxy Statement and Prospectus that are not
historical facts are forward-looking statements within Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based on current expectations, estimates
and projections about the industry and markets in which Storage Trust and Public
Storage operate, and each management's beliefs and assumptions. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"should," variations of such words and similar expressions are intended to
identify forward-looking statements. These statements involve (1) known and
unknown risks, uncertainties and other factors, including those identified under
the caption "Risk Factors" and elsewhere in this Proxy Statement and Prospectus,
(2) changes in general economic conditions in their respective target markets
that could adversely affect demand for their facilities, and (3) changes in
financial markets and interest rates that could adversely affect the cost of
capital and the ability to meet financial needs and obligations, that may cause
actual results to be materially different from any future results expressed or
implied by such forward-looking statements. You should not place undue reliance
on these forward-looking statements, which speak only as of the date of this
Proxy Statement and Prospectus. Storage Trust and Public Storage do not
undertake to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this document or to reflect
the occurrence of unanticipated events.
ABOUT THIS PROXY STATEMENT AND PROSPECTUS
This Proxy Statement and Prospectus is part of a registration statement that
Public Storage filed with the Securities and Exchange Commission (the
"Commission") relating to the shares of Public Storage common stock being issued
in connection with the merger. This Proxy Statement and Prospectus provides you
with a general description of the securities Public Storage will offer. You
should read this Proxy Statement and Prospectus together with the additional
information described under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
Storage Trust and Public Storage are subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and each
files reports, proxy statements and other information with the Commission. You
may read and copy any materials Storage Trust or Public Storage files with the
Commission at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
the Commission maintains an Internet site that contains reports, proxies,
information statements, and other information regarding issuers that file
electronically and the address of that site is http://www.sec.gov. Public
Storage's outstanding common stock and Storage Trust's outstanding common shares
are listed on the New York Stock Exchange (the "NYSE") under the symbol "PSA"
and "SEA," respectively, and Public Storage's outstanding common stock is also
listed on the Pacific Exchange ("PCX") under the symbol PSA, and all reports,
proxy statements and other information filed by Public Storage and Storage Trust
with the NYSE may be inspected at the NYSE's offices at 20 Broad Street, New
York, New York 10005 and all those reports and other information filed by Public
Storage with the PCX may be inspected at the PCX's offices at 301 Pine Street,
San Francisco, California 94104.
Public Storage has filed with the Commission a registration statement on Form S-
4 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act, with respect to the shares of Public Storage common
stock being offered in the merger. This Proxy Statement and Prospectus, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement. Certain parts of the
Registration Statement are omitted from the Proxy Statement and Prospectus in
accordance with the rules and regulations of the Commission. For further
information, your attention is directed to the Registration Statement.
Statements made in this Proxy Statement and Prospectus concerning the contents
of any documents referred to in this document are not necessarily complete, and
in each case are qualified in all respects by reference to the copy of such
document filed with the Commission.
16
<PAGE>
The Commission allows Public Storage and Storage Trust to "incorporate by
reference" the information Public Storage and Storage Trust file with the
Commission, which means that Public Storage and Storage Trust can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this Proxy
Statement and Prospectus, and information that Public Storage and Storage Trust
file later with the Commission will automatically update and supersede this
information.
Public Storage incorporates by reference the documents listed below:
. Public Storage's Annual Report on Form 10-K for the year ended
December 31, 1997;
. Public Storage's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998;
. Public Storage's Current Reports on Form 8-K, dated January 15,
1998, February 10, 1998, April 23, 1998 and December 7, 1998; and
. The description of Public Storage's common stock contained in
Public Storage's Registration Statement on Form 8-A, effective June
30, 1981, as supplemented by the description of Public Storage's
common stock contained in this Proxy Statement and Prospectus.
The Commission has assigned file number 1-8389 to the reports and other
information that Public Storage files with the Commission.
Storage Trust incorporates by reference the documents listed below:
. Storage Trust's Annual Report on Form 10-K for the year ended
December 31, 1997;
. Storage Trust's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998;
. Storage Trust's Current Reports on Form 8-K, dated March 23, 1998
(two reports filed this date) (each as amended), April 23, 1998,
June 15, 1998, August 14, 1998 and November 13, 1998; and
. Storage Trust's Registration Statements on Form 8-A, dated October
14, 1994 (filed October 14, 1994) and August 11, 1998 (filed August
13, 1998).
The Commission has assigned file number 1-13462 to the reports and other
information that Storage Trust files with the Commission.
This Proxy Statement and Prospectus also incorporates by reference any future
filings made by Public Storage or Storage Trust with the Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until all distributions
relating to the securities registered under the Registration Statement have been
completed. You should be aware that any statement contained in this Proxy
Statement and Prospectus or in a document incorporated by reference may be
modified or superseded by a document filed with the Commission at a later date.
Any statement which has been modified or superseded shall not be considered to
constitute a part of this Proxy Statement and Prospectus.
You may request a copy of each of Public Storage's filings at no cost, by
writing or telephoning Public Storage at the following address, telephone or
facsimile number:
17
<PAGE>
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Telephone: (800) 807-3055
(800) 421-2856
(818) 244-8080
Facsimile: (818) 244-9288
In addition, you may request a copy of each of Storage Trust's filings at no
cost, by writing or telephoning Storage Trust at the following address,
telephone or facsimile number:
Controller - External Reports
Storage Trust Realty
2407 Rangeline Street
Columbia, Missouri 65202
Telephone: (573) 499-4799
Facsimile: (573) 442-5554
In order to ensure timely delivery of any documents, you must request the
information by _____________ __, 1999.
You may also find more information concerning Public Storage and Storage Trust
at the following Internet addresses: http://www.publicstorage.com or
http://www.storagetrust.com.
You should rely only on the information included in this Proxy Statement or
incorporated by reference in this Prospectus. Neither Public Storage nor Storage
Trust has authorized anyone else to provide you with different information.
Public Storage is not making an offer of its shares of common stock in any state
where the offer is not permitted. You should not assume that the information in
this Proxy Statement and Prospectus is accurate as of any date other than the
date on the front of those documents.
18
<PAGE>
RISK FACTORS
You should consider carefully the factors set forth below in evaluating the
merger. The following list of risk factors may not be exhaustive. This Proxy
Statement and Prospectus contains forward-looking statements with respect to the
operations of Public Storage, Storage Trust and the combined company. Actual
results could differ materially from those set forth in the forward-looking
statements. See "Disclosure Regarding Forward-Looking Statements."
Risk Factors Relating to the Merger
Fixed Merger Consideration Subject to Change in Stock Value
The exchange ratio is fixed, but the market price of Public Storage common stock
may change. Accordingly, the Public Storage common stock that Public Storage
will issue for the Storage Trust common shares may have a greater or lower
aggregate value than the value contemplated at the time the merger agreement was
signed.
Storage Trust does not intend to obtain an updated fairness opinion of Merrill
Lynch.
Conflicts of Interest
If the merger is completed, Daniel Staton, chairman of Storage Trust, will
become a director of Public Storage and will be granted options to acquire
15,000 shares of Public Storage common stock under Public Storage's stock option
plan and will be granted annual options as a director. Other employees and
officers of Storage Trust may join Public Storage. Upon completion of the
merger, various officers and employees will be entitled to receive bonus
retention payments and severance payments totaling $2 million. You should read
"The Merger Agreement--The Retention Bonus Plan." In addition, all outstanding
Storage Trust options held by employees and trustees will fully vest and will
generally be cashed out when the merger is completed. You should read "The
Merger Agreement--Storage Trust Options."
Substantial Expenses and Payments if Merger Fails to Occur
The merger may not be completed. If the merger is not completed, Public Storage
and Storage Trust will have incurred substantial expenses. If the Merger
Agreement is terminated under certain circumstances, Storage Trust may be
required to pay Public Storage a $12 million termination fee plus Public
Storage's out-of-pocket expenses not in excess of $500,000. See "The Merger
Agreement--Certain Fees and Expenses."
Differences in Shareholder Rights
The rights of Storage Trust's shareholders currently are governed by Maryland
law and Storage Trust's Declaration of Trust and bylaws. After the merger,
shareholders of Storage Trust will become shareholders of Public Storage and
their rights will be governed by California law and Public Storage's Articles of
Incorporation and bylaws. The rights of shareholders of Storage Trust may differ
materially from the rights of shareholders of Public Storage. You should read
"Comparison of Shareholder Rights" for a detailed discussion of these
differences.
Lower Level of Distributions After the Merger
Because Public Storage currently distributes a smaller share of its funds from
operations than does Storage Trust, your regular initial cash distributions are
expected to be significantly lower after the merger than it was before the
merger. Currently Storage Trust pays its shareholders a distribution of $1.46
per share per year while Public Storage pays its shareholders a distribution of
$0.88 per share per year or an equivalent of $0.7568 per Storage Trust share per
year. A portion of the Storage Trust distribution is a return of capital. Public
Storage intends to make a special cash distribution to shareholders after the
merger in 1999 assuming a continuation of its increasing level of taxable
income.
19
<PAGE>
Integration Problems
Public Storage has never undertaken to integrate a company as large as Storage
Trust, which may make rapid combination of Public Storage and Storage Trust
difficult. As a result, Public Storage may have to spend additional time and
expense on integrating the facilities of Storage Trust into its portfolio that
it would otherwise spend on operating its business.
Risks of New Real Estate Markets
You will become subject to the risks of the real estate markets in which Public
Storage currently operates, such as California, but Storage Trust does not.
Risk Factors Relating to Ownership of Public Storage Common Stock
Control and Influence over Public Storage by the Hughes Family and Public
Storage Ownership Limitations
Public Storage shareholders are substantially limited in their ability to
control Public Storage. B. Wayne Hughes, Public Storage's chairman and chief
executive officer, and members of his family own approximately 33% of the
outstanding shares of Public Storage common stock (approximately 37% upon
conversion of the Public Storage class B common stock). Consequently, the Hughes
family may effectively control matters submitted to a vote of Public Storage
shareholders, including electing directors, amending Public Storage's Articles
of Incorporation, dissolving and approving other extraordinary transactions,
such as a takeover attempt. Also, the Public Storage Articles of Incorporation
and bylaws restrict the beneficial ownership of Public Storage securities.
Unless Public Storage's board of directors waives these limitations, no Public
Storage shareholder may own more than (A) 2.0% of the outstanding shares of all
common stock of Public Storage or (B) 9.9% of the outstanding shares of each
class or series of preferred or equity stock of Public Storage. The Public
Storage Articles of Incorporation and bylaws provide, however, that the Hughes
family may continue to own the shares of Public Storage common stock held at the
time of a 1995 reorganization. These limitations are designed, to the extent
possible, to avoid a concentration of ownership that might jeopardize the
ability of Public Storage to qualify as a REIT and to obtain the favorable tax
benefits afforded a qualified REIT. These limitations also make a change of
control significantly more difficult (if not impossible) even if it would be
favorable to the interests of the Public Storage shareholders. These provisions
will prevent future takeover attempts not approved by the Public Storage Board
even if a majority of the Public Storage shareholders deem it to be in their
best interests because they would receive a premium for their shares over the
shares' then market value or for other reasons. See "Description of Public
Storage Capital Stock--Ownership Limitations."
Liabilities with Respect to Acquired General Partner Interests
When Public Storage succeeded to substantially all of the facilities and
operations of affiliates in a 1995 reorganization, Public Storage became subject
to all of the affiliates' liabilities as general partner of various limited
partnerships. Public Storage 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, Mr. Hughes agreed
to indemnify Public Storage for activities of the affiliates before the 1995
reorganization and put in escrow shares of Public Storage class B common stock
received in the reorganization to support this indemnification.
General Risks Relating to Real Estate Investments and Public Storage's Business
Value of Investment Reduced by General Risks of Real Estate Ownership.
Like Storage Trust, Public Storage is subject to the risks generally related
to the ownership of real estate-related assets. These risks include:
1. lack of demand for rental spaces or units in a locale;
20
<PAGE>
2. changes in general economic or local conditions;
3. changes in supply of or demand for similar or competing facilities in an
area;
4. the impact of environmental protection laws;
5. changes in interest rates and availability of permanent mortgage funds,
which may render the sale or financing of a facility difficult or
unattractive; and
6. changes in tax, real estate and zoning laws.
Significant Competition among Mini-Warehouses.
Like Storage Trust, most of Public Storage's facilities are mini-warehouses.
Competition in the market areas in which many of its facilities are located is
significant and could affect the occupancy levels, rental rates and operating
expenses of certain of its facilities. Any increase in availability of funds for
investment in real estate may accelerate competition. Recent increases in
development of mini-warehouses are expected to further intensify competition
among mini-warehouse operators in certain market areas in which Public Storage
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
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.
Public Storage has conducted preliminary environmental assessments of most of
its facilities (and intends to conduct such assessments in connection with
property acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, such facilities. 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, Public Storage's operations and recent property
acquisitions, Public Storage 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 of such facilities are or may be the subject of federal or
state environmental investigations or remedial actions. Public Storage 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 these preliminary
environmental assessments, Public Storage believes it has funds available to
cover any liability (estimated at $4 million) from environmental contamination
or potential contamination and Public Storage is not aware of any environmental
contamination of its facilities material to its overall business, financial
condition or results of operation.
21
<PAGE>
Tenant Reinsurance
A corporation owned by the Hughes family reinsures policies insuring against
losses to goods stored by tenants in the mini-warehouses operated by Public
Storage. Public Storage 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 reinsurance. Public Storage has a right of first
refusal to buy the stock or assets of this corporation if the Hughes family or
the corporation agree to sell them. However, Public Storage has no interest in
the operations of this corporation and no right to buy the stock or assets of
the corporation unless the Hughes family decides to sell. If the reinsurance
business were owned directly by Public Storage, the insurance premiums would be
nonqualifying income to Public Storage under the Internal Revenue Code in
determining its REIT status. In the absence of a change in tax laws, REIT
requirements would likely preclude Public Storage from exercising its right of
first refusal to buy the stock or assets of the reinsurance corporation.
Canadian Operations
The Hughes family owns and operates mini-warehouses in Canada. Public Storage
has a right of first refusal to buy the stock or assets of the corporation
engaged in these operations if the Hughes family or the corporation agree to
sell. However, Public Storage has no interest in the operations of this
corporation and no right to buy the stock or the assets of that corporation
unless the Hughes family decides to sell.
Merchandise and Portable Self-Storage Companies.
At almost all of Public Storage'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 received from the sale of
these items would be nonqualifying income to Public Storage, Public Storage owns
the nonvoting preferred stock of the Lock/Box Company (representing 95% of the
equity). The Hughes family, which owns the voting common stock of the Lock/Box
Company (representing 5% of the equity), controls the operations of the Lock/Box
Company.
Public Storage organized Public Storage Pickup & Delivery ("PSPUD") in 1996 to
operate a portable self-storage business. Public Storage owns substantially all
of the economic interest of PSPUD. Since PSPUD will operate profitably only if
it can succeed in the relatively new field of portable self-storage, 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 $25,200,000 during the
first nine months of 1998. You should read "Material Federal Income Tax
Consequences--General Tax Treatment of Public Storage" for a discussion
concerning the treatment of income from and investment in PSPUD for purposes of
the REIT income and asset tests. Income derived directly from PSPUD is
nonqualifying income to Public Storage under the Internal Revenue Code in
determining its REIT status.
Restrictions on, and Risks of, Unsuccessful Development Activities.
Public Storage intends to continue to pursue development activities as
opportunities arise. Such development activities generally require various
government and other approvals. Public Storage may not receive such approvals.
Public Storage will incur risks associated with any such development activities.
These risks include:
1. the risk that development opportunities explored by Public Storage may
be abandoned;
2. the risk that construction costs of a project may exceed original
estimates, possibly making the project unprofitable;
3. lack of cash flow during the construction period; and
4. the risk that occupancy rates and rents at a completed project will
not be sufficient to make the project profitable.
22
<PAGE>
Public Storage's competitors seek properties for development and may have
greater resources than Public Storage.
23
<PAGE>
PUBLIC STORAGE
Description of Business
Public Storage is a fully integrated, self-administered and self-managed REIT
that owns, manages, leases, acquires and develops self-storage facilities
offering storage space for personal and business use. Public Storage is the
largest owner and operator of self-storage facilities in the United States with
equity interests (through direct ownership, as well as general and limited
partnership interests), as of September 30, 1998, in 1,089 self-storage
facilities located in 37 states. Public Storage also has a significant ownership
in PS Business Parks, Inc., a REIT that, as of September 30, 1998, had equity
interests in 99 commercial properties located in ten states.
In 1996 Public Storage organized PSPUD as a separate affiliated entity to
operate a portable self-storage business that rents portable containers.
Public Storage was organized as a California corporation in 1980. The principal
executive offices of Public Storage are located at 701 Western Avenue, Glendale,
California 91201-2397. The telephone number is (818) 244-8080.
Facilities
Public Storage primarily owns, manages, leases, acquires and develops self-
storage facilities, also known as mini-warehouses. 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
facility and the size of the storage spaces, 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.
24
<PAGE>
The following table reflects the geographic diversification of the mini-
warehouses in which Public Storage has an interest:
<TABLE>
<CAPTION>
At September 30, 1998
------------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
-------------------- ------------------------
<S> <C> <C>
California:
Southern 150 9,512
Northern 131 7,280
Texas 123 8,083
Florida 100 5,838
Illinois 67 4,224
Colorado 38 2,375
Washington 37 2,292
Georgia 36 1,962
New Jersey 35 2,018
Maryland 34 1,921
Virginia 33 2,040
New York 29 1,692
Ohio 27 1,650
Oregon 25 1,171
Nevada 22 1,409
Missouri 19 1,017
Pennsylvania 18 1,224
Other states (21 states) 165 9,249
----- ------
Totals 1,089 64,957
===== ======
</TABLE>
- ---------------
None of Public Storage's mini-warehouses involves 10% or more of Public
Storage's total assets or gross revenues. As of September 30, 1998, each of
Public Storage's facilities is generating sufficient revenues to cover its
operating expenses, other than those properties recently opened that are in the
initial lease-up stage. Only 25 of Public Storage's facilities 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. As of September 30, 1998, these 25 facilities were encumbered
by mortgages in the aggregate amount of $35,992,000, bearing interest at rates
ranging from 7.13% to 11.0% per year and maturing between May 1999 and September
2028. Each of Public Storage's facilities will continue to be used for its
current purpose. At present, Public Storage has no plans for any material
renovation or improvement of its facilities. However, Public Storage budgets for
regular maintenance, repair and upgrade of its facilities. Public Storage
believes each of its facilities is adequately covered by insurance.
Competition exists in substantially all of the market areas in which Public
Storage's mini-warehouse facilities are located, and the barriers to entry are
relatively low for competitors with the necessary capital. However, Public
Storage believes that the current overall demand for mini-warehouse space is
strong, and as reflected in the table below, the overall performance of Public
Storage's mini-warehouses has generally improved. More than 10% of Public
Storage'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 strengthening. Public Storage's mini-warehouses are
operated as part of the "Public Storage" system. Public Storage is the largest
operator of mini-warehouses in the United States.
25
<PAGE>
Set forth below is a schedule showing the overall occupancy rate and realized
rent for the 985 mini-warehouses in which Public Storage had an interest, direct
or indirect, for the periods indicated ("same - store mini-warehouses"):
<TABLE>
<CAPTION>
Nine
Years ended months ended
December 31, September 30,
--------------------- --------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level (1) 89.9% 91.0% 91.7% 91.6% 92.6%
Annual realized rent per occupied
square foot (1)(2) $8.37 $8.70 $9.20 $9.12 $9.72
</TABLE>
_______________
(1) Properties owned throughout the periods.
(2) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. Public Storage 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.
26
<PAGE>
STORAGE TRUST
DESCRIPTION OF BUSINESS
Storage Trust and its affiliates constitute a self-administered and self-managed
REIT which was organized in November 1994 to continue and expand the self-
storage facility business conducted by Burnam Holding Companies Co. and certain
of its affiliates (collectively, the "Predecessor Company") since 1974. Storage
Trust and its affiliates own, manage, lease, acquire and develop self-storage
facilities. Storage Trust owns and operates self-storage facilities in the
Southern, Mid-Atlantic, Midwestern and Western regions of the United States.
Storage Trust offers a broad range of features and amenities to its customers,
including uniformed customer service-oriented facility managers, door alarms,
lighting systems, video cameras, twenty-four hour computer-controlled access,
climate-controlled storage spaces, attractive buildings and wide drive aisles.
The business of Storage Trust is operated through Storage Trust Properties, L.P.
(the "Operating Partnership") and Storage Realty Management Co. Substantially
all of Storage Trust's assets and interest in self-storage facilities are held
by, and all of its operations are conducted through, the Operating Partnership.
Storage Trust is the sole general partner of, and thereby controls the
operations of, the Operating Partnership, holding approximately a 93% ownership
interest (as of September 30, 1998). The remaining ownership interests in the
Operating Partnership are primarily held by certain owners of the Predecessor
Company, including Burnam Holding Companies Co. and certain former owners of
assets acquired by the Operating Partnership subsequent to Storage Trust's
initial public offering of common shares. Storage Trust is dependent upon the
receipt of distributions or other payments from the Operating Partnership in
order to meet its financial obligations. Storage Realty Management Co. manages
facilities owned by unrelated third parties and conducts various other
businesses at certain facilities, such as the sale of locks and the processing
of customer property insurance. Through its ownership of the preferred stock,
the Operating Partnership enjoys substantially all of the economic benefit of
the businesses carried on by Storage Realty Management Co.
Storage Trust was formed as a Maryland real estate investment trust on July 12,
1994. The Operating Partnership was organized under the laws of the State of
Delaware on July 13, 1994. Storage Trust's and the Operating Partnership's
executive offices are located at 2407 Rangeline Street, Columbia, Missouri 65202
and their telephone number is (573) 499-4799.
27
<PAGE>
The following table reflects the location of Storage Trust's self-storage
facilities:
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
Net Rentable Square
Number of Facilities Feet (in thousands)
-------------------- -------------------
<S> <C> <C>
Texas 36 2,016
Georgia 27 1,626
Florida 27 1,311
South Carolina 24 1,003
Missouri 23 1,194
Illinois 23 1,176
Colorado 12 747
Tennessee 11 605
Other (8 states) 41 2,233
--- ------
Totals 224 11,911
--- ------
</TABLE>
None of Storage Trust's self-storage facilities involves 10% or more of Storage
Trust's total assets or gross revenues. As of the date hereof, each of Storage
Trust's properties is generating sufficient revenues to cover its operating
expenses other than those properties recently opened that are in the initial
lease-up stage. None of Storage Trust's properties is subject to any material
mortgage, lien, or any encumbrance other than liens for taxes, assessments not
yet due or payable, utility easements or other immaterial liens or encumbrances.
Each of Storage Trust's properties continues to be used for its current purpose.
Storage Trust believes each of its properties is adequately covered by
insurance. Substantially all of Storage Trust's facilities are subject to
competition and the barriers to entry are relatively low for competitors with
sufficient capital. More than 10% of Storage Trust's net rentable square feet
are located in each of Texas, Georgia, Florida and Missouri.
28
<PAGE>
Set forth below is a schedule showing the overall occupancy rate and realized
rents for the 105 self-storage facilities in which Storage Trust had an interest
for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
Years Ended December 31, September 30,
------------------------ -----------------
1996 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted averaged occupancy (1) 84.3% 83.9% 84.3% 83.9%
Average realized rent per occupied
square foot (1)(2) $7.15 $7.35 $7.36 $7.52
______________
</TABLE>
(1) Properties owned throughout 1996 to 1998.
(2) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. Storage Trust believes this is a more relevant
measure than posted rental rates, since-posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
29
<PAGE>
THE COMBINED COMPANY
GENERAL
After the merger, the combined company will have an interest in 1,313 mini-
warehouses in 37 states. Public Storage believes that Storage Trust has a
high quality portfolio of facilities which fit strategically in many of
Public Storage's target markets. The following table reflects the continued
geographic diversification of the combined company's mini-warehouses:
<TABLE>
<CAPTION>
At September 30, 1998
------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
------------------------------------------
California:
<S> <C> <C>
Southern California 150 9,512
Northern California 131 7,280
Texas 159 10,099
Florida 127 7,149
Illinois 90 5,400
Georgia 63 3,588
Colorado 50 3,122
Missouri 42 2,211
Washington 37 2,292
Virginia 37 2,241
New Jersey 35 2,018
Maryland 34 1,921
Ohio 32 1,899
New York 29 1,692
South Carolina 26 1,084
Oregon 25 1,171
Nevada 22 1,409
Tennessee 22 1,311
Kansas 22 1,274
Alabama 21 835
North Carolina 20 1,004
Pennsylvania 18 1,224
Other states (16 states) 121 7,132
----- ------
Totals 1,313 76,868
===== ======
</TABLE>
Substantially all of the combined company's facilities are subject to
competition and the barriers to entry are relatively low for competitors with
sufficient capital. More than 10% of the combined company's net rentable square
feet are located in each of Southern California and Texas.
30
<PAGE>
STRATEGIES
The combined company is expected to continue Public Storage's growth and
operating strategies. There can be no assurance that the combined company will
be successful in implementing Public Storage's strategies.
Growth Strategies
Public Storage's growth strategies focus on improving the operating performance
of its existing facilities and on increasing its ownership of mini-warehouses
through additional investments. Major elements of these strategies are as
follows:
. Increase net cash flow of existing facilities. Public Storage seeks
to increase the net cash flow generated by its existing facilities by
(i) increasing average occupancy rates and (ii) achieving higher
levels of realized monthly rents per occupied square foot. Average
occupancy at the Public Storage same-store mini-warehouses has
increased from 89.9% in 1995 to 92.6% for the nine months ended
September 30, 1998. Similarly, realized monthly rents per occupied
square foot have increased approximately 16.1% during this same
period. These factors have resulted in growth in net operating income
at the Public Storage same store mini-warehouses of approximately
5.2%, 7.0% and 8.5% in 1996, 1997 and the nine months ended September
30, 1998, respectively, over the prior period. Public Storage does
not expect to maintain this growth rate in future periods as it does
not anticipate increases in occupancies in its base portfolio and it
anticipates smaller increases in realized rents.
. Develop properties. Between 1995 and September 30, 1998, Public
Storage and a development joint venture partnership in which Public
Storage has a 30% interest have developed 28 mini-warehouses
(approximately 1,663,000 net rentable square feet) at a total cost of
approximately $133.7 million, and had 25 additional self storage
facilities (approximately 1,669,000 net rentable square feet) in
process with total estimated development costs of $115 million. At
September 30, 1998, Public Storage had identified 49 additional mini-
warehouse development projects (approximately 2,850,000 net rentable
square feet) at an estimated total cost of $179 million. Development
of these projects is subject to contingencies. Public Storage
believes that the combined company will be in a better position to
develop these projects and to be able to continue to develop mini-
warehouses that meet the combined company's criteria for success.
. Access to capital. Public Storage believes that the merger with
Storage Trust will strengthen its financial position and access to
capital.
. Conservative distribution policy. The combined company expects to
continue Public Storage's conservative distribution policy. After the
merger, Public Storage will seek to continue to retain significant
funds generated from operations (after funding its distributions and
capital improvements) for additional property investments and debt
reduction. During the nine months ended September 30, 1998, Public
Storage distributed 40.2% of its funds from operations allocable to
Common Stock and retained $95.7 million. Public Storage believes
that this policy strengthens its financial condition and provides
significant financial flexibility. There can be no assurance that the
combined company will be able to continue to retain this level of
cash.
Operating Strategies
After the merger, the combined company's mini-warehouses will be operated under
the "Public Storage" name, the most recognized name in the mini-warehouse
industry. The major elements of Public Storage's operating strategies are as
follows:
. Capitalize on Public Storage brand name recognition. Public Storage,
together with its predecessor, has 25 years of operating experience in
the mini-warehouse business, and is the largest operator of
31
<PAGE>
mini-warehouses in the United States. Public Storage believes that
its marketing and advertising programs improve its competitive
position in the market. Public Storage believes that it is the only
mini-warehouse operator regularly using television advertising in
several major markets around the country, and its in-house Yellow
Pages staff designs and places advertisements in approximately 700
directories. In addition, Public Storage offers a toll-free referral
system, 800-44-STORE, which services approximately 100,000 calls per
year from potential customers inquiring as to the nearest Public
Storage mini-warehouse.
. Maintain high occupancy levels and increase realized rents. Average
occupancy for the Public Storage same-store mini-warehouses increased
from 89.9% in 1995 to 91.7% in 1997. During the nine months ended
September 30, 1998, the average occupancy was 92.6% compared to 91.6%
for the comparable period in 1997. Realized monthly rents per square
foot increased from $8.37 in 1995 to $9.72 during the nine months
ended September 30, 1998.
. Concentrate facilities in major markets. Public Storage is focused
on owning and acquiring mini-warehouses located principally in the 54
largest metropolitan areas (those with populations in excess of
1,000,000) throughout the country. Public Storage believes that the
events resulting in the rental of mini-warehouse space occur with
greater frequency in the larger metropolitan areas than in less
populous areas. By concentrating its facilities within these markets,
Public Storage can also achieve economies of scale with respect to
property operations and advertising. The addition of Storage Trust's
portfolio of facilities will enhance this strategy.
. Focus on high quality properties in prime locations. Public Storage
seeks to own high quality properties located on prime land with high
traffic counts, high visibility and a dense population within a three
to five mile radius. Public Storage believes that facilities located
on prime land are less susceptible to the threat of competition from
new development and, as a result, have more stable cash flows. Public
Storage is also committed to investing the capital necessary to
maintain the high quality of its facilities and to upgrade them when
warranted by market conditions. The addition of Storage Trust's
portfolio of facilities will enhance this strategy.
. Systems and controls. Public Storage has an organizational structure
and a property management system, "CHAMP" (Computerized Help and
Management Program), which links its corporate office with each mini-
warehouse. This enables Public Storage to obtain daily information
from each mini-warehouse and to achieve efficiencies in operations and
maintain control over space inventory, rental rates, promotional
discounts and delinquencies. Expense management is achieved through
centralized payroll and accounts payable systems and a comprehensive
property tax appeals department, and Public Storage has an extensive
internal audit program designed to ensure proper handling of cash
collections.
. Professional property operation. In addition to approximately 120
support personnel at Public Storage's corporate offices, there are
approximately 2,800 on-site personnel who manage the day-to-day
operations of the mini-warehouses operated by Public Storage. These
on-site personnel are supervised by approximately 100 district
managers, 18 regional managers and five divisional managers (with an
average of more than 12 years experience in the mini-warehouse
industry) who report to the president of the management division (who
has 15 years of experience with Public Storage). Public Storage
carefully selects and extensively trains the operational and support
personnel and offers them a progressive career path. Public Storage
furnishes on-site personnel with detailed operating procedures.
32
<PAGE>
COMMON MARKETS
The following table sets forth a comparison of the occupancy levels of both
companies' mini-warehouses in common markets for the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
Public Storage Properties Storage Trust Properties
------------------------------------- ------------------------------------
Differences
Net Weighted Net Weighted in Weighted
Number of Rentable Avg. Number of Rentable Avg. Avg.
Market Properties Square Feet Occupancy Properties Square Feet Occupancy Occupancy
- -------------------------- ------------------------------------- ------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CO Colorado Springs 7 359,353 91.3% 5 344,615 87.2% 4.1%
CO Denver 29 1,911,768 94.6% 4 213,862 78.0% 16.6%
------------------------------------- ------------------------------------------- ----------
36 2,271,121 94.1% 9 558,477 83.7% 10.4%
------------------------------------- ------------------------------------------- ----------
FL Jacksonville 9 454,660 94.5% 6 347,455 89.8% 4.7%
FL Orlando 13 695,343 91.3% 5 232,809 86.4% 4.9%
FL Miami 29 1,613,555 89.7% 8 343,210 81.0% 8.7%
FL Tampa Bay 17 1,018,215 93.0% 3 196,685 89.6% 3.4%
------------------------------------- ------------------------------------------- ----------
68 3,781,773 91.4% 22 1,120,159 86.4% 5.0%
------------------------------------- ------------------------------------------- ----------
GA Atlanta 31 1,701,741 92.1% 23 1,420,133 82.3% 9.8%
GA Augusta 1 40,124 83.5% 2 110,353 82.6% 0.9%
------------------------------------- ------------------------------------------- ----------
32 1,741,865 91.9% 25 1,530,486 82.3% 9.6%
------------------------------------- ------------------------------------------- ----------
IL Chicago 63 3,993,063 92.8% 23 1,175,738 85.6% 7.2%
KS & MO Kansas City 13 783,366 91.7% 12 648,887 85.1% 6.6%
KY Louisville 2 119,375 87.8% 3 117,220 82.7% 5.1%
LA New Orleans 4 271,717 93.9% 1 68,927 80.7% 13.2%
MO St. Louis 11 518,036 92.0% 10 497,464 85.6% 6.4%
NC Charlotte 4 191,957 91.0% 5 227,089 67.7% 23.3%
NC Raleigh/Durham 3 208,610 88.1% 4 171,123 99.4% -11.3%
NC Greensboro 3 151,458 84.8% 1 37,180 85.9% -1.1%
------------------------------------- ------------------------------------------- ----------
10 552,025 88.2% 10 435,392 81.7% 6.5%
------------------------------------- ------------------------------------------- ----------
OH Columbus 12 762,825 89.1% 2 129,206 70.5% 18.6%
OH Cincinnati 12 638,740 91.0% 3 119,821 96.1% -5.1%
------------------------------------- ------------------------------------------- ----------
24 1,401,565 90.0% 5 249,027 82.8% 7.2%
------------------------------------- ------------------------------------------- ----------
SC Columbia 2 80,700 91.9% 9 360,758 86.1% 5.8%
TN Chattanooga 1 81,400 83.4% 3 119,620 71.4% 12.0%
TN Nashville 2 106,351 88.4% 8 485,076 74.3% 14.1%
------------------------------------- ------------------------------------------- ----------
3 187,751 86.2% 11 604,696 73.7% 12.5%
------------------------------------- ------------------------------------------- ----------
TX Dallas/Ft. Worth 53 3,062,137 93.5% 19 1,017,997 87.3% 6.2%
TX Houston 41 2,922,652 93.4% 17 998,064 86.0% 7.4%
------------------------------------- ------------------------------------------- ----------
94 5,984,789 93.4% 36 2,016,061 86.6% 6.8%
------------------------------------- ------------------------------------------- ----------
VA Washington D.C. 38 2,093,482 91.6% 3 125,382 90.7% 0.9%
VA Norfolk/Chesapeake 7 486,067 91.2% 1 75,300 91.4% -0.2%
------------------------------------- ------------------------------------------- ----------
45 2,579,549 91.5% 4 200,682 91.0% 0.5%
------------------------------------- ------------------------------------------- ----------
WI Milwaukee 6 377,750 94.8% 2 254,622 81.3% 13.5%
------------------------------------- ------------------------------------------- ----------
Totals 413 26,644,445 92.3% (1) 182 9,838,596 84.2% (1) 8.1% (1)
===================================== =========================================== ===========
</TABLE>
- -----------------------
(1) These percentages represent the monthly weighted average occupancy for the
nine month period ended September 30, 1998. At November 30, 1998, the
average occupancy for the same Public Storage facilities was 91.2% and for
the same Storage Trust facilities was 85.6%, resulting in a difference of
5.6%.
THERE CAN BE NO ASSURANCE THAT PUBLIC STORAGE WILL BE ABLE TO INCREASE THE
OCCUPANCY LEVELS OF STORAGE TRUST'S FACILITIES. OCCUPANCY LEVELS ARE A
FUNCTION NOT ONLY OF GENERAL MARKETS BUT ALSO OF SPECIFIC LOCATIONS,
PROPERTY-SPECIFIC COMPETITION, RENTAL RATES AND PHYSICAL CHARACTERISTICS,
SUCH AS SPACE MIX, SECURITY SYSTEMS AND CLIMATE CONTROL. WHILE THE
FACILITIES IN THIS TABLE ARE IN THE SAME GENERAL MARKETS, THEY ARE
OBVIOUSLY IN DIFFERENT SPECIFIC LOCATIONS AND HAVE DIFFERING PHYSICAL
CHARACTERISTICS.
33
<PAGE>
THE MERGER
TERMS OF THE MERGER
The Public Storage Board and the Storage Trust Board have each approved the
merger and the Merger Agreement, a copy of which you will find in Annex A
attached to this document. Pursuant to the Merger Agreement, among other things,
upon satisfaction (or waiver) of the conditions set forth in the Merger
Agreement, at the effective time of the merger:
. A wholly owned subsidiary of Public Storage will merge into
Storage Trust. Storage Trust will be the surviving entity, which
will be wholly owned by Public Storage.
. Each issued and outstanding share of Storage Trust will be
converted into the right to receive 0.86 shares of Public Storage
common stock.
No fractional shares of Public Storage common stock will be issued in the
merger. In lieu of fractional shares, a holder of Storage Trust common shares
otherwise entitled to a fractional share will be paid cash for such fractional
interest.
As a result of the merger and without any action on the part of the shareholder,
at the effective time, each Storage Trust common share will cease to be
outstanding, will be canceled and retired and will cease to exist. Each holder
of a certificate representing Storage Trust common shares will thereafter cease
to have any rights with respect to such shares, except the right to receive the
Public Storage common stock, as applicable, and cash in lieu of fractional
shares upon the surrender of such certificate. Promptly after the effective time
of the merger, the exchange agent, BankBoston N.A., will mail a letter of
transmittal and instructions to each holder of a certificate representing
Storage Trust common shares as of the effective time for use in effecting the
surrender of the certificate in exchange for certificates representing Public
Storage common stock and cash in lieu of fractional shares. See "The Merger
Agreement--Exchange of Storage Trust Share Certificates."
BACKGROUND OF THE MERGER
In early June 1998, B. Wayne Hughes, chairman and chief executive officer of
Public Storage, initiated several telephone conversations with certain trustees
of Storage Trust to discuss in broad terms a "strategic alliance" between Public
Storage and Storage Trust. On June 10, 1998, Mr. Hughes sent the following
letter to Daniel Staton, Chairman of the Board of Trustees of Storage Trust:
34
<PAGE>
June 10, 1998
By Federal Express
------------------
Mr. Daniel C. Staton, Chairman, Storage Trust Realty
312 Walnut Street, Suite 1151
Cincinnati, Ohio 45202
Dear Dan:
As we discussed over the telephone, we would like to meet with you to
discuss a proposal for a strategic alliance of our two companies. This
letter briefly outlines our thoughts.
PSI Investment
--------------
We propose to purchase 3,000,000 shares of your common stock for $26.00
per share. (This is equivalent to a price in excess of $27 since no
commissions are paid.) The proceeds of $78,000,000 would allow your company
to repay its revolving line of credit and acquire additional properties.
We would agree to certain restrictions on our voting rights and our
actions as a shareholder as required by your board and agreed to by ours. If
legally permissible, we would seek to have someone designated by you to serve
on our board and someone designated by us to serve on your board.
Operations
----------
We propose initially to jointly select a market in which both companies'
properties would be operated jointly under the Public Storage name for
advertising and marketing advantages. We would bring your properties in the
agreed-upon market into our national telephone reservation center and they
would participate in all ongoing promotional and media programs. We
currently receive referrals and have combined marketing programs with several
national companies (unrelated to storage such as Hertz and AT&T). Also these
properties would become part of our computerized reporting system, providing
both of us weekly with detailed occupancy information. If and as the joint
operating program in that market is successful in the view of both companies'
boards, it would be expanded to other markets.
We would allocate expenses in a jointly agreed upon method to each
property in those markets, but with no property management fee paid to either
company. Our benefits would come as a shareholder of Storage Trust, as well
as from lower operating costs on our properties.
I realize that the integration of operations will result in some
dislocations in both organizations. Some of your operating people would be
replaced by our people and some of our operating people would be replaced by
your people. However, we intend to continue to expand acquisition and
development activity and we should be able to relocate many operating people.
Therefore, we anticipate minimal reduction in employees of either company.
There should be sufficient work for anyone willing and able to contribute.
Benefits to Shareholders
------------------------
The strategic alliance should result in significant benefits to the
shareholders of both our companies.
35
<PAGE>
Issuance of Stock on Favorable Terms
------------------------------------
Storage Trust would issue stock at a premium to market without any
underwriting discounts or commissions.
Pay off Short-Term Debt
-----------------------
Storage Trust would be able to pay off its short-term debt enhancing its
financial flexibility.
Increase Occupancies of Storage Trust's Properties
--------------------------------------------------
Through joint use of the national telephone reservation system by mini-
warehouses and the portable self-storage business and a coordinated media
advertising program, we believe that the occupancies of Storage Trust's
properties can be increased. Enclosed is a comparison of the occupancies of the
Storage Trust and the Public Storage properties in the same markets as of
December 31, 1997, which is the latest date we have market by market information
on your properties. You will note that our occupancy at December 31, 1997 in
these same markets averages about 7% higher. We believe that we should be able
to increase your properties' occupancy to our 90% average occupancy.
Reduce Operating Costs of Both Storage Trust and Public Storage Properties
--------------------------------------------------------------------------
By spreading property level costs over a larger number of properties in the
same markets, we should reduce a number of cost items: yellow pages
advertisement, casualty and liability insurance, supervisory payroll, telephone
center and media advertising.
While the following numerical examples are not intended to be precise, I
think they reflect the economies of scale of a joint operating agreement. In
Dallas-Ft. Worth we currently have 48 properties and we spend $280,000 per year
or $6,000 per property on yellow pages advertisement. You probably spend a
higher amount for your 17 properties than $6,000 per property. If we combined
our costs, the resulting cost would be $4,300 per property ($280,000 / 65).
Another example would be in Milwaukee. We have six properties and supervisors
costing about $48,000 per annum or $8,000 per year per property. You have two
properties. Your costs have to be greater than the $8,000 per year per property.
We could each reduce our costs to $6,000 per property since in this example our
supervisory costs would not be increased. There are many markets where we have
more properties than you and you will be the primary beneficiary of the cost
savings resulting from economies of scale. Nashville, however, is the opposite.
We have two properties and you have eight and we will be the primary beneficiary
of the reduction in costs from a joint operating agreement.
Increase in Storage Trust Stock Price
-------------------------------------
We believe that a strategic alliance should result in a significant
increase in the stock price of Storage Trust through higher FFO and a higher
stock multiple from an accelerated growth rate and a lower debt to capital
ratio. Assuming a 7% increase in occupancy, a $2,000,000 combined reduction in
property operations and general and administrative expenses, and a $78,000,000
investment by Public Storage (used to pay off debt and acquire properties), pro-
forma 1997 FFO per share would increase to $2.36. Combined with an increase in
the stock multiple (based on 1997 FFO per share) from 11.2 to 12.4 (your
approximate multiple during the first half of 1997), your stock price would be
$29.25.
You have announced that you intend to more actively manage the Storage
Trust properties through additional field personnel. We agree with that
objective. However, it is our experience that hiring and training personnel is a
time-consuming process. Your shareholders would recognize the benefits of more
active property management much more quickly through a joint operating agreement
with Public Storage, which has the necessary infrastructure already in place in
many of your markets. It was also indicated that Storage Trust intended to cut
back on acquisition activities until your stock price increased from improvement
in property performance. We believe that a strategic alliance with Public
Storage will facilitate Storage Trust's continued growth without interruption.
There should be an immediate
36
<PAGE>
increase in stock price from Public Storage's investment and there should be a
prompt improvement in property operations from the joint marketing program.
I would appreciate the opportunity to meet with you to discuss this
proposal in greater detail.
Very truly yours,
B. Wayne Hughes
Chairman and CEO
Encl.
cc (w/encl.): Mr. Michael G. Burnam
Chief Executive Officer
On June 18, 1998, Mr. Staton sent the following letter to Mr. Hughes.
June 18, 1998
VIA OVERNIGHT COURIER
- ---------------------
B. Wayne Hughes
Chairman and CEO
Public Storage, Inc.
201 Western Avenue, Suite 200
Glendale, California 91201-2397
Dear Wayne:
We have received your letter dated June 10, 1998 setting forth your
proposal for a "strategic alliance" between Public Storage and Storage Trust. We
appreciate your interest and your thoughts in increasing the value of our
Company.
Following our careful review of your letter, we are declining your
proposal. Your proposal would involve what we believe is a transfer of a
controlling interest in our Company to Public Storage. Aside from the numerous
operational and legal considerations, such as antitrust law issues, raised by
your proposal, the simple fact is that Storage Trust Realty's position is that
its business is not for sale. The management and Board of Trustees of Storage
Trust believe that our Shareholders will continue to benefit materially from our
commitment to our long term strategic plan. Our analysis of your proposal is
that it is inadequate to induce our Company to sell control of its business in
light of the benefits available from its continued operation in the long term.
As a result, we must decline your offer.
37
<PAGE>
Thank you again for your expression of interest.
Sincerely yours,
Daniel C. Staton
Chairman
cc: Michael G. Burnam
Chief Executive Officer
On August 3, 1998, Mr. Hughes sent the following letter to Mr. Staton.
August 3, 1998
By Federal Express
- ------------------
Mr. Daniel C. Staton, Chairman, Storage Trust Realty
312 Walnut Street, Suite 1151
Cincinnati, Ohio 45202
Dear Dan:
I am sorry that you rejected our earlier proposal for a strategic alliance
between Public Storage and Storage Trust.
I continue to believe that it makes sense to combine the operations of our
two companies, particularly since many of Storage Trust's properties are in the
same markets as Public Storage. I believe a business combination may be possible
on a basis that both provides a premium to your shareholders over recent trading
prices of Storage Trust shares and would afford your shareholders the choice
whether to (1) receive cash for their shares or (2) increase the value of their
existing investment in an entity with greater liquidity and increased geographic
diversification, but with the same type of properties and substantially the same
business strategy as Storage Trust. In that regard, Public Storage proposes a
merger with Storage Trust in which Storage Trust shareholders would have the
option of receiving $25 in either cash or Public Storage stock for each share of
Storage Trust. At your election the transaction could be structured as tax-free
to your shareholders, which would necessarily limit the amount of cash to about
one-half of the total consideration. Your chief executive officer or another
person designated by your board would be invited to serve on the Public Storage
board after the merger. This proposal is obviously subject to the negotiation
and execution of a definitive merger agreement containing representations,
warranties and agreements customary for a transaction of this type.
The merger should result in higher revenues and lower expenses for the
properties of the surviving corporation, as well as lower combined general and
administrative expenses, benefiting the current shareholders of both Storage
Trust and Public Storage. Through joint use of our national telephone
reservation system by the mini-warehouses and the portable self-storage business
and a coordinated media advertising program, we believe that the occupancies of
Storage Trust's properties can be increased. As reflected in the chart
accompanying my June 10, 1998 letter, the December 31, 1997, occupancies of
Public Storage properties averaged about 7% higher than Storage Trust properties
in the same markets.
38
<PAGE>
Furthermore, by spreading property level costs over a larger number of
properties in the same markets, we should reduce a number of cost items for the
properties of both Storage Trust and Public Storage: yellow pages advertisement,
casualty and liability insurance, supervisory payroll, telephone center and
media advertising. My June 10 letter contained some specific numerical examples
of the economies of scale from combining property operations.
You have announced that you intend to manage the Storage Trust properties
more actively through additional field personnel. We agree with that objective.
However, it is our experience that hiring and training personnel is an expensive
and time-consuming process. Your shareholders would recognize the benefits of
more active property management much more quickly through a merger with Public
Storage, which has the necessary infrastructure already in place in many of your
markets.
We would seek after the merger to expand acquisition and development
activity significantly and we anticipate minimal reduction in employees of
either company. There should be sufficient work for everyone willing and able to
contribute.
This proposal presumably eliminates your legal objections, such as
antitrust law issues, to our earlier proposal for a strategic alliance.
I would appreciate the opportunity to meet with you at your early
convenience to discuss this proposal in greater detail.
Public Storage will be filing shortly a schedule 13D reporting its
ownership of approximately 5.9% of the shares of Storage Trust. We will forward
a copy to you when completed. Without regard to your response to our merger
proposal, Public Storage requests your board to waive the application of your
"Ownership Limit" to allow Public Storage to acquire up to 9.99% of your shares.
As you are aware, Public Storage is a publicly traded real estate investment
trust. My family and I own the largest interest in Public Storage at about 30%.
I believe that allowing Public Storage to purchase up to 9.99% of the Storage
Trust shares would continue to provide some price support for your shares,
without any adverse impact on Storage Trust's tax status. Please let me know if
you need any additional information to grant this waiver.
Thank you for your attention to these matters.
Very truly yours,
B. Wayne Hughes
Chairman and CEO
cc: Mr. Michael G. Burnam
Chief Executive Officer
On August 4, 1998, Public Storage filed a Schedule 13D with the Commission
announcing that it had purchased 964,000 Storage Trust common shares,
approximately 5.998% of outstanding Storage Trust common shares. On that same
day, Storage Trust issued a press release announcing that it had received an
unsolicited business combination proposal from Public Storage and that Public
Storage had requested a waiver of the ownership limit of 6% of the outstanding
common shares set forth in Storage Trust's Declaration of Trust. The Storage
Trust Board commented in the press release that Storage Trust was not for sale,
but that it would give serious consideration to the business combination
proposal as well as the request for a waiver from the ownership limit at an
upcoming meeting of the Board of Trustees.
39
<PAGE>
At its regularly scheduled meeting on August 7, 1998, the Storage Trust Board,
among other things, adopted the shareholder rights plan it had been considering
for several months, discussed with its counsel the most recent proposal from
Public Storage, the fact that the proposal was subject to the negotiation and
execution of a definitive merger agreement and the duties of the Storage Trust
Board, interviewed several investment banking firms to act as financial advisor
to Storage Trust and, based on its familiarity with Storage Trust and its
experience in the real estate and REIT industries, selected Merrill Lynch to act
as its financial advisor in exploring its strategic alternatives.
On August 10, 1998, Storage Trust issued a press release announcing "that it has
engaged Merrill Lynch to assist the Company in exploring its strategic
alternatives, which will include the Company continuing to discuss the proposal
it received from Public Storage, Inc." and that it had "authorized the adoption
of a shareholder rights plan . . . designed to enhance the ability of all of the
Company's shareholders to realize the long-term value of their investment."
On August 18, 1998, Mr. Staton, together with representatives of Merrill Lynch,
met with Mr. Hughes and Public Storage's general counsel. Mr. Staton stated that
Storage Trust's Board of Trustees would not allow Public Storage to increase its
ownership of shares, but was prepared to discuss a business combination of
Storage Trust and Public Storage.
The Storage Trust Board held a meeting on August 22, 1998 with its legal and
financial advisors to discuss the possible strategic alternatives available to
Storage Trust, including a stock or cash merger with a strategic party in the
industry, a private equity investment in Storage Trust, an asset sale or
liquidation, a leveraged buyout or a continuation of its long-term business
strategy as an independent company. The Storage Trust Board directed Merrill
Lynch to explore each of these alternatives with interested persons and to
report back to the Storage Trust Board on August 28, 1998.
On August 24, 1998, Mr. Staton sent a letter to Mr. Hughes confirming the
Storage Trust Board's determination not to grant Public Storage a waiver from
the ownership limit contained in Storage Trust's Declaration of Trust.
Between August 24, 1998 and September 14, 1998, Storage Trust entered into a
confidentiality and non-disclosure agreement governing the exchange of
confidential information with six unaffiliated parties, including Public
Storage. On August 26, 1998, the chief financial officers of Public Storage and
Storage Trust and a representative of Merrill Lynch met to discuss Public
Storage and Storage Trust and to exchange financial information.
The Storage Trust Board held a meeting on August 28, 1998 with its legal and
financial advisors to discuss the status of Merrill Lynch's exploration of
strategic alternatives, including a possible strategic business combination with
another self-storage business or other possible investors. Merrill Lynch
indicated that it had contacted a number of persons in the self-storage business
and representatives of other companies and that this process was continuing. At
this meeting, the Storage Trust Board also authorized management to develop a
severance and/or retention program to be implemented by Storage Trust in the
event that the Storage Trust Board determined to proceed with a transaction.
On August 28, 1998, Public Storage sent a letter to Mr. Staton withdrawing its
August 3 proposal effective as of September 4, 1998, unless accepted by Storage
Trust's Board of Trustees before that date. The letter went on to state: "We
would appreciate the opportunity to participate in the process being set up by
Merrill Lynch to evaluate proposals for your company. Depending on market
conditions and other factors, we may or may not submit a bid in that process."
The Storage Trust Board held a meeting on August 31, 1998 with its legal and
financial advisors to discuss the status of the August 3 proposal by Public
Storage and of the discussions of strategic alternatives with other interested
parties. The Storage Trust Board determined to continue the process of exploring
all strategic alternatives.
By letters dated September 3 and September 4, 1998, Storage Trust received
indications of interest from three additional parties. Party A indicated an
interest in pursuing a transaction in which it would acquire each outstanding
Storage Trust common share for $26.00 per share in cash. Party B indicated an
interest in pursuing a reverse acquisition in which the Storage Trust
shareholders would retain their shares in the combined company on a basis that
assigned a value of $26.00 per share to each Storage Trust common share and
$24.00 per share to each Party B share based on Party B's indication of the
current fair market value of its assets, which were non-self storage industry
assets. Party C indicated an interest
40
<PAGE>
in pursuing one of three transactions: (i) an infusion of Party C's assets or
capital into Storage Trust with a value of approximately $100 million, (ii) a
merger of Party C into Storage Trust or (iii) a tender offer for the outstanding
Storage Trust common shares and units of the Operating Partnership at a price
which Party C stated would be in excess of $25.00 per share.
The Storage Trust Board held a meeting on September 4, 1998 with its legal and
financial advisors to discuss the letters that had been received from Public
Storage and the other three parties. The Storage Trust Board noted that all
proposals received from third parties had various conditions and that the three
new proposals had all been received from private enterprises (one being a
wholly-owned subsidiary of a public company). It was determined that additional
detail and negotiations were needed with regard to each of the proposals before
such proposal could be considered by the Storage Trust Board to be a firm and
binding offer and, as a result, it was not in a position to negotiate
exclusively with any one party. The Storage Trust Board directed Merrill Lynch
to continue its discussions with each party who had expressed an indication of
interest to have each provide its best definitive offer, in terms of both value
and structure.
On September 4, 1998, Mr. Staton sent a letter to Public Storage and the other
three interested parties requesting greater specificity about any proposed
transaction with Storage Trust including: details concerning the proposed
transaction structure, any material terms and conditions of the proposal, the
treatment of employees and any further due diligence requirements. Party A
responded in writing on the same day that it was disappointed that Storage Trust
did not accept its offer and that it awaited further information from Storage
Trust's advisors on how to proceed.
On September 4, 1998, Mr. Hughes responded in writing to Mr. Staton that
although Public Storage would be pleased to address any questions Storage Trust
may have, he saw no purpose in doing so until the issue of price was resolved.
The Storage Trust Board held a meeting on September 11, 1998 with its legal and
financial advisors to discuss the status of the discussions with Public Storage,
the other three interested parties and additional parties expressing an interest
in a transaction with Storage Trust. The Storage Trust Board authorized Merrill
Lynch and Mayer, Brown & Platt to develop a form of definitive agreement to be
used by each party interested in consummating a transaction with Storage Trust.
On September 15, 1998, Merrill Lynch requested that Public Storage and other
interested parties submit proposals to Merrill Lynch concerning Storage Trust no
later than the close of business on September 21, 1998 on the form of definitive
agreement prescribed by Merrill Lynch on behalf of Storage Trust. Public Storage
again reiterated orally to Merrill Lynch that it was not prepared to discuss
other terms of a transaction until the issue of purchase price was resolved.
The Storage Trust Board held a meeting on September 18, 1998 with its legal and
financial advisors to discuss the current status of negotiations with the
parties having expressed an interest in consummating a transaction with Storage
Trust. In addition, the Storage Trust Board weighed the potential value of
consummating any of these transactions against the alternative of Storage Trust
remaining as an independent company and determined that, due to current real
estate capital market constraints, it would continue with the current
discussions with interested parties.
On September 21, 1998, Parties A and C submitted a joint proposal to acquire
Storage Trust pursuant to an all-cash tender offer. The proposal was contingent
on financing and indicated a price of $25.00 per share less various transaction
costs of unlimited amount. Party B refined its indication of interest in
pursuing a reverse acquisition. Party B proposed that the consideration for the
transaction would be 75% in shares and units of the Operating Partnership and
25% in cash. The Storage Trust common shares retained by Storage Trust
shareholders would be assigned a value of $28.00 per share and each Party B
share would be assigned a value of $24.00 per share. In addition, Party B
proposed issuing to each Storage Trust shareholder a contingent value right
which would provide that the cash consideration plus the stock consideration
(based on the trading price at the end of the 18-month period from closing)
would not be less that $25.00 per Storage Trust common share, although the
number of additional shares to be issued pursuant to the contingent value rights
was to be capped at 1.5 million Storage Trust common shares.
41
<PAGE>
On September 23, 1998, representatives of Public Storage and Merrill Lynch
discussed a possible merger of Public Storage and Storage Trust and on October
8, 1998 a representative of Merrill Lynch met with Mr. Hughes and other officers
of Public Storage to discuss various aspects of a proposed merger between Public
Storage and Storage Trust, primarily price and the form of consideration to the
Storage Trust shareholders.
The Storage Trust Board held a meeting on September 25, 1998 with its legal and
financial advisors to discuss the proposals by Public Storage and Party B and
the joint proposal by Parties A and C. The Board of Trustees had an extensive
discussion concerning the advantages and disadvantages of each proposal, which
included the financing contingency in the joint proposal by Parties A and C and
the difficulty in valuing the business and the assets being contributed in the
proposal by Party B, as well as of the prospects of Storage Trust continuing its
long-term strategy as an independent company. The discussion also focused on the
current state of the real estate capital markets. There was a consensus among
the Storage Trust Trustees that binding and final offers which do not have
contingent terms or conditions be solicited from each of the parties.
On September 28, 1998, Public Storage submitted to Storage Trust's legal
advisors its initial comments regarding the form of the definitive agreement
they were given. A response to these comments was provided to Public Storage on
October 5, 1998.
The Storage Trust Board held a meeting on October 9, 1998 with its legal and
financial advisors to discuss the status of the various proposals and it was
determined that the deterioration in the equity and debt real estate markets was
having an adverse impact on the negotiations and the price that someone would be
willing to pay to acquire Storage Trust common shares. It was concluded that
Merrill Lynch should continue to discuss proposed transactions with interested
persons but that Storage Trust must be in a position to continue its long-term
business strategy as an independent entity.
Between October 8 and November 10, 1998, representatives of Public Storage and
Merrill Lynch discussed various terms of a possible merger, primarily the
exchange ratio, whether the transaction would be structured as taxable or tax-
free to Storage Trust shareholders, the distribution level to be maintained by
Storage Trust between the signing of a merger agreement and the completion of a
merger and any adjustments in the merger consideration for any adverse
developments in Storage Trust's operations and financial condition. During this
period, Merrill Lynch was advised that Parties A and C could not remove their
financing contingency and that Party B determined to remove itself from the
process. Also during this period, counsel for Storage Trust and Public Storage
met several times to review and revise the form of merger agreement.
In the discussions on the exchange ratio, Public Storage indicated that the
exchange ratio should be based upon each company's relative net asset valuation
per common share. Public Storage presented to Merrill Lynch its calculations of
net asset values per common share for each of the companies. Based on these
calculations, Public Storage estimated that the net asset value per common share
as of September 30, 1998 was $21.90 for Storage Trust and $26.90 for Public
Storage resulting in an exchange ratio of 0.81 shares ($21.90 divided by $26.90)
of Public Storage common stock for each Storage Trust common share.
During the discussions, Public Storage indicated it would consider an exchange
ratio as high as .86 provided that (i) the transaction was structured as taxable
to Storage Trust shareholders, (ii) there would be a mechanism to reduce the
exchange ratio for adverse developments in Storage Trust's operations and
financial condition and (iii) Storage Trust would immediately reduce its
distributions.
In arriving at its determination of net asset value per common share, Public
Storage employed consistent methodologies in determining the value of each of
the companies' (i) investment in real estate facilities, including development
and expansion projects, (ii) retail merchandise operations, (iii) other assets
and liabilities (based on book values) and (iv) other contingent liabilities. In
the case of Storage Trust, such liabilities included Merrill Lynch's fee, legal
fees, earn outs and land lease buyouts, severance payments and non-vested stock
options, which upon a change of control would immediately become vested. In
addition, in the case of Public Storage, no value was attributed to its
investments in PSPUD and the Class B common shares were assumed to be converted
into Public Storage common stock.
42
<PAGE>
Public Storage also noted that its estimated 1998 payout ratio (distributions to
common shareholders divided by funds from operations per common share) was 40%
compared to 82% for Storage Trust. This relationship indicates that Public
Storage is retaining significantly more of its cash flow generated from
operations than Storage Trust. Such retained cash flow is generally used by both
companies to repay borrowings or acquire additional real estate investments.
Public Storage noted that for the period from September 30, 1998 (the date upon
which Public Storage had calculated the respective net asset values) through the
date on which the proposed merger is consummated, Public Storage would retain
significantly more operating cash flow on a per common share basis than Storage
Trust. As a result, assuming all other things being equal, Public Storage's net
asset value per common share would increase at a higher rate relative to Storage
Trust's net asset value per common share for the period from September 30, 1998
through the date of the merger.
The Storage Trust Board held a meeting on November 10, 1998 with its legal and
financial advisors to discuss the current status of the Public Storage proposal.
Merrill Lynch reported on its financial analysis of the current proposal,
including the issues it was examining in determining whether or not it would be
able to deliver a fairness opinion with respect to a transaction between Storage
Trust and Public Storage. Mayer, Brown & Platt reported on the negotiations of
definitive merger documentation and summarized the documents for the Storage
Trust Board. Finally, Merrill Lynch reported that it would be in a position to
deliver its opinion that a merger with Public Storage on the terms described in
the next sentence would be fair from a financial point of view to shareholders
of Storage Trust, other than Public Storage. Following such reports and
discussions, including a discussion of remaining as an independent company, the
Storage Trust Board moved to instruct Merrill Lynch to make a final proposal to
Public Storage of a merger on the following terms: (i) an exchange ratio of 0.86
share of Public Storage common stock for each Storage Trust common share in a
transaction structured as a tax-free merger with no post-signing adjustment for
adverse developments, (ii) Storage Trust must be permitted to declare its
customary distribution of $0.46 per share during the fourth quarter of 1998 and
(iii) beginning in the first quarter of 1999, Storage Trust would adopt Public
Storage's distribution policy, adjusted for the exchange ratio. Following the
meeting, Storage Trust's financial and legal advisors advised Public Storage
that Storage Trust was not prepared to merge with Public Storage on terms any
less favorable than those described in the previous sentence and that a response
to the proposal was required by noon the following day.
Following the discussion of Public Storage with Storage Trust's financial and
legal advisors, on November 10, 1998, the Public Storage Board met and approved
the transaction subject to negotiation of final terms in the discretion of
management. On November 11, 1998, representatives of Public Storage indicated
that Public Storage was prepared to accept Storage Trust's proposal and the
merger documentation was finalized.
The Storage Trust Board held a meeting on November 12, 1998 with its legal and
financial advisors to discuss the final terms of the proposed merger with Public
Storage. Merrill Lynch provided its oral opinion, confirmed by its written
opinion of the same date, that the exchange ratio is fair from a financial point
of view to the Storage Trust shareholders other than Public Storage. Mayer,
Brown & Platt reported that definitive merger documentation was ready for
execution. Following such reports and further discussion, the Storage Trust
Board voted unanimously to approve the proposed merger and Merger Agreement and
resolved to recommend the merger to the Storage Trust shareholders.
The Merger Agreement was executed and announced prior to the opening of trading
on the NYSE on November 12, 1998.
RECOMMENDATIONS OF THE STORAGE TRUST BOARD OF TRUSTEES; REASONS FOR THE MERGER
At a regular meeting of the Storage Trust Board on November 10, 1998 and a
special meeting of the Storage Trust Board on November 12, 1998, the Storage
Trust Board reviewed with its legal and financial advisors the terms of the
Merger Agreement, the business and prospects of Storage Trust and Public Storage
and the potential business combination of the two companies. By unanimous vote
on November 12, 1998, the Storage Trust Board determined the merger is advisable
and in the best interests of Storage Trust and its shareholders and approved the
merger and the Merger Agreement and the transactions contemplated thereby and
resolved to recommend that Storage Trust's shareholders approve the merger and
the Merger Agreement. In making its determination with respect to the merger,
the Storage Trust Board considered the following material positive factors:
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1. The merger will combine complementary assets of Storage Trust and Public
Storage, furthering the size of the nation's largest self-storage REIT
with a pro forma total market equity capitalization of approximately
$5.0 billion. The Storage Trust Board believes that the Storage Trust
shareholders will hold interests in a combined company that will have
the advantage of increased geographic diversification. Storage Trust
has an interest in 224 facilities in 16 states compared with an interest
in 1,313 facilities in 37 states for the combined company.
2. The combined company will capitalize on Public Storage's name
recognition from 25 years of operating experience and its position as
the largest operator of self-storage facilities in the United States.
The national platform furthered by the combined company, together with a
significant incremental investment in markets with good long-term growth
prospects, should provide Storage Trust shareholders with a strong
foundation for continued long-term growth in a company with the same
type of properties as Storage Trust.
3. The Storage Trust Board believes that the merger will result in improved
liquidity for Storage Trust shareholders as a result of increased total
equity capitalization of the combined company and an increased trading
volume of the securities of the combined company.
4. The combined company should have an improved credit profile, reduced
cost of capital and increased access to capital on more favorable terms
with its large market capitalization and conservative distribution
policy. Storage Trust has a total market capitalization of approximately
$600 million and a ratio of debt-to-total market capitalization at
September 30, 1998 of 32% compared with a total market capitalization of
approximately $5 billion and a ratio of debt-to-total market
capitalization at September 30, 1998 of 5.9% for the combined company.
5. The combined portfolio should benefit from Public Storage's national
telephone reservation system, presenting an opportunity for increased
revenues through higher occupancies.
6. The merger will eliminate duplicative general and administrative
expenses and should result in economies of scale and cost efficiencies
through greater critical mass for the combined company and a reduction
in a number of cost items such as yellow pages advertisements, casualty
and liability insurance, supervisory payroll and media advertising.
7. The premium that Storage Trust shareholders would receive for the
Storage Trust common shares in the merger as calculated based on the
closing prices of the Storage Trust common shares ($21.75) and the
Public Storage common stock ($26.6875) on November 11, 1998 (a premium
of approximately 5.5%).
8. The merger has been structured as tax-free to Storage Trust
shareholders.
9. The opinion, analyses and presentations of Merrill Lynch, described
below under "--Opinion of Storage Trust's Financial Advisor," including
the opinion of Merrill Lynch to the effect that, as of the date of such
opinion, and based upon and subject to certain matters stated therein,
the consideration to be received by the holders of Storage Trust common
shares pursuant to the Merger Agreement is fair, from a financial point
of view, to such holders (other than Public Storage and its affiliates).
The Storage Trust Board also considered the following potential negative
factors in its deliberations concerning the merger:
1. Because the exchange ratio is fixed, a decline in the value of Public
Storage common stock would reduce the value of the consideration to be
received by Storage Trust holders in the merger.
2. Because Public Storage currently distributes a smaller share of its
funds from operations than does Storage Trust, commencing with the first
quarter of 1999, Storage Trust shareholders would receive an immediate
reduction of 59% in their initial annual distribution rate. A portion
of the Storage Trust distribution is a return
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of capital. Public Storage intends to make a special cash distribution
after the merger in 1999 assuming a continuation of its increasing level
of taxable income.
3. The size of the transaction may make rapid integration of Storage Trust
and Public Storage difficult. Additionally, management time and
resources will be allocated to the transaction rather than to either
Public Storage's or Storage Trust's business.
4. Storage Trust shareholders will become subject to the risks of the real
estate markets in which Public Storage currently operates, but Storage
Trust does not. For example, a significant number of the Public Storage
facilities are located in California and, as a result, a downturn in the
California economy could have a disproportionate effect on the combined
company.
In view of the wide variety of factors considered by the Storage Trust Board,
the Storage Trust Board did not quantify or otherwise attempt to assign
relative weights to the specific factors considered in making its
determination. However, in the view of the Storage Trust Board, the
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by
it in its deliberations regarding the merger. In the event the merger is not
consummated, Storage Trust intends to continue its long-term business
strategy as an independent company.
OPINION OF STORAGE TRUST'S FINANCIAL ADVISOR
On August 10, 1998 Merrill Lynch was retained by Storage Trust to act as its
exclusive financial advisor in connection with the evaluation of various
strategic alternatives available to Storage Trust.
On November 12, 1998, Merrill Lynch delivered the Merrill Lynch opinion to
the Storage Trust Board stating that, as of November 12, 1998, and based upon
the assumptions made, matters considered and limits of review set forth
therein, the exchange ratio in the merger is fair, from a financial point of
view, to the holders of Storage Trust common shares, other than Public
Storage or its affiliates.
The full text of the Merrill Lynch opinion, which sets forth assumptions
made, matters considered and limits on the review undertaken, is attached to
this Proxy Statement as Annex B and is incorporated in this document by
reference. The description of the Merrill Lynch opinion set forth in this
document is qualified in its entirety by reference to the full text of the
Merrill Lynch opinion. You are urged to read the opinion in its entirety.
In the opinion of Storage Trust, no events or significant changes in
information have occurred that would alter the opinion of Merrill Lynch.
However, if such an event or change does occur, including, without
limitation, an amendment to the Merger Agreement which materially affects the
financial terms in that agreement, a revised fairness opinion may be
requested.
THE MERRILL LYNCH OPINION IS ADDRESSED TO THE STORAGE TRUST BOARD AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE
RATIO IN THE MERGER AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION BY STORAGE TRUST TO ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE,
NOR SHOULD IT BE CONSTRUED AS, A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE EXCHANGE RATIO
PURSUANT TO THE MERGER WAS DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN
STORAGE TRUST AND PUBLIC STORAGE AND WAS APPROVED BY THE STORAGE TRUST BOARD.
In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch, among other things: (i) reviewed certain publicly available business
and financial information relating to Storage Trust and Public Storage which
Merrill Lynch deemed to be relevant; (ii) reviewed certain information,
including financial forecasts, relating to the business, earnings, funds from
operations, adjusted funds from operations, cash flow, assets, liabilities
and prospects of Storage Trust and Public Storage furnished to it by Storage
Trust and Public Storage; (iii) discussed with members of Storage Trust's
senior management the reasonableness of the aggregate amount of the expected
cost savings resulting from potential synergies from the merger (the
"Expected Synergies"); (iv) conducted discussions with members of senior
management
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of Storage Trust and Public Storage concerning the matters described in
clauses (i) and (ii) above, as well as their respective businesses and
prospects; (v) reviewed the market prices and valuation multiples for the
Storage Trust common shares and Public Storage common stock and compared them
with those of certain publicly traded companies that Merrill Lynch deemed
relevant; (vi) reviewed the results of operations of Storage Trust and Public
Storage and compared them with those of certain publicly traded companies
that Merrill Lynch deemed relevant; (vii) compared the proposed financial
terms of the merger with the financial terms of certain other transactions
which Merrill Lynch deemed relevant; (viii) participated in certain
discussions and negotiations among representatives of Storage Trust and
Public Storage and their financial and legal advisors; (ix) reviewed the
potential pro forma impact of the merger; (x) reviewed a draft dated November
11, 1998 of the Merger Agreement; and (xi) reviewed such other financial
studies and analyses and took into account such other matters as Merrill
Lynch deemed necessary, including its assessment of general economic, market
and monetary conditions.
In preparing the Merrill Lynch opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly
available, and it does not assume any responsibility for independently
verifying such information or undertaking an independent evaluation or
appraisal of any of the assets or liabilities of Storage Trust or Public
Storage nor has Merrill Lynch been furnished with or undertaken any such
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of Storage Trust or Public Storage. In addition, Merrill Lynch
does not assume any obligation to conduct any physical inspection of the
properties or facilities of Storage Trust and Public Storage. With respect
to the financial forecast information furnished to or discussed with Merrill
Lynch by Storage Trust and Public Storage, Merrill Lynch assumed that they
have been reasonably prepared by Storage Trust and Public Storage, as the
case may be, and with respect to the Expected Synergies, Merrill Lynch also
assumed the reasonableness of such amounts based upon its discussions with
Storage Trust. Merrill Lynch also assumed that the final form of the Merger
Agreement was substantially similar to the last draft reviewed by it.
Merrill Lynch expresses no opinion as to the price at which Public Storage
will trade following consummation of the merger. The Merrill Lynch opinion
does not address the relative merits of the merger and alternate business
combinations with third parties.
The Merrill Lynch opinion is necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and on the
information made available to them as of, the date of the Merrill Lynch
opinion. Merrill Lynch assumed that in the course of obtaining the necessary
regulatory or other consents or approvals (contractual or otherwise) for the
merger, no restrictions, including any divestiture requirements or amendments
or modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of the merger. Merrill Lynch also assumed that the
merger will not change the REIT status of the combined company.
At the meeting of the Storage Trust Board held on November 12, 1998, Merrill
Lynch presented certain financial analyses accompanied by written materials
in connection with the delivery of the Merrill Lynch opinion. The following
is a summary of the material financial and comparative analyses performed by
Merrill Lynch in arriving at the Merrill Lynch opinion.
Valuation of Storage Trust
Historical Trading Performance and Current Capitalization. Merrill Lynch
reviewed certain trading information for Storage Trust and, on the basis
thereof, calculated its market value, market capitalization and trading
multiples based on its stock price as of November 6, 1998 of $21.88. For
this purpose, Merrill Lynch defined "total market capitalization" as market
value of the Storage Trust's common equity (including operating partnership
units) plus total debt. Merrill Lynch then calculated the market value of
Storage Trust as a multiple of projected funds from operations ("FFO") (based
on mean estimates of FFO provided by First Call, an industry service provider
of earnings estimates based on an average of earnings estimates published by
various investment banking firms) and FFO less recurring capital expenditures
("AFFO") (based on estimates of AFFO from Merrill Lynch's "Comparative
Valuation REIT Weekly" dated November 6, 1998). Storage Trust's FFO
multiples for 1998 and 1999 were 9.6x and 8.8x, respectively, and the AFFO
multiples for 1998 and 1999 were 10.2x and 9.4x, respectively.
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Merrill Lynch reviewed the terms of the proposed merger and, on the basis
thereof and using publicly available share price information for Public Storage
common stock as of November 6, 1998, calculated an aggregate net value (the "Net
Value") of $410.7 million. The Net Value consisted of $412.6 million of Storage
Trust common shares less option proceeds of $1.9 million. Using an estimation of
Storage Trust's debt balances as of October 21, 1998 provided by Storage Trust's
management, Merrill Lynch also calculated an aggregate transaction value (the
"Transaction Value") of $608.4 million which consisted of the Net Value plus
debt of $194 million. Merrill Lynch also calculated Net Value transaction
multiples based on projections provided by Storage Trust's management of its FFO
and AFFO of 10.7x and 11.2x, respectively, for 1998 and 10.1x and 10.4x,
respectively, for 1999.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from Merrill Lynch's "Comparative Valuation REIT Weekly"
dated November 6, 1998, Merrill Lynch compared certain financial and operating
information and ratios for Storage Trust with the corresponding financial and
operating information for a group of publicly traded companies engaged primarily
in the ownership, management, operation and acquisition of self storage
facilities which Merrill Lynch deemed to be reasonably comparable to Storage
Trust. For the purpose of its analyses, the following companies were used as
comparable companies to Storage Trust: Public Storage, Storage USA, Shurgard
Storage and Sovran Storage (collectively, the "Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for the
Comparable Companies and for Storage Trust as of November 6, 1998: a range of
market value as a multiple of projected 1999 FFO of 8.5x to 9.6x, with a mean of
9.2x (as compared to Storage Trust at 8.8x); and a range of market value as a
multiple of projected 1999 AFFO of 9.1x to 10.1x, with a mean of 9.7x (as
compared to Storage Trust at 9.4x). This results in a per share valuation of
between $20.66 and $23.33.
None of the Comparable Companies is, of course, identical to Storage Trust.
Accordingly, a complete analysis of the results of the foregoing calculations
cannot be limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the Comparable Companies, and other factors that could affect
the public trading value of the Comparable Companies, as well as that of Storage
Trust. In addition, the multiples of market value to estimated 1998 and
projected 1999 FFO and AFFO for the Comparable Companies are based on
projections prepared by research analysts using only publicly available
information. Accordingly, such estimates may or may not prove to be accurate.
Comparable Transactions Analysis. Merrill Lynch also compared certain financial
ratios of the merger with those of other selected mergers and strategic
transactions involving REITs which Merrill Lynch deemed to be relevant. These
transactions were the proposed acquisition of Tower Realty Trust by Reckson
Associates Realty Corp. and Crescent Real Estate Equities Company, the merger of
Kimco Realty Corp. with Price REIT, the merger of AIMCO with Ambassador
Apartments, the merger of Camden Property Trust with Oasis Residential and the
merger of United Dominion Realty with South West Property Trust.
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the premium of the implied
offer value per share relative to the acquired company's stock price on the day
before announcement of the respective transaction and the implied offer value
per share for the acquired company, as of the day before the announcement of the
respective transaction, as a multiple of the estimated FFO per share for such
company for the current year, if the deal was announced in the first half of the
year, or for the next year if the deal was announced in the second half of the
year. This analysis yielded a range of premiums of 3.4% to 10.3% with a mean of
7.7% and a range of transaction FFO multiples of 10.3x to 10.7x with a mean of
10.5x. This results in a per share valuation of between $22.62 and $24.13.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., analyses of the present value of the projected levered cash
flows for the periods using the discount rates indicated) of Storage Trust based
upon projections provided by Storage Trust's management of its FFO for the years
1999 through 2003, inclusive, using discount rates reflecting an equity cost of
capital ranging from 16.0% to 18.0% and terminal value multiples of calendar
year 2003 FFO ranging from 8.5x to 9.5x. Based upon Storage Trust's projection
of FFO per share for the years 1999
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through 2003, the range of present values per share of Storage Trust common
shares was $21.47 to $24.67 using the discounted FFO method.
Net Asset Valuation Analysis. Merrill Lynch performed a net asset valuation
for Storage Trust based on an asset-by-asset real estate valuation of Storage
Trust's facilities, an estimation of the current value for Storage Trust's
other assets and liabilities, and an estimation of Storage Trust's management
of its debt balances as of December 31, 1998. The real estate valuation
utilized property specific projections prepared by Storage Trust's management
for the calendar year 1999. For the operating portfolio of Storage Trust,
the valuation utilized the direct capitalization method on 1999 property net
operating income and a range of capitalization rates of 9.5% to 10.5%. These
calculations indicated a per share net asset valuation range for Storage
Trust of $20.18 to $23.30.
Valuation of Public Storage
Historical Trading Performance and Current Capitalization. Merrill Lynch
reviewed certain trading information for Public Storage and, on the basis
thereof, calculated its market value, market capitalization and trading
multiples based on its stock price as of November 6, 1998 of $27.81. For
this purpose, Merrill Lynch defined "total market capitalization" as market
value of Public Storage's common equity, plus preferred stock at liquidation
value plus total debt. Merrill Lynch then calculated the market value of
Public Storage as a multiple of projected FFO (based on mean estimates of FFO
provided by First Call) and AFFO (based on estimates of AFFO from analysts'
reports from Merrill Lynch's "Comparative Valuation of REIT Weekly" as of
November 6, 1998). Public Storage's FFO multiples for 1998 and 1999 were
12.5x and 10.3x, respectively, and the AFFO multiples for 1998 and 1999 were
13.2x and 10.7x, respectively.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from Merrill Lynch's "Comparative Valuation of REIT
Weekly" as of November 6, 1998, Merrill Lynch compared certain financial and
operating information and ratios for Public Storage with the corresponding
financial and operating information for a group of publicly traded companies
engaged primarily in the ownership, management, operation and acquisition of
self storage facilities which Merrill Lynch deemed to be reasonably
comparable to Public Storage. For the purpose of its analyses, Merrill Lynch
used the same Comparable Companies for Public Storage as it did for Storage
Trust, except that it substituted Storage Trust for Public Storage.
Merrill Lynch's calculations resulted in the following relevant ranges for
the Public Storage Comparable Companies and for Public Storage as of November
6, 1998: a range of market value as a multiple of projected 1999 FFO of 8.5x
to 9.6x, with a mean of 9.1x (as compared to Public Storage at 10.3x); and a
range of market value as a multiple of projected 1999 AFFO of 9.1x to 10.1x,
with a mean of 9.6x (as compared to Public Storage at 10.7x). This results
in a per share valuation of between $23.04 and $26.02.
None of the Public Storage Comparable Companies is, of course, identical to
Public Storage. Accordingly, a complete analysis of the results of the
foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgments concerning
differences in financial and operating characteristics of the Public Storage
Comparable Companies, and other factors that could affect the public trading
volume of the Public Storage Comparable Companies, as well as that of Public
Storage. In addition, the multiples of market value to estimated 1998 and
projected 1999 FFO and AFFO for the Public Storage Comparable Companies are
based on projections prepared by research analysts using only publicly
available information. Accordingly, such estimates may or may not prove to
be accurate.
Comparable Transactions Analysis. Merrill Lynch also compared certain
financial ratios of the merger with those of other selected mergers and
strategic transactions involving REITs which Merrill Lynch deemed to be
relevant. These transactions were Equity Residential Property Trust's
proposed merger with Wellsford Residential Property Trust, Camden Property
Trust's proposed merger with Paragon Group, Inc., United Dominion Realty,
Inc.'s merger with South West Property Trust Inc., the proposed acquisition
of Tower Realty Trust by Reckson Associates Realty Corp. and Crescent Real
Estate Equities Company, the merger of Kimco Realty Corp. with Price REIT,
the merger of AIMCO
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with Ambassador Apartments, the merger of Camden Property Trust with Oasis
Residential, the merger of Equity Residential with Merry Land & Invest. Co.,
the merger of New Plan Realty with Excel Realty, the merger of Security
Capital Pacific with Security Capital Atlantic, the merger of Simon DeBartolo
Group with Corporate Property Inc., the merger of Camden Property Trust with
Oasis Residential, the merger of Equity Residential with Evans Withycombe,
the merger of Equity Office Properties with Beacon Properties, the merger of
Simon DeBartolo Group with Retail Property Trust, the merger of Post
Properties with Columbus Realty Trust, the merger of Equity Residential with
Wellsford Residential, the merger of Chateau Properties with ROC Communities,
the merger of Highwoods Properties with Crocker Realty, and the merger of
Simon Property Group with DeBartolo Realty.
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the premium of the implied
offer value per share relative to the acquired company's stock price on the
day before announcement of the respective transaction and the implied offer
value per share for the acquired company, as of the day before the
announcement of the respective transaction, as a multiple of the estimated
FFO per share for such company for the current year, if the deal was
announced in the first half of the year, or for the next year if the deal was
announced in the second half of the year. This analysis yielded a range of
premiums of 3.4% to 19.5% with a mean of 9.8% and a range of transaction FFO
multiples of 10.1x to 12.3x with a mean of 10.9x. This results in a per share
valuation of between $28.76 and $33.24.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., analyses of the present value of the projected levered cash
flows for the periods using the discount rates indicated) of Public Storage
based upon projections provided by Public Storage's management of its AFFO
for the years 1999 through 2003, inclusive, using discount rates reflecting
an equity cost of capital ranging from 15.5% to 17.5% and terminal value
multiples of calendar year 2003 FFO ranging from 10.0x to 11.0x. Based upon
Public Storage's projection of FFO per share for the years 1999 through
2003, the range of present values per share of Public Storage common stock
was $26.25 to $30.01 using the discounted FFO method.
Net Asset Valuation Analysis. Merrill Lynch also performed a net asset
valuation for Public Storage based on an asset-by-asset real estate valuation
of Public Storage's facilities, an estimation of the current values for
Public Storage's other assets and liabilities, and an estimation of Public
Storage's debt balances as of June 30, 1998. The real estate valuation
utilized property specific projections prepared by Public Storage's
management for the calendar year 1999. For the operating portfolio of Public
Storage, the valuation utilized the direct capitalization method of the six
months ended June 30, 1998 annualized operating results and a range of
capitalization rates of 9.10% to 9.60%. These calculations indicated a per
share net asset valuation range for Public Storage of $24.44 to $26.19.
Pro Forma Merger Consequences
Relative Discounted Cash Flow Analysis. Merrill Lynch utilized the results
of the discounted cash flow analysis of Public Storage and Storage Trust
described above to calculate a range of implied exchange ratios based on a
comparison of the relative ranges of discounted cash flow value for Public
Storage and Storage Trust. The analysis yielded an implied exchange ratio
range of 0.715 to 0.940.
Pro Forma Combination Analysis. Merrill Lynch analyzed the pro forma effects
resulting from the merger, including the potential impact on Storage Trust's
projected stand-alone FFO per share and the anticipated accretion (i.e., the
incremental increase) to Public Storage's FFO per share resulting from the
merger. Merrill Lynch observed that, after giving effect to the Expected
Synergies, the merger would be accretive to Public Storage's projected FFO
per share in each of the years 1999 through 2003, inclusive. Merrill Lynch
also observed that the indicated annual dividend per share of Public
Storage's common stock pro forma for the merger would be $0.88 per share of
Public Storage's common stock, implying no reduction in Public Storage's
current indicated dividend rate.
Capitalization. In addition, Merrill Lynch compared Public Storage's
projected book capitalization as of December 31, 1998 to (i) its pro forma
projected book capitalization as of December 31, 1998, after giving effect to
the merger and (ii) based on projections of Public Storage's and Storage
Trust's management, Public Storage's pro forma implied market capitalization
as of December 31, 1998 after giving effect to the merger. The projected
total debt to implied market
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capitalization was 32.1%, 20.3% and 29.3% as of December 31, 1999 on a pro
forma basis and as of December 31, 2000 and December 31, 2001 on a pro forma
basis, respectively.
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
opinion. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial or summary description. Merrill Lynch
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
process underlying the Merrill Lynch opinion. In its analyses, Merrill Lynch
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
Storage Trust's, Public Storage's and Merrill Lynch's control. Any estimates
contained in Merrill Lynch's analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth in the opinion. Estimated values do not purport to be appraisals and
do not necessarily reflect the prices at which businesses or companies may be
sold in the future, and such estimates are inherently subject to uncertainty.
The Storage Trust Board selected Merrill Lynch to render a fairness opinion
because Merrill Lynch is an internationally recognized investment banking
firm with substantial experience in transactions similar to this merger and
because it is familiar with Storage Trust and its business. Merrill Lynch is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
For rendering service to Storage Trust, Storage Trust is paying to Merrill
Lynch a customary fee and has agreed to indemnify Merrill Lynch and certain
related persons against certain liabilities arising out of or in conjunction
with its rendering of services, including certain liabilities under the
federal securities laws.
Merrill Lynch may provide financial advisory and financing services to Public
Storage and Storage Trust and may receive fees for the rendering of such
services. In the ordinary course of its business, Merrill Lynch may actively
trade in the securities of Public Storage and Storage Trust for its own
account and the account of its customers and, accordingly, may at any time
hold a long or short position in such securities.
INTERESTS OF CERTAIN PARTIES
Upon consummation of the merger, Daniel Staton, currently chairman of the
Storage Trust Board, will become a member of the Public Storage Board. Other
employees and officers of Storage Trust may join Public Storage after the
merger. You should read "Risk Factors--Conflicts of Interest."
In connection with the merger and under their employment agreements, Michael
Burnam, P. Crismon Burnam, Stephen Dulle and Gregory Darus will receive
severance payments in the approximate amounts of $523,000, $496,000, $471,000
and $94,000, respectively. In addition, certain other employees are eligible
to participate in the Bonus Retention Plan and, in the aggregate, will
receive amounts totaling $416,000. You should read "The Merger Agreement--
The Bonus Retention Plan."
All outstanding Storage Trust options held by employees, trustees and
officers will fully vest and generally be cashed out when the merger is
completed. You should read "The Merger Agreement--Storage Trust Options."
Public Storage has agreed to continue indemnification to trustees and
officers of Storage Trust and to continue insurance coverage for events
occurring before the merger. You should read "The Merger Agreement--
Indemnification."
An affiliate of Public Storage has agreed to purchase the common equity
interests in Storage Realty Management Co. from Burnam Holding Companies Co.,
which is owned by certain inside trustees and officers of Storage Trust, for
a total of $25,000.
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ACCOUNTING TREATMENT
Public Storage will account for the merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16. Accordingly, Public Storage will
record the assets and liabilities acquired from Storage Trust at Public
Storage's cost (the purchase price).
RESTRICTIONS ON SALES BY AFFILIATES
The Public Storage common stock to be issued in the merger will be registered
under the Securities Act of 1933. Such securities will be freely
transferable under the Securities Act of 1933, except for those issued to any
person who may be deemed to be an affiliate (as such term is defined for
purposes of Rule 145 under the Securities Act of 1933) of Public Storage or
Storage Trust. Affiliates may not sell the Public Storage common stock
acquired in connection with the merger except pursuant to (1) an effective
registration statement under the Securities Act of 1933 covering such
securities, (2) paragraph (d) of Rule 145 or (3) any other applicable
exemption under the Securities Act of 1933. Storage Trust has agreed to use
its reasonable best efforts to procure written agreements from executive
officers and trustees containing, appropriate representations and commitments
intended to ensure compliance with the Securities Act of 1933.
FEDERAL INCOME TAX CONSEQUENCES
For a discussion of the tax consequences of the merger, you should read
"Material Federal Income Tax Consequences -- The Merger."
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THE MERGER AGREEMENT
STORAGE TRUST BOARD RECOMMENDATION
THE STORAGE TRUST BOARD OF TRUSTEES HAS UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT STORAGE TRUST SHAREHOLDERS VOTE "FOR" THE MERGER. The
affirmative vote of the holders of two-thirds of the votes entitled to be
cast by holders of Storage Trust common shares is required to approve this
proposal.
GENERAL
The Merger Agreement provides for the merger of a wholly owned subsidiary of
Public Storage with and into Storage Trust. Storage Trust will be the
surviving entity, which will then be a subsidiary of Public Storage. In the
merger, the holders of Storage Trust common shares will be issued 0.86 of a
share of Public Storage common stock for each common share of Storage Trust.
The transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes. The discussion in this Proxy Statement and
Prospectus of the Merger Agreement and the description of the material terms
of the Merger Agreement are qualified in their entirety by reference to the
Merger Agreement, a copy of which is attached to this Proxy Statement and
Prospectus as Annex A and is incorporated by reference.
EFFECTIVE TIME OF THE MERGER
Subject to the satisfaction (or waiver) of the other conditions to the
obligations of Public Storage and Storage Trust to consummate the merger, the
merger will be consummated as soon as practicable following the approval by
the Storage Trust shareholders of the merger and the Merger Agreement at the
special meeting,. It is currently expected that the merger will become
effective in the first quarter of 1999.
EXCHANGE OF STORAGE TRUST SHARE CERTIFICATES
As soon as practicable after the effective time of the merger, the exchange
agent, BankBoston N.A., will mail to each holder of an outstanding
certificate or certificates which up to that point evidenced Storage Trust
common shares:
(1) a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to such certificate will pass
only upon delivery of such certificates to the exchange agent), and
(2) instructions for use in effecting the surrender of such
certificates for the Public Storage common stock.
Upon surrender to the exchange agent of such certificates for cancellation,
together with such letter of transmittal, the holder of such certificates
shall be entitled to a certificate evidencing the number of full shares of
Public Storage common stock and the amount of cash in lieu of a fractional
share, if any, into which the aggregate number of Storage Trust common shares
previously evidenced by such certificates surrendered were converted pursuant
to the Merger Agreement. HOLDERS OF STORAGE TRUST COMMON SHARES SHOULD NOT
SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
No fractional shares of Public Storage common stock will be issued upon the
surrender of certificates evidencing Storage Trust common shares. Public
Storage will pay each former holder of Storage Trust common shares who would
otherwise be entitled to received a fractional share of Public Storage common
stock an amount in cash equal to the product obtained by multiplying (1) such
fractional share interest by (2) the closing price of a share of Public
Storage common stock on the New York Stock Exchange on the day of the
effective time of the merger.
No dividends or other distributions with respect to Public Storage common
stock with a record date after the effective time of the merger will be paid
to the holder of any unsurrendered certificate for Storage Trust common
shares and no cash in lieu of fractional shares will be paid to any such
holder until the surrender of such certificate in accordance with the
described procedures. Subject to applicable laws, Public Storage will pay
cash in lieu of fractional shares, if any, to
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any holder of a certificate evidencing Storage Trust common shares who has
surrendered the certificate. Public Storage will not pay interest on these
payments.
After the effective time of the merger, Storage Trust's stock transfer books
shall be closed and there will be no further transfer on the records of Storage
Trust of certificates evidencing Storage Trust common shares. If such
certificates are presented to Storage Trust for transfer after the transfer
books are closed, they will be canceled against delivery of certificates for
Public Storage common stock as provided above.
No interest will be paid or will accrue on any cash payable pursuant to the
Merger Agreement. All Public Storage common stock issued and all cash paid upon
the surrender of certificates evidencing Storage Trust common shares shall be
deemed to have been issued and paid in full satisfaction.
The Merger Agreement provides that at the effective time of the merger Storage
Trust's obligations with respect to outstanding options to acquire Storage Trust
common shares will cease to represent a right to acquire those shares. The plan
is outlined below in "The Merger Agreement--Storage Trust Options."
CONDITIONS TO THE MERGER
The respective obligations of Public Storage and Storage Trust to effect the
merger and the other transactions contemplated by the Merger Agreement are
subject to the satisfaction or waiver of each of the following conditions at or
prior to the effective time of the merger:
1. the shareholders of Storage Trust must have approved the merger, the
Merger Agreement and the transactions contemplated by the Merger
Agreement;
2. the Public Storage common stock issuable as a result of the merger
must have been approved for listing on the New York Stock Exchange and
the Pacific Exchange, subject to official notice of issuance;
3. the registration statement of which this Proxy Statement and
Prospectus is a part must have become effective in accordance with the
Securities Act of 1933, and must not be the subject of any stop order
or proceedings by the Securities and Exchange Commission seeking a
stop order;
4. no temporary restraining order, preliminary or permanent injunction or
other order or decree by any court of competent jurisdiction which
prevents the consummation of the merger may be in effect;
5. Public Storage and Storage Trust must each have performed in all
material respects its respective obligations contained in the Merger
Agreement required to be performed on or prior to the closing of the
merger and the representations and warranties of each party must be
true and correct on and as of the date made and the date of the
closing of the merger and each party shall provide a certificate
confirming those matters;
6. Public Storage must have received an opinion from Mayer, Brown & Platt
that (i) Storage Trust is organized and has operated in conformity
with the requirements for qualification as a REIT under the Internal
Revenue Code and (ii) Storage Trust Properties, L.P. is treated for
United States federal income tax purposes as a partnership, and not as
a corporation or association taxable as a corporation;
7. Public Storage must have received an opinion from A. Timothy Scott to
the effect that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code;
8. Public Storage and Storage Trust must have received all required
consents and waivers from third parties;
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9. Storage Trust must have received an opinion from a nationally
recognized law firm that Public Storage is organized and has operated
in conformity with the requirements for qualification as a REIT under
the Internal Revenue Code; and
10. Storage Trust must have received an opinion from Mayer, Brown & Platt
to the effect that the merger will qualify as a reorganization under
Section 368(a) of the Internal Revenue Code.
STORAGE TRUST OPTIONS
At least twenty (20) days prior to the effective time of the merger, Public
Storage must elect one of the two alternatives described below regarding
outstanding options under Storage Trust's 1994 Share Incentive Plan (the
"Storage Trust Stock Option Plan"). For purposes of this section, each option to
purchase units of limited partnership interest in the Operating Partnership is
deemed to be an option to purchase Storage Trust common shares. The two
alternatives are as follows:
1. Storage Trust must take all actions necessary to provide that all
outstanding options are fully exercisable and vested immediately prior
to the effective time of the merger. All options shall then be
canceled, and Storage Trust shall pay to each holder of options cash
equal to the product of (i) the excess, if any, of the closing price
of the Storage Trust common shares over the exercise price per share
of the option and (ii) the number of Storage Trust common shares which
would have been issuable pursuant to such options. Should this
alternative be determined to cause an individual to be subject to the
profit recovery provisions of Section 16 of the Securities Exchange
Act of 1934, and if the individual agrees, the option may be canceled
immediately prior to the effective time or at some later time as may
be necessary to avoid application of such profit recovery provisions
and such individual will be entitled to receive from Storage Trust
cash equal to the product of (x) the excess, if any, of the closing
price of Storage Trust common shares over the exercise price per share
of the option and (y) the number of Storage Trust common shares which
would have been issuable pursuant to such option immediately prior to
the effective time. For this purpose, the closing price is the closing
price of a Storage Trust common share, reported as "New York Stock
Exchange Composite Transactions" by The Wall Street Journal (Midwest
Edition) for the twenty (20) trading days ending on the third trading
day immediately prior to the effective date of the merger. A trading
day is any day on which such shares are traded on the NYSE.
2. If requested by Public Storage, Storage Trust will take reasonable
steps to seek to cause each option to be amended, with the consent of
the holder, to:
(i) adjust the number of shares for which such option is
exercisable by multiplying the number of shares by 0.86,
(ii) adjust the per share exercise price by dividing such exercise
price by 0.86,
(iii) provide that such option shall be exercisable for Public
Storage common shares, and
(iv) eliminate any dividend equivalent rights or distribution
equivalent rights.
Each option will become fully exercisable and vested immediately prior to the
effective time of the merger. If one or more holders do not provide such
consent, Storage Trust will follow the procedures outlined in (1) above with
respect to each option that has not been amended prior to the effective time of
the merger to be exercisable for Public Storage common shares. Storage Trust
will use its reasonable efforts in seeking such consents from the option
holders. However, the ability to obtain any such consents is not a condition to
closing the merger.
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In the event that Public Storage elects alternative (2) above, the Storage
Trust Stock Option Plan will remain in effect with respect to options that
remain outstanding after the effective time of the merger. Public Storage
will not, however, make additional grants of options under the Storage
Trust Stock Option Plan. Public Storage agrees to register the shares
subject to the Storage Trust Stock Option Plan on a registration statement
on Form S-8 filed with the Commission as soon as practicable following the
effective time of the merger.
The Retention Bonus Plan
Certain Storage Trust employees, other than employees who have written
employment agreements, severance or retention agreements, are part of a
Retention Bonus Plan. Each participant in the plan is entitled to a bonus in an
amount determined by a committee appointed by Storage Trust if such person is
employed by Storage Trust through the effective time of the merger. The bonus
will be paid in a lump sum cash payment. The total amount payable under the
Retention Bonus Plan, together with all severance amounts payable under written
employment or other agreements, cannot exceed $2.0 million.
Representations and Warranties
The Merger Agreement contains various customary representations and warranties
relating to, among other things:
1. the due organization, power, authority and good standing of Public
Storage, Storage Trust and each party's subsidiaries and similar
corporate matters;
2. the capital structure of Public Storage and Storage Trust and the
Operating Partnership;
3. the existence of interests in other entities and properties owned by
Storage Trust;
4. the requirements of third parties' consents to the merger;
5. certain documents filed by Storage Trust and Public Storage with the
Commission and certain financial statements of Public Storage and
Storage Trust and the accuracy of the information contained in these
statements;
6. the absence of certain changes or events from the information filed by
Public Storage and Storage Trust with the Commission or from such
financial statements of Public Storage and Storage Trust and the
absence of undisclosed liabilities;
7. certain matters relating to litigation;
8. certain matters relating to properties;
9. certain matters relating to the environment;
10. certain matters relating to related party transactions and payments to
employees, officers, trustees or directors;
11. certain matters relating to Storage Trust's employee benefit plans and
any other employee matters;
12. certain matters relating to taxes; and
13. the accuracy of the information supplied by each party for inclusion
in this Proxy Statement and Prospectus.
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CERTAIN COVENANTS
Conduct of Business Prior to Merger
Except as specifically required by the terms of the Merger Agreement or upon
written consent of the other party, Public Storage and Storage Trust have agreed
that they will, prior to the effective time of the merger, carry on their
respective businesses in the usual, regular and ordinary course, consistent with
past practice and they will use their reasonable best efforts to preserve intact
their current business organizations and preserve their relationships with
lessees.
In addition, except as contemplated by the Merger Agreement, unless the other
party has agreed in writing, Public Storage and Storage Trust have each agreed
that they and their respective subsidiaries will:
1. use their reasonable efforts to preserve their business organizations
and goodwill and keep available the services of their officers and
employees;
2. confer upon reasonable request with one or more representatives of the
other party to report material operational matters;
3. promptly notify the other party of any material emergency, of any
material adverse change in its business or of any material
governmental complaints, investigations or hearings;
4. promptly deliver to the other true and correct copies of any report,
statement or schedule filed with the Commission;
5. maintain their books and records in accordance with GAAP consistently
applied and not change in any material manner any methods, principles
or practices of accounting, except as may be required by the
Commission, applicable law or GAAP;
6. duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities
(except permitted extensions which do not adversely affect REIT
status); and
7. continue to qualify as a REIT prior to the effective time and not
enter into any prohibited transaction as defined in Section 857(b)(6)
of the Internal Revenue Code.
In addition, Storage Trust agrees that it and its subsidiaries will:
1. not make or rescind any express or deemed tax election (unless
required by law or necessary to preserve REIT status);
2. other than in connection with certain development agreements and
binding contracts, not enter into any option to acquire, or exercise
an option or contract to acquire, additional real property, incur
additional indebtedness except for working capital under its revolving
line(s) of credit such that the outstanding borrowings under the
revolving line(s) of credit do not exceed $115,000,000 in the
aggregate, exercise its option to increase its revolving line of
credit without providing reasonable prior notice to Public Storage,
renew any borrowings under its revolving line(s) of credit for a
period of time other than the shortest permissible renewal period,
encumber assets or commence construction of, or enter into any
agreement or commitment to develop or construct other real estate
projects;
3. not amend its Declaration of Trust, by-laws, code of regulations or
partnership agreement or comparable organization documents of any
subsidiary without Public Storage's prior written consent, which shall
not be unreasonably withheld or delayed;
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4. not change its capital structure, other than pursuant to (i) previous
agreements; (ii) the conversion of any outstanding units, in
accordance with the terms of those units; (iii) the Storage Trust
Dividend Reinvestment Plan with respect to common shares Storage Trust
is committed to issue; and (iv) Storage Trust Stock Option Plan;
5. not grant options (including any options under the Storage Trust Stock
Option Plan) or other rights or commitments relating to its common
shares;
6. not (i) authorize any dividend or make any other distribution or
payment with respect to any shares of its beneficial interest, or (ii)
directly or indirectly acquire any common shares, except for dividend
payments as otherwise provided under the Merger Agreement;
7. not dispose of any property, except in the ordinary course of
business;
8. not make any loans, advances or capital contributions to, or
investments in, any other person, other than subsidiaries in the
ordinary course of business consistent with prior practice;
9. not satisfy any material claims, liabilities or obligations, other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice, or in accordance with their
terms;
10. not enter into any commitment, contractual obligation, capital
expenditure or transaction which may result in total payments in
excess of $50,000 or aggregate commitments in excess of $400,000
(other than the renewal of its insurance policies in the ordinary
course of business after providing reasonable prior notice to Public
Storage of such renewal), except in certain limited circumstances;
11. not guarantee the indebtedness of another person, except with respect
to subsidiaries;
12. not enter into or amend any agreements or arrangements with any
consultants or affiliates in an aggregate amount in excess of
$100,000;
13. except as provided in the Retention Bonus Program, not increase any
compensation other than pursuant to previous employment agreements or,
other than in the ordinary course of business consistent with past
practice, (i) enter into or amend any employment agreement with
current employees, other than waivers by employees of benefits under
such agreements, or (ii) enter into any employment agreement with any
other person not currently an employee, provided that any such
agreement or arrangement is terminable at will by Storage Trust;
14. not adopt any new employee benefit plan or amend any existing plans,
except for changes which are required by law and changes which are not
more favorable to participants than provisions presently in effect,
except in certain limited circumstances;
15. not change the ownership of any of its subsidiaries;
16. not accept a promissory note in payment of the exercise price payable
under any option to purchase Storage Trust common shares;
17. not enter into or amend any agreement with affiliates, officers,
directors or employees;
18. not merge, acquire substantially all of the assets of or acquire the
beneficial ownership of a majority of the outstanding equity interests
in any person or entity; and
19. suspend the Storage Trust Dividend Reinvestment Plan.
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Other
Public Storage and Storage Trust have agreed that:
1. Public Storage shall take any action required to be taken under
applicable state blue sky or securities laws in connection with the
merger;
2. as soon as practicable following the date upon which Public Storage's
registration statement is declared effective by the Commission,
Storage Trust will use its reasonable best efforts to obtain the
approval of its shareholders required by the Merger Agreement; and
3. they will cooperate and use their respective best efforts to cause to
be done, all things necessary or advisable to consummate the
transactions contemplated by the Merger Agreement, including using
their reasonable best efforts to identify and obtain all necessary or
appropriate waivers, consents and approvals, to effect all necessary
registrations and filings and to lift any injunction or other legal
bar to the transactions contemplated by the Merger Agreement.
Storage Trust also agreed to use its reasonable best efforts to take such
actions as may be reasonably requested by Public Storage to facilitate decisions
and subsequent actions by Public Storage to terminate or transition any of
Storage Trust's benefit plans, stock option plans and similar matters,
including, without limitation, appropriate amendment of the Storage Trust stock
option plans.
DISTRIBUTIONS
On January 15, 1999, a dividend of $0.46 per Storage Trust common share will be
paid to Storage Trust shareholders as of December 15, 1998. Thereafter, Storage
Trust will adopt Public Storage's distribution policy, adjusted for the exchange
ratio. After the effective time of the merger, Public Storage intends to
maintain its current quarterly distribution policy and to pay stated quarterly
distributions on the shares of Public Storage common stock issued in the merger,
subject to authorization by the Public Storage Board and the availability of
funds for that purpose. Storage Trust and Public Storage will coordinate the
payment of distributions for each quarter of 1999 so that no Storage Trust
shareholder will receive two distributions or fail to receive one distribution,
for any quarter.
NO SOLICITATION OF TRANSACTIONS
Neither Storage Trust, any of its respective subsidiaries, its officers, its
trustees, its employees, its agents or its financial advisor may directly or
indirectly:
initiate, solicit or encourage proposals (including to its shareholders)
relating to any merger, acquisition, tender offer, exchange offer,
consolidation, sale of assets or similar transaction involving all or any
significant portion of the assets or any equity securities of Storage Trust
or its subsidiaries, other than the transactions contemplated by the Merger
Agreement, or engage in any negotiations or discussions, or provide any
confidential information or data to, any person relating to such an
acquisition proposal.
In addition, Storage Trust will immediately cease any existing activities,
discussions or negotiations with any third parties conducted prior to the
signing of the Merger Agreement and will inform those parties of the prohibition
against solicitation. Storage Trust will also notify Public Storage immediately
if it receives any inquiries or proposals, or requests for information, or if
negotiations or discussions are sought to be initiated or to be continued.
However, the foregoing does not prohibit Storage Trust from:
1. furnishing information concerning Storage Trust and its businesses or
assets (pursuant to an appropriate confidentiality agreement which the
Storage Trust Board determines in good faith is
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required to comply with its duties under applicable law) to a third
party who has made an unsolicited alternative proposal,
2. entering into discussions or negotiations with a third party who has
made an unsolicited alternative proposal,
3. following receipt of an unsolicited alternative proposal, taking and
disclosing to its shareholders a position contemplated by Rule 14e-
2(a) or Rule 14d-9 under the Securities Exchange Act of 1934 or
otherwise making disclosure to its shareholders, and
4. following approval and recommendation of an acquisition proposal that
the Storage Trust Board in good faith determines to be more favorable
from a financial point of view to the shareholders than the merger and
which the Board determines is reasonably capable of being consummated,
withdrawing or modifying the Board's recommendation in favor of the
Merger Agreement and the transactions contemplated thereby,
but in each case referred to in clauses (1) through (4) above only if and to the
extent that the Storage Trust Board has concluded in good faith that such action
is appropriate for the Board to comply with its duties under applicable law. In
addition, prior to furnishing information to, or entering into discussions or
negotiations with, such third party, Storage Trust provides written notice to
Public Storage that it will furnish such information or enter into such
discussions and Storage Trust must inform Public Storage of the status of such
discussions or negotiations, subject to any confidentiality agreement.
TERMINATION
The Merger Agreement may be terminated at any time prior to the filing of
Articles of Merger with the State Department of Assessments and Taxation of
Maryland, whether before or after approval by the shareholders of Storage Trust,
under the following circumstances:
(1) by mutual written consent of Public Storage and Storage Trust duly
authorized by the Storage Trust Board and the Public Storage Board;
(2) by Public Storage or Storage Trust, if the merger has not been
consummated by June 30, 1999; provided that the terminating party did
not materially breach its obligations in a manner which contributed to
the merger not being consummated at that time;
(3) by Public Storage or Storage Trust, if any judgment, injunction,
order, decree or action preventing the consummation of the merger has
become final and nonappealable;
(4) unilaterally by either Public Storage or Storage Trust if the other
party breaches any representation, warranty, covenant, obligation or
agreement in all material respects, such that the condition to provide
a certificate as to compliance with such matters cannot be satisfied
prior to June 30, 1999;
(5) by either Public Storage or Storage Trust if the Storage Trust
shareholder approvals have not been obtained; and
(6) by Storage Trust or Public Storage, if prior to the shareholders
meeting, the Storage Trust Board shall have withdrawn or modified its
approval of the merger or the Merger Agreement in connection with a
superior acquisition proposal.
BREAK-UP PAYMENT
If the Merger Agreement is terminated:
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(1) because the Storage Trust Board withdrew its recommendation following
its approval of a superior acquisition proposal, then Storage Trust
must pay Public Storage (provided Storage Trust was not entitled to
terminate the agreement due to a breach by Public Storage) a fee equal
to $12 million plus the lesser amount of (x) $500,000 and (y) out-of-
pocket expenses, including, without limitation, all attorneys'
(including in-house counsel), accountants' and investment bankers'
fees and expenses ("Break-Up Expenses");
(2) because of a material breach by Storage Trust, and at the time of the
termination Storage Trust has received an acquisition proposal and
within 12 months after the breach Storage Trust enters into a written
agreement relating to an acquisition proposal which is subsequently
consummated, then Storage Trust must pay Public Storage (provided
Storage Trust was not entitled to terminate due to a breach by Public
Storage) an amount equal to $12 million plus Break-Up Expenses (less
any Break-Up Expenses previously paid);
(3) because of a material breach by Storage Trust, then Storage Trust must
pay Public Storage an amount equal to the Break-Up Expenses;
(4) because the Storage Trust shareholder approvals were not obtained
(provided Storage Trust was not entitled to terminate this Agreement
due to a breach by Public Storage) an amount equal to the Break-Up
Expenses, provided the closing price of Public Storage common shares
over the twenty trading days ending on the third trading day
immediately prior to the shareholder vote was equal to or greater than
$26.50; and
(5) because of a breach by Public Storage, Public Storage will pay Storage
Trust (provided Public Storage was not entitled to terminate due to a
breach by Storage Trust) an amount equal to the Break-Up Expenses.
Any payment of $12 million to Public Storage shall be compensation and
liquidated damages for the loss suffered by Public Storage as a result of the
failure of the merger to be consummated. Any payment shall be paid within
fifteen (15) days after any terminating event.
To the extent that the right to receive a termination fee in a taxable year
would create excessive bad income for REIT purposes for the recipient, the right
to receive the portion that would create bad income shall be deferred, or
potentially extinguished. Bad income is created when a payment would cause the
payee to violate for that taxable year either the 75% or 95% gross income tests
described in Sections 856(c)(2) or 856(c)(3) of the Internal Revenue Code.
Any amount deferred in a particular taxable year shall become payable in the
next succeeding year(s), but only to the extent that it would not then create
bad income. To the extent that any deferred amount would continue to create bad
income after it has been carried forward for seven years (applying first in,
first out principles), that portion shall no longer be an obligation of the
payor. Payments that would otherwise be bad income shall be made if the payee
obtains an opinion of tax counsel or a private ruling from the IRS that the
receipt of such excess amounts would not adversely affect the payee's ability to
qualify as a REIT. If a payment is inadvertently made in an amount in excess of
the limitations set forth above, such excess payments shall be treated as a loan
from the payor to the payee, to be repaid as soon as practicable following
discovery of the overpayment.
INDEMNIFICATION
Public Storage has agreed to provide indemnification and exculpation from
liabilities or acts or omissions occurring at or prior to the effective time of
the merger in favor of the current or former trustees or officers of Storage
Trust and its subsidiaries as provided in their organizational documents and any
indemnification agreements or arrangements of Storage Trust and its subsidiaries
will survive the merger. Public Storage will maintain liability insurance
(covering Storage Trust's trustees and officers) for six years after the
effective time. This insurance will provide a coverage
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amount and other terms and conditions no less favorable to the indemnified
parties than under Storage Trust's current policy.
AMENDMENT AND WAIVER
The Merger Agreement may not be amended except in writing signed by both the
Board of Directors of Public Storage and the Board of Trustees of Storage Trust.
The Merger Agreement may not be amended in any respect requiring further
approval of the shareholders following initial approval by Storage Trust
shareholders unless further approval is obtained. At any time prior to the
closing, Public Storage or Storage Trust may:
(1) extend the time for the performance of any of the obligations of the
other party,
(2) waive any inaccuracies in the representations and warranties contained
in the agreement or in any other document delivered, and
(3) subject to the amendment provision, waive compliance with any of the
agreements or conditions.
Any agreement on the part of a party to any such extension or waiver shall be
valid only if set forth in a writing signed by that party.
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THE SPECIAL MEETING OF STORAGE TRUST SHAREHOLDERS
Purpose of the Meeting
At the Storage Trust special meeting, the holders of Storage Trust common shares
will be asked to consider and vote upon a proposal to approve the merger and the
Merger Agreement. You can find a copy of the Merger Agreement as Annex A to this
Proxy Statement and Prospectus.
Date, Time and Place; Record Date
The Storage Trust special meeting is scheduled to be held on ,
, 1999, at __________________________, _______________, ________,
_________.
The Storage Trust Board has fixed the close of business on _________, 1999 as
the record date for the determination of holders of Storage Trust Common shares
entitled to notice of and to vote at the Storage Trust special meeting. As of
the date of this document there were 150,000,000 authorized common shares of
Storage Trust, of which 16,076,291 common shares were issued and outstanding and
_______ were owned by trustees, executive officers and their affiliates of
Storage Trust.
Voting Rights
Assuming the existence of a quorum, the affirmative vote of the holders of at
least two-thirds of the votes entitled to be cast by holders of Storage Trust
common shares is required to approve the merger and the Merger Agreement.
Holders of record of Storage Trust common shares on the Storage Trust record
date are entitled to one (1) vote per Storage Trust common share at the Storage
Trust special meeting. The presence, either in person or by proxy, of the
holders of a majority of the votes entitled to be cast by holders of Storage
Trust common shares is necessary to constitute a quorum at the Storage Trust
special meeting.
If a shareholder attends the Storage Trust special meeting, he or she may vote
by ballot. However, since many shareholders may be unable to attend the Storage
Trust special meeting, the Storage Trust Board is soliciting proxies so that
each holder of Storage Trust common shares on the Storage Trust record date has
the opportunity to vote on the proposals to be considered at the Storage Trust
special meeting. When a proxy card is returned properly signed and dated, the
Storage Trust common shares represented thereby will be voted in accordance with
the instructions on the proxy card. If a shareholder does not return a signed
proxy card, his or her Storage Trust common shares will not be voted and thus
will have the effect of a vote "against" the merger and the Merger Agreement.
Similarly, broker non-votes and abstentions have the effect of a vote "against"
the merger and the Merger Agreement. Shareholders are urged to mark the box on
the proxy card to indicate how their Storage Trust common shares are to be
voted. If a shareholder returns a signed proxy card, but does not indicate how
his or her Storage Trust common shares are to be voted, the Storage Trust common
shares represented by the proxy card will be voted "FOR" the merger and the
Merger Agreement. The proxy card also confers discretionary authority on the
individuals appointed by the Storage Trust Board and named on the proxy card to
vote those Storage Trust common shares represented on any other matter that is
properly presented for action at the Storage Trust special meeting. Such
discretionary authority will not be used to vote for adjournment of the Storage
Trust special meeting to permit further solicitation of proxies if the
shareholder votes against any proposal.
Any Storage Trust shareholder who executes and returns a proxy card may revoke
such proxy at any time before it is voted by :
(1) notifying the Secretary of Storage Trust in writing at 2407 Rangeline
Street, Columbia, Missouri 65202,
(2) granting a subsequent proxy, or
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(3) appearing in person and voting at the Storage Trust special meeting.
Attendance at the Storage Trust special meeting will not in and of itself
constitute revocation of a proxy.
Other Matters
Storage Trust is not aware of any business or matter other than those indicated
above which may be properly presented at the Storage Trust special meeting. If,
however, any other matter properly comes before the Storage Trust special
meeting, the proxy holders will, in their discretion, vote on such matter in
accordance with their best judgment.
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COMPARISON OF SHAREHOLDER RIGHTS
Public Storage is organized as a corporation under the laws of the State of
California, and Storage Trust is organized as a REIT under the laws of the State
of Maryland. As a California corporation, Public Storage is subject to the
General Corporation Law of California (the "California Act"), which is a general
corporation statute dealing with a wide variety of matters, including election,
tenure, duties, liabilities and indemnification of directors and officers,
dividends and other distributions, meeting and voting rights of shareholders,
and extraordinary actions, such as amendments to the charter, mergers, sales of
all or substantially all of the assets and dissolution. As a Maryland REIT,
Storage Trust is governed by Title 8 of the Maryland General Corporation Law
(the "MGCL") relating to real estate investment trusts (the "Maryland REIT Law")
and certain other provisions of the MGCL. The Maryland REIT Law covers some of
the same matters covered by the California Act, including liabilities of the
trust, shareholders, trustees and officers, amendment of the declaration of
trust, and mergers of a Maryland REIT with other entities. The Maryland REIT Law
specifically incorporates certain provisions of the MGCL, which governs
corporations organized under the laws of Maryland. There are many matters that
are addressed in the California Act that are not dealt with in the Maryland REIT
Law, and it is the general practice of Maryland REITs to address some of these
matters through provisions in the declaration of trust.
Certain differences between (1) the California Act and the Maryland REIT Law and
(2) the Public Storage Restated Articles of Incorporation, as amended (the
"Public Storage Articles") and bylaws and the Storage Trust Second Amended and
Restated Declaration of Trust (the "Storage Trust Declaration") and bylaws are
discussed below. However, the discussion of the comparative rights of
shareholders of Public Storage and shareholders of Storage Trust set forth below
does not purport to be complete and is subject to and qualified in its entirely
by reference to the California Act and the Maryland REIT Law and also to the
Public Storage Articles and bylaws and to the Storage Trust Declaration and
bylaws. Copies of the Public Storage Articles and bylaws have been filed as
exhibits to the registration statement filed by Public Storage of which this
Proxy Statement and Prospectus is a part.
Storage Trust (Maryland) Public Storage (California)
------------------------ ---------------------------
Authorized Shares
Under the Storage Trust Declaration, The Public Storage Articles authorize
the number of shares of beneficial the issuance of 200,000,000 shares of
interest of Storage Trust authorized Public Storage common stock, 7,000,000
for issuance is 150,000,000, par shares of Class B common stock,
value $0.01 per share. Under the 50,000,000 shares of preferred stock
Storage Trust Declaration, the and 200,000,000 shares of equity stock.
Storage Trust Board, by two-thirds The Public Storage Articles provide
vote, may amend the Storage Trust that the preferred stock and equity
Declaration, without the consent of stock may be issued from time to time
the shareholders of Storage Trust, in one or more series and give the
to qualify as a real estate Public Storage Board broad authority to
investment trust under Maryland REIT fix the dividend rights, conversion and
Law. The Storage Trust Declaration voting rights, redemption provisions
provides further that the Storage and liquidation preferences, if any, of
Trust Board may classify or each series of preferred and equity
reclassify any unissued shares from stock. Any increase in the aggregate
time to time by setting or changing number of shares which Public Storage
the preferences, conversion or other has the authority to issue would
rights, voting powers, restrictions, require an amendment to the Public
limitations as to dividends, Storage Articles which must first be
qualifications, or terms or approved by Public Storage's
conditions of redemption. To date, shareholders. See "Description of
the Storage Trust Board has Public Storage Capital Stock" for
classified 150,000 shares of information on Public Storage's
beneficial interest as Series A outstanding capital stock.
Junior Participating Preferred
Shares (none of which are issued and
outstanding).
Special Meetings of Shareholders
The Storage Trust Declaration The Public Storage bylaws provide that
provides that a majority of the the Public Storage Board, the Chairman
trustees, a majority of the of the Board or the President may call
Independent Trustees (as defined in a special meeting of Public Storage's
the Storage Trust Declaration) or shareholders. The Public Storage bylaws
any executive officer of Storage provide that a special meeting must be
Trust may call a special meeting called at the
of Storage Trust's shareholders and
a special
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meeting must be called at the written request of shareholders
written request of not less than 10% entitled to cast 10% of all the votes
of the shareholders entitled to vote. entitled to be cast at the meeting.
Limitation of Personal Liability of
Directors/Trustees
The Maryland REIT Law provides that As permitted by the California Act,
a Maryland REIT's charter may include the Public Storage Articles limit a
a provision eliminating or limiting director's liability for monetary
the personal liability of a director damages to Public Storage or its
or officer to the corporation or its shareholders for breach of the
stockholders for any money damages director's duty of care, where a
except (1) to the extent that it is director fails to exercise
proved that the person actually sufficient care in carrying out the
received an improper benefit or profit responsibilities of office. Those
in money, property or services, for provisions would not protect a
the amount of the benefit or profit in director who knowingly did something
money, property, or services actually wrong, or otherwise acted in bad
received or (2) to the extent that a faith, nor would they foreclose any
court finds that the person's action, other remedy which might be available
or failure to act, was the result of to Public Storage or its shareholders,
active and deliberate dishonesty and such as the availability of
was material to the cause of action non-monetary relief.
adjudicated in the proceeding. The
Storage Trust Declaration provides
that, to the maximum extent permitted
by Maryland law, its trustees and
officers have no personal liability to
Storage Trust or its shareholders for
money damages.
Classified Board of Directors/Trustees
Under the Storage Trust Declaration, Under the Public Storage Articles and
the Storage Trust Board may be bylaws, the Public Storage Board is
comprised of between three and 15 comprised of between five and nine
trustees with the actual number being directors (the actual number being
determined by the Storage Trust Board. determined by the Public Storage
The Storage Trust Board is divided Board or the shareholders), each of
into three classes, each consisting, whom must stand for election at each
as nearly as possible, of one-third annual meeting of shareholders.
of the total number of trustees. The
trustees of each class serve for
three years with one class standing
for election each year. Each trustee
holds office until the annual meeting
for the year in which his term
expires.
Election of Directors/Trustees
The Storage Trust Declaration provides With respect to the election of
that each shareholder may vote the directors, each holder of Public
number of shares owned by him for each Storage common stock is entitled to
vacancy of trustees to be filled. cast as many votes as there are
There is no cumulative voting. directors to be elected multiplied
by the number of shares registered
in the shareholder's name. The
shareholder may cumulate votes for
directors by casting all votes for one
candidate or by distributing his or her
votes among some or all of the
candidates.
Removal of Directors/Trustees
Maryland REIT Law provides that unless The California Act permits a director
the declaration of trust provides to be removed by the shareholders with
otherwise, the shareholders of a or without cause subject to provisions
Maryland REIT may remove any trustee, designed to protect shareholders' right
with or without cause, by the to cumulate votes for directors.
affirmative vote of a majority of all
of the votes entitled to be cast for
the election of trustees. The Storage
Trust Declaration provides that
trustees may be removed at any time,
by
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the affirmative vote of two-thirds of
the outstanding shares (which action
shall only be taken by vote at a
meeting).
Standard of Conduct for Directors/
Trustees
The Maryland REIT Law contains no The California Act requires a director
statutory standard of conduct for of a California corporation to perform
trustees of a Maryland REIT. It is his or her duties as a director in
possible that Maryland courts would good faith, in a manner believed to be
look, by analogy, to the MGCL, which in the best interests of the
contains a provision concerning corporation and its shareholders with
standards of conduct of directors of the care, including reasonable
Maryland corporations. The MGCL inquiry, as an ordinarily prudent
requires a director of a Maryland person in a like position would use
corporation to perform his or her under similar circumstances.
duties in good faith, with a
reasonable belief that his or her
actions are in the best interest of
the corporation and with the care of
an ordinarily prudent person in a
like position under similar
circumstances.
Board Committees
The Maryland REIT Law contains no The California Act permits the board
provision for or limitation on the of a California corporation to
composition of or delegation of delegate to a committee of two or more
powers to committees of the board of directors any of its powers except the
trustees of a Maryland REIT. Under power to approve any action which also
the Storage Trust Declaration, the requires shareholder approval, fill
Storage Trust Board may designate vacancies on the board or on a
one or more committees which shall committee of directors, fix the
consist of one or more trustees. Such compensation of directors, amend
committees shall have and may bylaws or approve dividends, except at
exercise such powers as shall be a previously-prescribed rate.
conferred or authorized by the
resolution of the Storage Trust Board
appointing them.
Amendment of Storage Trust
Declaration or the Public Storage
Articles
The Maryland REIT Law requires the The California Act requires the
approval of shareholders of a approval of shareholders of a
Maryland REIT for any amendment to California corporation for any
the declaration of trust, with certain amendment to the articles of
exceptions. As permitted by the incorporation, except that certain
Maryland REIT Law, the Storage Trust immaterial amendments specified in
Declaration permits the Storage Trust the California Act may be made by the
Board, by a two-thirds vote, to amend board of directors. Unless a specific
the Storage Trust Declaration to section of the California Act or a
qualify as a real estate investment California corporation's articles of
trust under the Internal Revenue Code incorporation require a greater vote,
or under the Maryland REIT Law. In an amendment to a California
addition, as permitted by the Maryland corporation's articles of
REIT Law, the Storage Trust incorporation generally must be
Declaration provides that, except as approved by a majority of the votes
specifically provided otherwise, an cast on the amendment. The Public
amendment to Storage Trust Declaration Storage Articles do not include any
must be approved by a majority of the provision requiring greater than a
shareholders entitled to vote thereon. majority of votes for amendment.
Shareholder Inspection of Books and
Records
Under the Maryland REIT Law, any Under the California Act, a
shareholder of a real estate investment shareholder is entitled to inspect
trust may inspect and copy the bylaws the bylaws of the corporation during
of the trust, minutes of proceedings of business hours. In addition, a
shareholders, annual statements of shareholder is entitled, upon
affairs of the trust and voting trust written demand, to inspect and copy
agreements. In addition, any the record of shareholders, the
shareholder, or group of shareholders, accounting books and records and
of record of the trust who has owned at minutes of proceedings of the
least five percent of the outstanding shareholders and the board of
shares of any class of beneficial directors and any committee of the
interest for at least six months is board of directors, at any time
entitled to inspect and copy the during usual business hours, for a
purpose reasonably related to his or
her interest as a
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trust's books of account and share shareholder. The Public Storage
ledger and to require the trust to bylaws permit any shareholder the
prepare and deliver a verified right to inspect and copy the books
statement of the affairs of the trust and records of the corporation to
and a verified list of the name and the extent and on the conditions
address of, and the number of shares specified by the California Act.
owned by, each shareholder of the
trust. The Storage Trust Declaration
permits any shareholder the right to
inspect and copy the books and
records of the trust to the extent
and on the conditions specified by
Maryland REIT Law.
Dividends and Other Distributions
The Maryland REIT Law contains no Under the California Act, Public
limitations on the payment of Storage may pay distributions (1)
dividends or other distributions by if the amount of its retained
a Maryland REIT. The Storage Trust earnings is at least equal to the
bylaws provide that the trustees, amount of distributions to be paid
subject to the provisions of or (2) if after the distribution
Maryland REIT Law, may declare and Public Storage's assets would be at
pay dividends or other distributions least 125% of its liabilities.
as the trustees in their discretion Public Storage may not make a
shall determine. distribution on its common stock if
the excess of its assets over its
liabilities would be less than the
liquidation preference of its
preferred stock. In no case may
Public Storage make a distribution
that renders it unable to meet its
liabilities as they mature.
Maryland Asset Requirements
To maintain its qualifications as a There is no such requirement for
Maryland REIT, the Maryland REIT Law Public Storage under the California
requires that Storage Trust hold, Act. See, however, "Material Federal
either directly or indirectly, at Income Tax Consequences--General Tax
least 75% of the value of its assets Treatment of Public Storage--Technical
in real estate assets, mortgages or Requirements for Taxation as a REIT."
mortgage related securities,
government securities, cash and cash
equivalent items, including
high-grade short-term securities and
receivables. The Maryland REIT Law
also prohibits using or applying
land for farming, agriculture,
horticulture or similar purposes.
Action by Written Consent of Shareholders
Under the Storage Trust bylaws, any Consistent with the California Act,
action required or permitted to be the Public Storage bylaws allow
taken at a meeting of shareholders shareholders to take any action
may be taken without a meeting if without a meeting, without prior
all shareholders entitled to vote notice and without a vote, upon the
on the matter consent to the action written consent of shareholders
in writing, any shareholder entitled having not less than the minimum
to notice of the meeting but not number of votes that would be
entitled to vote at it provides a necessary to take such action at a
written waiver of any right to meeting at which all shares entitled
dissent and such consent and waiver to vote thereon were present and
are filed with the corporate minutes. voted. Generally, directors may not
be elected by written consent except
by unanimous written consent.
Appraisal Rights
The Maryland REIT Law provides that Subject to certain exceptions and
objecting shareholders of a merging limitations, the California Act
Maryland REIT have the same rights to recognizes dissenters' rights of
demand and receive payment of the appraisal in most reorganizations
"fair value" of their shares as that require shareholder approval.
objecting stockholders of a Maryland
corporation under the MGCL. However,
except as otherwise provided by the
provisions of the MGCL regarding
certain business combinations with
interested shareholders and certain
control share acquisitions,
shareholders do not have appraisal
rights if, among other things, the
stock is listed on a national
securities exchange on the record
date for determining
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shareholders entitled to vote on the
merger. Storage Trust shareholders
will not have appraisal rights in
the merger.
Indemnification
The Maryland REIT Law provides that Under the California Act, a
a Maryland REIT may indemnify or corporation may generally indemnify
advance expenses to trustees, its officers, directors, employees
officers, employees and agents of and agents against expenses
the trust to the same extent as is (including attorneys' fees),
permitted for directors, officers, judgments, fines and amounts paid in
employees and agents of a Maryland settlement of any proceeding (other
corporation under the MGCL. The than derivative actions), if they
Storage Trust Declaration provides acted in good faith and in a manner
that Storage Trust shall indemnify they reasonably believed to be in or
trustees and officers to the maximum not opposed to the best interests of
extent permitted by Maryland law. the corporation and, with respect to
any criminal action or proceeding,
The MGCL permits a corporation to had no reasonable cause to believe
indemnify its present and former their conduct was unlawful. A
directors and officers, among others, similar standard is applicable in
against judgments, penalties, fines, derivative actions, except that
settlements and reasonable expenses indemnification may be made only for
actually incurred by them in (1) expenses (including attorneys'
connection with any proceeding to fees) and certain amounts paid in
which they may be made a party by settlement, and (2) in the event the
reason of their service in those or person seeking indemnification has
other capacities unless it is been adjudicated liable, amounts
established that (a) the act or deemed proper, fair and reasonable
omission of the director or officer by the appropriate court upon
was material to the matter giving application thereto. The California
rise to the proceeding and (i) was Act provides that to the extent that
committed in bad faith or (ii) was such persons have been successful in
the result of active and deliberate defense of any proceeding, they must
dishonesty, (b) the director or be indemnified by the corporation
officer actually received an improper against expenses actually and
personal benefit in money, property reasonably incurred in connection
or services or (c) in the case of any therewith. Additionally, the
criminal proceeding, the director or California Act provides that, unless
officer had reasonable cause to a corporation's articles of
believe that the act or omission was incorporation provide otherwise, if
unlawful. However, under the MGCL, a a corporation does not so indemnify
Maryland corporation may not such persons, they may seek, and a
indemnify for an adverse judgment in court may order, indemnification
a suit by or in the right of the under certain circumstances even if
corporation or for judgment of the board of directors or shareholders
liability on the basis that personal of the corporation have determined
benefit was improperly received, that the persons are not entitled to
unless in either case a court orders indemnification. The Public Storage
indemnification and then only for Articles and the Public Storage bylaws
expenses. In addition, the MGCL generally provide that directors and
permits a corporation to advance officers will be indemnified to the
reasonable expenses to a director or fullest extent permitted by law.
officer upon the corporation's receipt
of (a) a written affirmation by the Public Storage currently has
director or officer of his good faith indemnification agreements with each
belief that he has met the standard of of its directors and executive
conduct necessary for indemnification officers.
by the corporation and (b) a written
undertaking by him or on his behalf to
repay the amount paid or reimbursed by
the corporation if it shall ultimately
be determined that the standard of
conduct was not met.
Storage Trust has entered into
indemnification agreements with each
of its trustees and officers.
Business Combinations
Generally, under the Maryland REIT Under the California Act, no vote of
Law, the approval by the affirmative shareholders is required for a merger
vote of two-thirds of all the votes or other reorganization if the
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entitled to be cast on the matter is shareholders of a constituent
required for mergers of a Maryland corporation have more than
REIT, unless the declaration of trust five-sixths of the voting power of
increases or reduces the vote to not the surviving corporation. Otherwise
less than a majority. The Storage the California Act requires a class
Trust Declaration does not change vote of each constituent corporation,
this requirement. except that no vote of preferred
shareholders of a surviving
Under the MGCL, as applicable to corporation is required unless the
Maryland real estate investment merger changes their rights,
trusts, certain "business preferences, privileges or
combinations" (including certain restrictions.
mergers, consolidations, share
exchanges and asset transfers and There is no provision under the
certain issuances and California Act comparable to the
reclassifications of equity provisions in the MGCL governing
securities) between a Maryland real "business combinations" with an
estate investment trust and any Interested Shareholder.
person who beneficially owns 10% or
more of the voting power of the
trust's shares or an affiliate or
associate of the trust who, at any
time within the two year period
prior to the date in question, was
the beneficial owner of 10% or more
of the voting power of the then
outstanding voting shares of
beneficial interest of the trust
(an "Interested Shareholder") or an
affiliate of the Interested
Shareholder are prohibited for five
years after the most recent date on
which the Interested Shareholder
becomes an Interested Shareholder.
Thereafter, any such business
combination must be recommended by
the board of trustees of such trust
and approved by the affirmative
vote of at least (a) 80% of the votes
entitled to be cast by holders of
outstanding voting shares of
beneficial interest of the trust and
(b) two-thirds of the votes entitled
to be cast by holders of voting
shares of the trust other than shares
held by the Interested Shareholder
with whom (or with whose affiliate)
the business combination is to be
effected or by an affiliate or
associate of the Interested
Shareholder, voting together as a
single voting group, unless, among
other conditions, the trust's common
shareholders receive a minimum price
(as defined in the MGCL) for their
shares and the consideration is
received in cash or in the same form
as previously paid by the Interested
Shareholder for its shares. The
Storage Trust Declaration provides
that the provisions of Title 3,
Subtitle 6 of the MGCL entitled
"Special Voting Requirements" (or
any successor statute) shall not
apply to any business combinations
with any of Gordon Burnam, Bonnie
Burnam, Kimberly Flower, P. Crismon
Burnam, Michael G. Burnam, Timothy B.
Burnam, any member of their
respective immediate families and any
of their respective affiliates,
heirs, devisees, legal
representatives, successors or
beneficiaries (collectively, the
"Burnam Family").
Control Share Acquisitions
The MGCL, as applicable to Maryland The California Act contains no
real estate investment trusts, comparable provision.
provides that "control shares" of a
Maryland real estate investment trust
acquired in a
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"control share acquisition" have no
voting rights except to the extent
approved by a vote of two-thirds of
the votes entitled to be cast on
the matter, excluding shares of
beneficial interest owned by the
acquiror, by officers or by trustees
who are employees of the trust.
"Control Shares" are voting shares of
beneficial interest which, if
aggregated with all other such shares
of beneficial interest previously
acquired by the acquiror, or in
respect of which the acquiror is able
to exercise or direct the exercise of
voting power (except solely by virtue
of a revocable proxy), would entitle
the acquiror to exercise voting power
in electing trustees within one of
the following ranges of voting power:
(i) one-fifth or more but less than
one-third, (ii) one-third or more but
less than a majority, or (iii) a
majority or more of all voting power.
Control shares do not include shares
the acquiring person is then entitled
to vote as a result of having
previously obtained shareholder
approval. A "control share
acquisition" means the acquisition of
control shares, subject to certain
exceptions.
A person who has made or proposes to
make a control share acquisition, upon
satisfaction of certain conditions
(including an undertaking to pay
expenses), may compel the board of
trustees of the trust to call a special
meeting of shareholders to be held
within 50 days of demand to consider
the voting rights of the shares. If no
request for a meeting is made, the
trust may itself present the question
at any shareholders meeting.
If voting rights are not approved at
the meeting or if the acquiring person
does not deliver an acquiring person
statement as required by the statute,
then, subject to certain conditions
and limitations, the trust may redeem
any or all of the control shares
(except those for which voting rights
have previously been approved) for
fair value determined, without regard
to the absence of voting rights for
the control shares, as of the date of
the last control share acquisition by
the acquiror or of any meeting of
shareholders at which the voting
rights of such shares are considered
and not approved. If voting rights
for control shares are approved at a
shareholders meeting and the acquiror
becomes entitled to vote a majority
of the shares entitled to vote, all
other shareholders may exercise
appraisal rights. The fair value of
the shares as determined for purposes
of such appraisal rights may not be
less than the highest price per share
paid by the acquiror in the control
share acquisition.
The control share acquisition statute
does not apply (a) to shares acquired
in a merger, consolidation or share
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exchange if the trust is a party to
the transaction or (b) to
acquisitions approved or exempted
by the declaration of trust or bylaws
of the trust.
The Storage Trust Declaration
provides that the provisions of Title
3, Subtitle 7 of the MGCL entitled
"Voting Rights of Certain Control
Shares" (or any successor statute) do
not apply to shares owned or acquired
by any member of the Burnam Family.
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DESCRIPTION OF PUBLIC STORAGE CAPITAL STOCK
Public Storage is authorized to issue 200,000,000 shares of Public Storage
common stock, par value $.10 per share, 7,000,000 shares of Public Storage 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 November 30, 1998, Public Storage had outstanding 115,705,929
shares of Public Storage common stock (exclusive of shares issuable upon
conversion of Public Storage'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 Public Storage common stock sets forth certain
general terms and provisions of Public Storage common stock. The statements
below describing Public Storage common stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Public Storage Articles and bylaws.
Public Storage shareholders will be entitled to receive dividends when, as and
if declared by the Public Storage Board, out of funds legally available
therefor. Payment and declaration of dividends on Public Storage common stock
and purchases of shares thereof by Public Storage will be subject to certain
restrictions if Public Storage fails to pay dividends on outstanding preferred
stock. See "--Preferred Stock." Upon any liquidation, dissolution or winding
up of Public Storage, holders of Public Storage 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
Public Storage and the preferential amounts owing with respect to any
outstanding preferred stock. Holders of Public Storage common stock have no
preemptive rights, which means they have no right to acquire any additional
shares of Public Storage common stock that may be issued by Public Storage at a
subsequent date.
Each outstanding share of Public Storage common stock entitles the holder to one
vote on all matters presented to Public Storage shareholders for a vote, with
the exception that Public Storage shareholders have cumulative voting rights
with respect to the election of the Board of Directors, in accordance with
California law. Cumulative voting entitles each Public Storage 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 Public Storage 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 Public Storage
shareholder chooses. Public Storage shareholders have no preemptive or other
rights to subscribe for or purchase additional shares of Public Storage common
stock. All outstanding shares of Public Storage common stock are fully paid and
nonassessable.
Ownership Limitations
For Public Storage to qualify as a REIT under the Internal Revenue 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
Internal Revenue Code, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities) during the last half of a taxable
year. In order to maintain its qualification as a REIT, the Public Storage
Articles and bylaws provide certain restrictions on the shares of capital stock
that a Public Storage shareholder may own.
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. (the "PSMI Merger"), Storage Equities, Inc.
became self-administered and self-managed, acquired substantially all of PSMI's
United States real estate interests and was renamed "Public Storage, Inc."
The Public Storage Articles 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 Internal Revenue Code, more than (A) 2.0% of the outstanding
shares of all common stock of Public Storage, or (B) 9.9% of the outstanding
shares of each class or series of shares of preferred stock or equity stock of
Public Storage. The Public Storage Articles 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
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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 Public
Storage's REIT status in view of the Hughes family's substantial ownership
interest in Public Storage. See "Material Federal Income Tax Consequences--
General Tax Treatment of Public Storage," and "--Consequences of the PSMI Merger
on Public Storage's Qualification as a REIT."
The Public Storage Board, 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
Internal Revenue Code) of the maximum amount of capital stock of Public Storage
permitted as a result of the exception to be granted and (y) assuming that the
four other persons who would be treated as "individuals" for the purposes of
Section 542(a)(2) of the Internal Revenue Code and who would beneficially own
the largest amounts of stock of Public Storage (determined by value)
beneficially own the maximum amount of capital stock of Public Storage permitted
under the ownership limits (or any waivers of the ownership limits granted with
respect to such persons), Public Storage would not be "closely held" within the
meaning of Section 856(h) of the Internal Revenue Code and would not otherwise
fail to qualify as a REIT, and (B) such person provides to Public Storage'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 Internal Revenue Code, any shares
of any class of Public Storage's capital stock if such ownership or acquisition
(i) would cause more than 50% in value of Public Storage's outstanding capital
stock to be owned, either directly or constructively, under the applicable
attribution rules of the Internal Revenue Code, by five or fewer individuals (as
defined in the Internal Revenue Code to include certain tax-exempt entities,
other than, in general, qualified domestic pension funds), (ii) would result in
Public Storage's stock being beneficially owned by less than 100 persons
(determined without reference to any rules of attribution), or (iii) would
otherwise result in Public Storage's failing to qualify as a REIT.
The Public Storage Articles and bylaws provide that, if any holder of Public
Storage's capital stock purports to transfer shares to a person or there is a
change in the capital structure of Public Storage and either the transfer or the
change in capital structure would result in Public Storage 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 Public Storage 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 Public Storage Articles 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 to the shares to 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 Public Storage Class B common stock (i) does not participate in
distributions until the later to occur of funds from operations per common share
(as defined below by Public Storage) aggregating $1.80 during any period of four
consecutive calendar quarters, or January 1, 2000; thereafter, the Public
Storage Class B common stock will participate in distributions (other than
liquidating distributions), at the rate of 97% of the per share distributions on
the Public Storage common stock, provided that cumulative distributions of at
least $.22 per quarter per share have been paid on
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the Public Storage 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 Public Storage common
stock, on a share for share basis, upon the later to occur of funds from
operations per common share aggregating $3.00 during any period of four
consecutive calendar quarters, or January 1, 2003.
For these purposes:
(1) Funds from operations 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 Public Storage'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 funds from
operations attributable to minority interest. Funds from operations
is a supplemental performance measure for equity REITs as defined by
NAREIT. The NAREIT definition does not specifically address the
treatment of minority interest in the determination of funds from
operations or the treatment of the amortization of property management
agreements and goodwill. In the case of Public Storage, funds from
operations 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. Funds from operations does not take into consideration
scheduled principal payments on debt, capital improvements,
distributions and other obligations of Public Storage. Accordingly,
funds from operations is not a substitute for Public Storage's cash
flow or net income as a measure of its liquidity or operating
performance or ability to pay distributions.
(2) Funds from operations per common share means funds from operations
less preferred stock dividends (other than dividends on convertible
preferred stock) divided by the outstanding weighted average shares of
Public Storage common stock assuming conversion of all outstanding
convertible securities and the Public Storage Class B common stock.
Preferred Stock
Public Storage is authorized to issue 50,000,000 shares of preferred stock, $.01
par value per share. The Public Storage Articles 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 November 30, 1998, Public Storage 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 Public Storage 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 Public Storage, the holders of each of the series of senior preferred
stock will be entitled to receive out of Public Storage's assets available for
distribution to stockholders, before any distribution of assets is made to
holders of Public Storage 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.
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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 two-thirds 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
Public Storage is authorized to issue 200,000,000 shares of equity stock, $.01
par value per share. At November 30, 1998, Public Storage had 225,000
outstanding shares of equity stock which rank on a parity with the Public
Storage common stock. The Public Storage Articles 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 Public Storage 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 Public Storage
in transactions not approved by Public Storage's Board of Directors. Public
Storage has no intention to issue Public Storage common stock or the preferred
stock or equity stock for such purposes.
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INVESTMENT POLICIES
The following is a discussion of Public Storage's investment policies and
objectives. The Public Storage Board has determined these policies and,
although there is no present intention to do so, these policies may be amended
or revised from time to time at the discretion of the Public Storage Board
without a vote of Public Storage's shareholders, except that Public Storage
cannot enter into certain extraordinary transactions (such as a merger or the
sale of all or substantially all of its assets) without the approval of a
majority of the shareholders. No assurance can be given that these objectives
will be achieved.
The investment objectives of Public Storage are to maximize funds from
operations allocable to holders of Public Storage common stock and to increase
shareholder value through internal growth and acquisitions. Funds from
operations is a supplemental performance measure for equity REITs used by
industry analysts. Funds from operations does not take into consideration
principal payments on debt, capital improvements, distributions and other
obligations of Public Storage. Accordingly, funds from operations is not a
substitute for Public Storage's net cash provided by operating activities or net
income as a measure of Public Storage's liquidity or operating performance. An
increase in Public Storage's funds from operations will not necessarily
correspond with an increase in distributions to holders of Public Storage common
stock. Public Storage is required to distribute at least 95% of its ordinary
REIT taxable income in order to maintain its qualification as a REIT. Public
Storage distributes less than its cash available for distribution (recently
distributing less than its taxable income), permitting it to retain funds for
additional investment and debt reduction.
Public Storage 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 a priority over Public Storage common stock (including Public
Storage 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
Public Storage from satisfying the REIT distribution requirements. Therefore,
Public Storage shareholders should expect to be able to liquidate their
investment only by selling their shares in the market, and the market of the
Public Storage common stock may not necessarily equal or exceed the market value
of Public Storage's assets or the net proceeds which might be available for
distribution upon liquidation if Public Storage were to liquidate. Public
Storage has grown, and intends to continue to grow, as new investments are made.
While Public Storage emphasizes equity real estate investments, including
interests in real estate partnerships and other entities, it may in its
discretion invest in mortgages.
Subject to certain limitations in Public Storage's bylaws, Public Storage has
broad powers to borrow in furtherance of its investment objectives. Public
Storage 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 September 30, 1998,
Public Storage's ratio of "Debt" (liabilities other than "accrued and other
liabilities" and "minority interest" that should, in accordance with GAAP, be
reflected on Public Storage's balance sheet) to "Assets" (Public Storage's total
assets that should, in accordance with GAAP, be reflected on Public Storage's
balance sheet) was approximately 3%.
Public Storage's bylaws restrict Public Storage from acquiring facilities from
its affiliates or from selling facilities to them unless the transaction (i) is
approved by a majority of Public Storage's independent directors and (ii) is
fair to Public Storage based on an independent appraisal.
Subject to the rules of the NYSE and applicable provisions of California law,
Public Storage has issued and intends to continue to issue authorized capital
stock without shareholder approval. You should read "Description of Public
Storage Capital Stock."
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax consequences
that are generally applicable to Storage Trust shareholders as a result of the
merger and as a result of the subsequent ownership and disposition of shares of
Public Storage common stock. To the extent this summary discusses matters of
law, it is based upon the opinion of A. Timothy Scott, senior vice president and
tax counsel of Public Storage and, with respect to matters discussed herein
under "The Merger", also upon the opinion of Mayer, Brown & Platt, counsel to
Storage Trust. This discussion is not exhaustive of all possible tax
consequences 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 Storage Trust shareholder in light of
his or her particular circumstances or to certain types of Storage Trust
shareholders 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, individuals who received Storage Trust shares or
the right to receive Storage Trust shares pursuant to stock options or in other
compensatory transactions and other special status taxpayers, including holders
of limited partnership interests in the Operating Partnership).
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, legislative history, judicial decisions, and Internal
Revenue Service ("IRS") pronouncements, certain factual assumptions related to
the ownership and operation of Public Storage and Storage Trust and certain
representations made by Public Storage and Storage Trust. 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 Public Storage or Storage Trust that would affect this
discussion. Neither Storage Trust nor Public Storage plans to obtain any
rulings from the IRS concerning tax issues with respect to the merger or the
continued qualification of Public Storage 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.
THIS SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. STORAGE TRUST
SHAREHOLDERS 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.
The Merger
General
In the opinion of Mayer, Brown & Platt and Mr. Scott, based on certain factual
assumptions and representations made by Public Storage and Storage Trust, the
merger will constitute a "reorganization" under Section 368(a) of the Code, and
each of Public Storage and Storage Trust will be a party to the reorganization
within the meaning of Section 368(a) of the Code. The discussion that follows
assumes that the merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code.
Tax Treatment of Public Storage and Storage Trust.
Public Storage and Storage Trust will not recognize gain or loss in the merger.
Public Storage effectively will succeed to the assets, liabilities, and tax
attributes of Storage Trust. Accordingly, following the merger, Public Storage
will hold the assets of Storage Trust (principally, Storage Trust's interest in
the Storage Trust Operating Partnership) with a carryover tax basis, determined
by reference to the historic basis of the assets in the hands of Storage Trust.
Tax Treatment of Storage Trust Shareholders.
No gain or loss will be recognized by Storage Trust shareholders to the extent
they receive Public Storage common stock (except for cash received in lieu of
fractional shares) in the merger. The tax basis and holding period of the
Public
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Storage common stock received will be the same as that of the Storage Trust
common shares surrendered in exchange for the Public Storage common stock,
provided that such Storage Trust common shares were held as capital assets by
the holder at the time of the merger.
A Storage Trust shareholder who receives cash in the merger in lieu of a
fractional share interest will be treated as having received the fractional
share interest in Public Storage common stock in the merger (with the tax basis
determined as described above) and then as having received the cash in
redemption of the fractional share interest. The cash payment will be treated
as a distribution in payment of the fractional interest deemed redeemed under
Section 302 of the Code. In the circumstances of the merger, Storage Trust
shareholders generally will recognize gain or loss on the deemed redemption in
an amount equal to the difference between the amount of cash received and the
holder's adjusted tax basis allocable to the fractional share surrendered. That
gain or loss would be capital gain or loss if the interest in the Storage Trust
shares surrendered is held as a capital asset at the time of the merger, and it
generally would be long term gain or loss if the holding period for the
fractional share interest exceeds one year. It is possible, however, if none of
the tests set forth in Section 302 of the Code is satisfied, for the cash
payment to be taxed as a dividend.
Tax Treatment of Public Storage Shareholders.
No gain or loss will be recognized by Public Storage shareholders as a result of
the merger. The tax basis and holding period of the Public Storage stock held
by existing Public Storage shareholders will not change as a result of the
merger.
General Tax Treatment of Public Storage
If certain detailed conditions imposed by the Code and the related Treasury
Regulations are met, an entity, such as Public Storage, 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 Public Storage of being
treated as a REIT for federal income tax purposes is that this enables Public
Storage 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.
Public Storage 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. Public Storage believes that it has qualified since its
election, and currently qualifies, as a REIT, and Public Storage expects to
continue to be taxed as a REIT for federal income tax purposes. Mr. Scott has
rendered an opinion to Public Storage to the effect that Public Storage is
organized in conformity with the requirements for qualification as a REIT and
its proposed method of operation following the merger will enable Public Storage
to continue to meet the requirements for qualification as a REIT. This opinion
is based on certain extensive and detailed representations as to factual and
legal matters made by Public Storage and Storage Trust that relate to the
qualification of both Storage Trust and Public Storage as REITs, including
specific representations regarding satisfaction of the stock ownership and gross
income requirements applicable to REITs.
While Public Storage 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 Public Storage, no assurance can be given that Public
Storage has so qualified or 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 Public Storage 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,
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(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.
The Public Storage Articles and bylaws contain restrictions regarding the
transfer of its capital stock that are intended to assist Public Storage in
continuing to satisfy the stock ownership requirements described in conditions
(5) and (6). See "Description of Public Storage Capital Stock--Ownership
Limitations." The ownership restrictions in the Public Storage Articles 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
established by the Public Storage Board. The restrictions provide that if, at
any time, for any reason, those ownership limitations are violated or more than
50% in value of Public Storage'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 Public Storage (a private letter
ruling is legally binding only with respect to the taxpayer to whom it was
issued and Public Storage has not obtained and will not seek a private ruling on
this issue) or contend that Public Storage failed to enforce these arrangements.
Pursuant to the 1997 Act, for Public Storage's taxable years commencing on or
after January 1, 1998, if Public Storage 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
Public Storage does not know, or exercising reasonable diligence would not have
known, whether it failed to meet the 5/50 Test (requirement (6) above), Public
Storage will be treated as having met the 5/50 Test. Public Storage believes
that it has issued and outstanding sufficient shares with sufficient diversity
of ownership to allow it to satisfy the REIT ownership requirements, and Public
Storage intends to comply with the regulatory rules to be issued pursuant to the
1997 Act. See "--Consequences of the PSMI Merger on Public Storage'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 merger with Storage Trust or 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 Public Storage's
Qualification as a REIT--Elimination of Any Accumulated Earnings and Profits
Attributable to Non-REIT Years." Storage Trust does not have any accumulated
earnings and profits attributable to non-REIT years and as a result, no such
items will carry over to Public Storage from Storage Trust in the merger.
Income Tests. In order to maintain qualification as a REIT, Public Storage must
satisfy certain gross income requirements, which are applied on an annual basis.
First, at least 75% of Public Storage'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 Public Storage'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,
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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, Public Storage will not have to meet this 30% gross income test in
1998 and subsequent years.
Rents received by Public Storage 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. Public Storage 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 Public Storage,
or an owner of 10% or more of Public Storage, directly or constructively owns
10% or more of such tenant. Public Storage does not anticipate that it will
receive material amounts of 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." Public Storage does not anticipate deriving rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents. Finally, for rents received to qualify as
"rents from real property," Public Storage 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 Public
Storage derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by Public Storage 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
Public Storage believes may not be provided by Public Storage directly without
jeopardizing the qualification of rent as "rents from real property" will be
performed by "independent contractors."
Pursuant to the 1997 Act, for Public Storage's taxable years commencing on or
after January 1, 1998, rents received generally will qualify as rents from real
property even if Public Storage 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
Public Storage with respect to such property. In computing any such amounts,
the amount that Public Storage 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 Public Storage of providing the impermissible
services. See "--Consequences of the PSMI Merger on Public Storage's
Qualification as a REIT--Non-qualifying Income," and "--Consequences of the PSMI
Merger on Public Storage's Qualification as a REIT--Acquisition of Affiliated
Partnership Interests" for a discussion of specific aspects of the PSMI Merger
that may affect Public Storage's ability to satisfy the 95% gross income test.
Public Storage owns substantially all of the economic interest in PSPUD (the
portable self-storage business). The income from that business would be
nonqualifying income to Public Storage and the business is conducted by a
limited partnership between Public Storage and a subsidiary of the Lock/Box
Company. The share of gross income of that business attributable to Public
Storage's partnership interest, when combined with other nonqualifying income of
Public Storage, must be less than 5% of Public Storage's total gross revenues.
Public Storage anticipates that it will be able to continue to satisfy both the
95% and 75% gross income tests.
If Public Storage 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, Public Storage 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. Public Storage 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
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circumstances Public Storage would be entitled to the benefit of this relief
provision. Even if the relief provision were to apply, Public Storage 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 Public Storage's
taxable income (computed without its distribution deduction) and the denominator
of which would be Public Storage's gross income from all sources. This excise
tax would have the general effect of causing Public Storage 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
Public Storage'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 Public Storage
owns an interest). Not more than 25% of Public Storage'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 Public Storage may not exceed 5% of the value of Public
Storage's total assets, and Public Storage 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 Public Storage acquires securities of an issuer. Public
Storage believes that it satisfies these tests. In this regard, however, the
value of Public Storage's interest in the Lock/Box Company (including the
Lock/Box Company's interest in PSPUD) may not exceed 5% of the value of Public
Storage's total assets and the 10% voting stock prohibition precludes Public
Storage from controlling the operations of the Lock/Box Company (in which Public
Storage 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 Public
Storage owns a less than 10% voting interest) and may preclude Public Storage
from exercising its rights of first refusal with respect to the corporations
owning the Canadian operations and the reinsurance business. Similar
restrictions will apply to Public Storage's indirect ownership interest in
Storage Realty Management Co. ("SRMC") after the merger. See "--Recent
Administration Proposal" for a discussion of a proposal that, if enacted, would
limit Public Storage's ability to derive economic benefits from the activities
of the Lock/Box Company, PSPUD and SRMC.
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 a
partnership interest. See "--Consequences of the PSMI Merger on Public Storage's
Qualification as a REIT--Acquisition of Affiliated Partnership Interests in the
PSMI Merger." Following the merger, Public Storage will take into account for
these purposes its share of assets and income of the Storage Trust Operating
Partnership.
Annual Distribution Requirements. In order to qualify as a REIT, Public Storage
must distribute to its shareholders in each taxable year an amount at least
equal to 95% of Public Storage's "REIT taxable income" (which is generally
equivalent to net taxable ordinary income).
In years prior to 1990, Public Storage made distributions in excess of its REIT
taxable income. During 1990, Public Storage reduced its distributions to its
shareholders. As a result, distributions paid by Public Storage in 1990 were
less than 95% of Public Storage's REIT taxable income for 1990. Public Storage
has satisfied the REIT distribution requirements for 1990 through 1997 by
attributing distributions in 1991 through 1998 to the prior year's taxable
income, and Public Storage expects to satisfy the distribution requirement for
1998 by attributing distributions in 1999 to its 1998 taxable income. Public
Storage 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 Public Storage 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 under certain
circumstances as described below under the heading "--Taxation of Taxable
Domestic Holders of Public Storage Common Stock--Distributions by Public
Storage." The extent to which Public Storage will be required to attribute
distributions to the prior year will depend on Public Storage's operating
results and the level of distributions as determined by the Public Storage
Board.
In addition, if Public Storage 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, Public Storage would
be subject to a 4% excise tax on the excess of
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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.
Public Storage intends to make timely distributions sufficient to satisfy its
annual distribution requirements. It is expected that Public Storage'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, Public Storage 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 Public Storage, 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 Public Storage. In such circumstances, in order to meet the
distribution requirements, Public Storage 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, Public Storage 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 Public
Storage's deduction for dividends paid for the earlier year. Thus, Public
Storage may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Public Storage 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 Public Storage's Qualification as a REIT--
Elimination of Any Accumulated Earnings and Profits Attributable to Non-REIT
Years."
Applicable Federal Income Tax.
If Public Storage qualifies for taxation as a REIT, Public Storage generally
will not be subject to federal corporate income taxes on net income that it
distributes currently to shareholders. However, Public Storage will be subject
to federal income tax in the following circumstances.
(1) Public Storage will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(2) Under certain circumstances, Public Storage may be subject to the
"alternative minimum tax" on its items of tax preference.
(3) If Public Storage 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 nonqualifying income
from foreclosure property, Public Storage will be subject to tax at
the highest corporate rate on such income.
(4) If Public Storage 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 Public Storage 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 RElT 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 Public
Storage fails the 75% or 95% gross income test.
(6) If Public Storage 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, Public Storage
would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
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(7) Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486,
Public Storage 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 Public Storage'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 highest 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) Public
Storage's adjusted basis in such assets at the time of the acquisition
by Public Storage. Public Storage made an election pursuant to IRS
Notice 88-19 with respect to the PSMI Merger. Accordingly, Public
Storage 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. Public Storage currently does not
intend to dispose of 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 Public Storage fails to qualify as a REIT and relief
provisions do not apply, Public Storage 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
Public Storage for distributions to its shareholders or for reinvestment. As a
result, failure of Public Storage to qualify as a REIT during any taxable year
could have a material adverse effect upon Public Storage and its shareholders.
Termination of REIT Election.
Public Storage's election to be treated as a REIT will terminate automatically
if Public Storage fails to meet the REIT qualification requirements described
above. If a termination (or a voluntary revocation) occurs, unless certain
relief provisions apply, Public Storage would not be eligible to elect RElT
status again until the fifth taxable year that begins after the first year for
which Public Storage's election was terminated (or revoked). If Public Storage
loses its REIT status, but later qualifies and elects to be taxed as a REIT
again, Public Storage may face significant adverse tax consequences. Immediately
prior to the effectiveness of the election to return to REIT status, Public
Storage would be treated as if it disposed of all of its assets in a taxable
transaction, triggering taxable gain with respect to Public Storage's
appreciated assets. (Public Storage 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.) Public Storage 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 Public Storage's Qualification as a Reit
In light of the unique federal income tax requirements applicable to REITs,
Public Storage's continued qualification as a REIT could have been adversely
affected by the PSMI Merger, as discussed in greater detail below.
Nonqualifying Income.
As described above, under the 95% gross income test, Public Storage 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, Public Storage assumed property management
activities for entities in which Public Storage had an interest, as well as for
other entities in which Public Storage did not have an interest. Public Storage
receives management fees from these owners in exchange for
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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 Public Storage 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 Public Storage in December 1995 approximately
$4.5 million of management fees that Public Storage otherwise would have been
expected to receive for 1996, discounted to compensate for early payment. At the
time, Public Storage 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 Public Storage 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 Public Storage 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, Public Storage's REIT status may have been terminated
unless Public Storage satisfied the "good cause" exception to the income test.
There can be no assurance, however, that if Public Storage failed to satisfy the
95% test, the IRS would necessarily agree that Public Storage had operated in a
manner that qualifies for the "good cause" exception.
In connection with the PSMI Merger, Public Storage and the various other owners
of mini-warehouses and business parks for which Public Storage 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 Public Storage 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 Public Storage 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 Public Storage under the management agreement for the management of the
properties owned by the Owners. Public Storage 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 Public Storage for
purposes of the 95% test.
Violation of Ownership Requirements.
For Public Storage 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 Public Storage stock (the
Hughes family's interest has subsequently come to represent less than 30% at
October 1, 1998). In order to assist Public Storage in meeting these ownership
restrictions, the Public Storage Articles and bylaws generally prohibit the
actual or constructive ownership of more than 2.0% of the outstanding shares of
all common stock of Public Storage or more than 9.9% of the outstanding shares
of each class or series of shares of preferred stock of Public Storage, as was
described above. (The Public Storage Articles 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
Public Storage Articles. Therefore, to further assist Public Storage in meeting
the ownership restrictions, the Hughes family at the time of the PSMI Merger
entered into an agreement with Public Storage for the benefit of Public Storage
and certain designated charitable beneficiaries providing that if, at any time,
for any reason, more than 50% in value of Public Storage's outstanding stock
otherwise would be considered owned by five or fewer individuals, then a number
of shares of Public Storage 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 Public Storage's
ownership
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limitations, were 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 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 Public Storage (a private letter ruling is legally binding only
with respect to the taxpayer to whom it was issued and Public Storage did not
seek any such ruling) or contend that Public Storage failed to enforce these
various arrangements and, as a result, there can be no assurance that these
arrangements necessarily preserve Public Storage'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 Public Storage in the PSMI Merger and Public
Storage 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 Public Storage as a REIT
(unless the "deficiency dividend" procedures described below apply and Public
Storage complies with those procedures).
The amount of any accumulated earnings and profits of PSMI acquired by Public
Storage 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, Public Storage 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 Public Storage
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
Public Storage 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,
Public Storage 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, Public Storage 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, Public Storage 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, Public
Storage 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, Public Storage has acquired
interests in various partnerships that own and operate properties. Also, as a
result of the merger, Public Storage will indirectly acquire the general partner
interest in the Operating Partnership of Storage Trust. Public Storage, 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 Public
Storage's interest in each of' the partnerships must be determined in accordance
with its "capital interest" in such partnership.
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The ownership of these partnership interests creates several issues regarding
Public Storage's satisfaction of the 95% gross income test. First, Public
Storage 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. Public Storage disregards the
portion of management fees derived from partnerships in which it is a partner
that corresponds to its interest in these partnerships in determining the amount
of its Nonqualifying Income, and Public Storage'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 Public Storage, either rejecting the approach set forth in the private letter
rulings mentioned above or contending that Public Storage's situation is
distinguishable from those addressed in the private letter rulings (for example,
because Public Storage does not have a "substantial" interest in the
partnerships).
Second, Public Storage acquired interests in certain of these partnerships that
entitles Public Storage 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 Public Storage'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 Public Storage and
the percentage of the management fees paid to Public Storage that is disregarded
in determining Public Storage's Nonqualifying Income. For example, if Public
Storage 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 Public Storage's interest only contributed 1% of the
total capital contributed to the partnership), Public Storage'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 Public Storage's ability
to satisfy the 95% gross income test. In determining its "capital interest" in
the various partnerships, Public Storage 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 Public Storage's
"capital interests," which could adversely affect Public Storage's ability to
satisfy the 95% gross income test.
Taxation of Taxable Domestic Holders of Public Storage Common Stock
As used below, the term "U.S. Shareholder" means a holder of shares of Public
Storage 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 Public Storage.
As long as Public Storage qualifies as a REIT, distributions made to Public
Storage'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 Public Storage'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 Public Storage as capital gain dividends generally
will be taxed as long-term capital gain to shareholders, to the extent that the
distributions do not exceed Public Storage'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
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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, which generally include capital gains (other than gains in the
25% group) in the 20% group if the asset was held more than 12 months at time of
sale. The Notice further provided that designations made by the REIT will only
be 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 Public Storage. Instead, such losses would
be carried over by Public Storage for potential offset against future income
(subject to certain limitations). Distributions made by Public Storage and gain
arising from the sale or exchange by a U.S. Shareholder of Public Storage 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 Public Storage 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. Public Storage 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 Public Storage, 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 Public Storage.
Public Storage 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 Public
Storage, 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.
Public Storage may distribute cash in excess of its net taxable income. Upon
distribution of such cash by Public Storage to shareholders (other than as a
capital gain dividend), if all of Public Storage'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 Public Storage may, upon the
sale of the capital stock, realize a higher taxable gain or a smaller loss
because the basis of Public Storage common stock as reduced will be used for
purposes of computing the amount of the gain or loss.
In any year in which Public Storage does not qualify as a REIT, distributions by
Public Storage 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 Public Storage's tax preference
items.
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Sales of Public Storage Common Stock.
In general, a U.S. Shareholder will realize gain or loss upon the sale of Public
Storage 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 Public Storage 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
Public Storage 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," Public Storage 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 Public Storage that the
shareholder is subject to the rules or has furnished an incorrect taxpayer
identification number.
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 Public Storage 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 Public Storage, including any reporting requirements, as well as
the tax treatment of such an investment under their home country laws.
Distributions by Public Storage.
Distributions to a non-U.S. Shareholder will generally be subject to tax as
ordinary income to the extent of Public Storage'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. Under
currently applicable Treasury regulations, withholding agents are required to
determine the applicable withholding rate pursuant to the appropriate tax
treaty, and withhold the appropriate amount. New Treasury Regulations recently
have been adopted that revise in certain respects the rules applicable to non-
U.S. Shareholders (the "New Regulations"). The New Regulations are generally
effective with respect to payments made after December 31, 1998 but the IRS has
announced that the New Regulations will be amended to be effective generally for
payments made after December 31, 1999, subject to certain transition rules.
Currently, dividends paid to an address in a foreign country are presumed to be
paid to a resident of that country (unless the payor has knowledge to the
contrary) for purposes of the 30% U.S. withholding tax applicable to certain
non-U.S. Shareholders and for purposes of determining the applicability of a tax
treaty rate. Under the New Regulations, however, a non-U.S. Shareholder who
wishes to claim the benefit of an applicable treaty rate will be required to
provide an IRS Form W-8 which satisfies applicable certification and other
requirements, including a representation as to the holder's foreign status, the
holder's name and permanent residence address, and the relevant tax treaty. Such
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information is subject to being reported to the IRS. A permanent residence
address for this purpose generally is the address in the country where the
person claims to be a resident for purposes of the country's income tax. If the
beneficial holder is a corporation, then the address is where the corporation
maintains its principal office in its country of incorporation. The New
Regulations also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty and for purposes of the 30%
withholding tax described above, dividends paid to a non-U.S. Shareholder that
is an entity should be treated as paid to the entity or those holding an
interest in that entity. In particular, in the case of a foreign partnership,
the certification requirement will generally be applied to the partners of the
partnership. In addition, the New Regulations will also require the partnership
to provide certain information, including a United States taxpayer
identification number, and will provide look-through rules for tiered
partnerships. A non-U.S. Shareholder that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amount withheld by filing an appropriate claim for refund with the IRS.
If the amount distributed exceeds a non-U.S. Shareholder's allocable share of
current or accumulated 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 Public Storage will be required to
withhold 10% of any distribution to a non-U.S. Shareholder in excess of Public
Storage's current and accumulated earnings and profits. Consequently, although
Public Storage 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 Public Storage 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 Public Storage, 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 Public Storage in order to claim such treatment.
Distributions to a non-U.S. Shareholder that are designated by Public Storage 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 Public Storage 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. Public Storage 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.
Although the law is not entirely clear on the matter, it appears that amounts
designated by Public Storage 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 Public Storage 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 Public Storage on such undistributed
capital gains (and to receive
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from the IRS a refund to the extent their proportionate share of such tax paid
by Public Storage 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 Public Storage 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
Public Storage's shareholders are believed to be non U.S. Shareholders, Public
Storage 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.
Public Storage must report annually to the IRS and to each non-U.S. Shareholder
the amount of dividends (including any capital gain dividends) paid to, and the
tax withheld with respect to, each non-U.S. Shareholder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these returns may also be made available
under the provisions of a specific treaty or agreement with the tax authorities
in the country in which the non-U.S. Shareholder resides.
The New Regulations also make certain changes in the new information reporting
and backup withholding rules for payments made after December 31, 1998. As
stated above, the IRS has announced its intention to amend the New Regulations
to extend the effective date to those payments made after December 31, 1999. In
general, the New Regulations do not significantly alter the substantive backup
withholding and information reporting requirements described herein.
Shareholders should consult their tax advisors with respect to such changes.
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 Public Storage 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 Public Storage's compliance with the REIT share ownership
requirements, Public Storage 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.
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Recent Legislation
As described above, the 1997 Act contained certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contained 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 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 Public Storage to its shareholders that are designated by
Public Storage as "capital gain dividends," see "-- Taxation of Taxable Domestic
Holders of Public Storage Common Stock -- Distributions by Public Storage"
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 contained a number
of technical provisions that either (i) reduce the risk that Public Storage will
inadvertently cease to qualify as a REIT, or (ii) provide additional flexibility
with which Public Storage can meet the REIT qualification requirements. These
provisions are effective for Public Storage'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 and SRMC. 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 Public
Storage"), 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 or SRMC were to
commence new trade or business activities or acquire substantial new assets
after the effective date of the proposal, the Lock/Box Company or SRMC, as the
case may be, would lose its grandfathered status and Public Storage would be
subject to the new 10% of the vote or value limitation with respect to its
ownership interest in the Lock/Box Company or SRMC, as the case may be (which
Public Storage does not now satisfy). Accordingly, the proposal, if enacted,
could materially impede Public Storage's ability to expand the business
activities of the Lock/Box Company, PSPUD or SRMC and to engage in other
activities through non-qualified REIT subsidiaries without jeopardizing Public
Storage's REIT status. This would limit Public Storage's ability to derive
economic benefit from engaging in activities which were related to Public
Storage'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 and may be able to eliminate this tax. Accordingly, if
enacted as currently drafted, this provision could impede Public Storage's
ability to acquire additional properties through mergers with C corporations.
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STATE AND LOCAL TAXES
The tax treatment of Storage Trust shareholders, Public Storage and Public
Storage's shareholders in states having taxing jurisdiction over them may differ
from the federal income tax treatment. Accordingly, no discussion of state
taxation of Storage Trust shareholders, Public Storage or Public Storage's
shareholders is provided nor is any representation made as to the tax status of
Public Storage in such states. All Storage Trust shareholders should consult
their own tax advisors as to the treatment under the respective state tax laws
applicable to them.
PLAN OF DISTRIBUTION
This Proxy Statement and Prospectus also relates to the possible issuance by
Public Storage of shares of Public Storage common stock if, and to the extent
that, holders of units in the Operating Partnership convert their units into
shares of Public Storage common stock. Public Storage has registered such shares
of common stock for sale to provide the holders of such shares with freely
tradeable securities, but registration of such shares of Public Storage common
stock does not necessarily mean that any of such shares will be issued by Public
Storage. Public Storage will not receive any proceeds from the issuance of the
shares of Public Storage common stock to holders of units.
LEGAL MATTERS
David Goldberg, senior vice president and general counsel of Public Storage,
will deliver an opinion to the effect that the shares of Public Storage common
stock to be issued in the merger will be validly issued, fully paid and
nonassessable. Mr. Goldberg owns 89,547 shares of Public Storage common stock
and 600 shares of Public Storage senior preferred stock and has options to
acquire an additional 172,834 shares of Public Storage common stock. A. Timothy
Scott, senior vice president and tax counsel of Public Storage, has rendered an
opinion to the effect that the discussion under "Material Federal Income Tax
Consequences" fairly summarizes the material federal income tax consequences as
a result of the merger, and the subsequent ownership of Public Storage common
stock and Mayer, Brown & Platt has rendered a similar opinion as to matters
discussed under "Material Federal Income Tax Consequences -- The Merger". Mr.
Scott owns 3,367 shares of Public Storage common stock and has options to
acquire an additional 60,000 shares of common stock.
INDEPENDENT PUBLIC ACCOUNTANTS AND EXPERTS
Ernst & Young LLP, independent auditors, have audited the Public Storage
consolidated financial statements (and schedule) included in the Public Storage
Annual Report on Form 10-K for the year ended December 31, 1997, as set forth in
their report, which is incorporated in this Proxy Statement and Prospectus by
reference. The Public Storage consolidated financial statements are incorporated
by reference in reliance on their report, given on their authority as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the Storage Trust
consolidated financial statements (and schedules) included in the Storage Trust
Annual Report on Form 10-K for the year ended December 31, 1997, and the
Historical Summary of Combined Statement of Gross Revenues and Direct Operating
Expenses, Historical Summary of Statement of Gross Revenues and Direct Operating
Expenses, and Historical Summary of Combined Gross Revenues and Direct Operating
Expenses of certain properties acquired, appearing in the Current Reports of
Storage Trust on Forms 8-K/A dated April 30, 1998 and August 14, 1998, as set
forth in their reports, which are incorporated in this Proxy Statement and
Prospectus by reference. The Storage Trust consolidated financial statements
(and schedules) and Historical Summary of Combined Statement of Gross Revenues
and Direct Operating Expenses, Historical Summary of Statement of Gross Revenues
and Direct Operating Expenses, and Historical Summary of Combined Gross Revenues
and Direct Operating Expenses of certain properties acquired are incorporated by
reference in reliance on their reports, given on their authority as experts in
accounting and auditing.
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EXPENSES OF SOLICITATION
All fees and expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses, except those fees and expenses incurred in connection with filing,
printing and distributing this Proxy Statement and Prospectus will be paid 50%
by Public Storage and 50% by Storage Trust. The cost of solicitation of proxies
from Storage Trust shareholders will be borne by Storage Trust. Storage Trust
intends to retain Shareholders Capital Corporation to solicit proxies on behalf
of Storage Trust. The solicitation fee will equal $______________. Storage Trust
will reimburse brokers, fiduciaries, custodians and other nominees for
reasonable out-of-pocket expenses incurred in sending this Proxy Statement and
Prospectus and other proxy materials to, and obtaining instructions relating to
such materials, from Storage Trust shareholders.
SHAREHOLDER PROPOSALS
Any proposal that a Public Storage shareholder wishes to submit for inclusion in
Public Storage's proxy statement for the 1999 annual meeting of shareholders
pursuant to Commission Rule 14a-8 must have been received by Public Storage no
later than January 1, 1999. Notice to Public Storage of any proposal that a
shareholder wishes to propose for consideration at the 1999 annual meeting of
shareholders, but does not seek to include in Public Storage's proxy statement
pursuant to Rule 14a-8, must be delivered to Public Storage no later than March
1, 1999 if the proposing shareholder wishes for Public Storage to describe the
nature of the proposal in its proxy statement as a condition to exercising its
discretionary authority to vote proxies on the proposal. Any shareholder
proposals or notices submitted to Public Storage should be addressed to: Sarah
Hass, Secretary, Public Storage, Inc., 701 Western Avenue, Glendale, California
91201-2397.
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Annex A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
STORAGE TRUST REALTY,
PUBLIC STORAGE, INC.
AND
NEWCO MERGER SUBSIDIARY, INC.
DATED AS OF NOVEMBER 12, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 1 THE MERGER.................................................................................. 1
1.1 THE MERGER............................................................................ 1
1.2 CLOSING............................................................................... 2
1.3 EFFECTIVE TIME........................................................................ 2
1.4 EFFECTS OF MERGER ON COMPANY'S DECLARATION OF TRUST AND BYLAWS........................ 2
1.5 DIRECTORS AND OFFICERS................................................................ 2
1.6 EFFECT ON SHARES OF BENEFICIAL INTEREST, OPTIONS AND UNITS............................ 2
1.7 [Reserved]............................................................................ 2
1.8 TRANSFER OF SECURITIES OF STORAGE REALTY MANAGEMENT CO................................ 2
1.9 MERGER CONSIDERATION.................................................................. 3
1.10 PAYMENT............................................................................... 3
1.11 NO FURTHER RIGHTS..................................................................... 4
1.12 CLOSING OF THE COMPANY'S TRANSFER BOOKS............................................... 4
1.13 STOCK OPTIONS......................................................................... 4
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................... 6
2.1 ORGANIZATION, STANDING AND POWER OF THE COMPANY....................................... 6
2.2 COMPANY SUBSIDIARIES.................................................................. 6
2.3 CAPITAL STRUCTURE..................................................................... 7
2.4 OTHER INTERESTS....................................................................... 8
2.5 ORGANIZATION, STANDING AND POWER OF THE PARTNERSHIP................................... 9
2.6 CAPITAL STRUCTURE OF THE PARTNERSHIP.................................................. 9
2.7 AUTHORITY; NONCONTRAVENTION; CONSENTS................................................. 9
2.8 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES; BOOKS AND RECORDS....... 11
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.................................................. 11
2.10 LITIGATION............................................................................ 12
2.11 PROPERTIES............................................................................ 12
2.12 ENVIRONMENTAL MATTERS................................................................. 15
2.13 RELATED PARTY TRANSACTIONS............................................................ 17
2.14 EMPLOYEE BENEFITS..................................................................... 17
2.15 EMPLOYEE MATTERS...................................................................... 19
2.16 TAXES................................................................................. 19
2.17 NO PAYMENTS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS............................. 21
</TABLE>
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2.18 BROKERS; SCHEDULE OF FEES AND EXPENSES................................................ 21
2.19 COMPLIANCE WITH LAWS.................................................................. 21
2.20 CONTRACTS; DEBT INSTRUMENTS........................................................... 21
2.21 OPINION OF FINANCIAL ADVISOR.......................................................... 23
2.22 STATE TAKEOVER STATUTES; WAIVER OF OWNERSHIP LIMITATION............................... 23
2.23 REGISTRATION STATEMENT................................................................ 24
2.24 DEVELOPMENT PROPERTIES................................................................ 24
2.25 INVESTMENT COMPANY ACT OF 1940........................................................ 24
2.26 TRADEMARKS, PATENTS AND COPYRIGHTS.................................................... 24
2.27 INSURANCE............................................................................. 25
2.28 DEFINITION OF KNOWLEDGE OF THE COMPANY................................................ 25
2.29 VOTE REQUIRED......................................................................... 25
2.30 RIGHTS AGREEMENT...................................................................... 25
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ACQUIROR.................................................. 25
3.1 ORGANIZATION, STANDING AND POWER OF ACQUIROR.......................................... 25
3.2 ACQUIROR SUBSIDIARIES................................................................. 26
3.3 CAPITAL STRUCTURE..................................................................... 26
3.4 AUTHORITY; NONCONTRAVENTION; CONSENTS................................................. 27
3.5 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.......................... 28
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS.................................................. 29
3.7 LITIGATION............................................................................ 29
3.8 PROPERTIES............................................................................ 30
3.9 ENVIRONMENTAL MATTERS................................................................. 30
3.10 TAXES................................................................................. 31
3.11 BROKERS; SCHEDULE OF FEES AND EXPENSES................................................ 32
3.12 COMPLIANCE WITH LAWS.................................................................. 32
3.13 STATE TAKEOVER STATUTES............................................................... 32
3.14 REGISTRATION STATEMENT................................................................ 32
3.15 INVESTMENT COMPANY ACT OF 1940........................................................ 32
3.16 TRADEMARKS, PATENTS AND COPYRIGHTS.................................................... 33
3.17 DEFINITION OF KNOWLEDGE OF ACQUIROR................................................... 33
3.18 VOTE REQUIRED......................................................................... 33
ARTICLE 4 COVENANTS................................................................................... 33
4.1 ACQUISITION PROPOSALS................................................................. 33
4.2 CONDUCT OF THE COMPANY'S BUSINESS PENDING MERGER...................................... 34
4.3 CONDUCT OF ACQUIROR'S BUSINESS PENDING MERGER......................................... 38
4.4 OTHER ACTIONS......................................................................... 39
</TABLE>
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4.5 FILING OF CERTAIN REPORTS............................................................. 39
4.6 COMPLIANCE WITH THE SECURITIES ACT.................................................... 39
ARTICLE 5 ADDITIONAL COVENANTS........................................................................ 40
5.1 PREPARATION OF THE REGISTRATION STATEMENT
AND THE PROXY STATEMENT; THE COMPANY SHAREHOLDERS MEETING............................. 40
5.2 ACCESS TO INFORMATION: CONFIDENTIALITY................................................ 41
5.3 BEST EFFORTS; NOTIFICATION............................................................ 41
5.4 COSTS OF TRANSACTION.................................................................. 42
5.5 TAX TREATMENT; TAX ELECTIONS.......................................................... 42
5.6 PUBLIC ANNOUNCEMENTS.................................................................. 42
5.7 LISTING............................................................................... 43
5.8 TRANSFER AND GAINS TAXES.............................................................. 43
5.9 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS......................................... 43
5.10 INDEMNIFICATION....................................................................... 44
5.11 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS............................................ 45
5.12 STORAGE TRUST PROPERTIES, L.P......................................................... 45
5.13 NOTICES............................................................................... 46
ARTICLE 6 CONDITIONS.................................................................................. 46
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER............................ 46
6.2 CONDITIONS TO OBLIGATIONS OF ACQUIROR................................................. 46
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY.............................................. 48
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER........................................................... 49
7.1 TERMINATION........................................................................... 49
7.2 CERTAIN FEES AND EXPENSES............................................................. 50
7.3 EFFECT OF TERMINATION................................................................. 51
7.4 AMENDMENT............................................................................. 51
7.5 EXTENSION; WAIVER..................................................................... 51
ARTICLE 8 GENERAL PROVISIONS.......................................................................... 52
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES......................................... 52
8.2 NOTICES............................................................................... 52
8.3 INTERPRETATION........................................................................ 53
8.4 COUNTERPARTS.......................................................................... 53
8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES........................................ 53
8.6 GOVERNING LAW......................................................................... 53
</TABLE>
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8.7 ASSIGNMENT............................................................................ 53
8.8 ENFORCEMENT........................................................................... 54
8.9 SEVERABILITY.......................................................................... 54
8.10 NON-RECOURSE TO DIRECTORS, TRUSTEES AND OFFICERS...................................... 54
</TABLE>
EXHIBITS
Exhibit A -- Articles of Merger
Exhibit B -- [Reserved]
Exhibit C -- Agreement to Purchase Stock of Storage Realty Management Co.
Exhibit D -- Retention Program
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
November 12, 1998 by and among Storage Trust Realty, a Maryland real estate
investment trust (the "Company"), Public Storage, Inc., a California corporation
("Acquiror"), and Newco Merger Subsidiary, Inc., a Maryland corporation and a
subsidiary of Acquiror ("MSub").
RECITALS:
A. The Board of Trustees of the Company and the Board of Directors
of Acquiror deem it advisable and in the best interests of their respective
companies and their shareholders, subject to the conditions and other provisions
contained herein, that the Company and MSub will merge with the Company being
the surviving entity in such merger (the "Merger") and each issued and
outstanding common share of beneficial interest, par value $.01 per share, of
the Company ("Company Common Shares") will be converted into the right to
receive the Merger Consideration (as described in Section 1.9 below).
B. Upon the terms and conditions set forth herein, Acquiror, MSub
and the Company shall execute Articles of Merger in substantially the form
attached hereto as Exhibit A (the "Articles of Merger") and shall file such
articles in accordance with Maryland law to effectuate the Merger.
C. For federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
D. The Company has received a fairness opinion relating to the
Merger, as more fully described herein.
E. The Company and Acquiror desire to make certain representations,
warranties and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the premises, and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, and in accordance with Title 3 and Title 8 of the Corporations and
Associations Article of the
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Annotated Code of Maryland, as amended ("Title 3" and "Title 8", respectively),
MSub shall be merged with and into the Company, with the Company as the
surviving entity (the "Surviving Entity").
1.2 CLOSING. The closing of the Merger ("Closing") will take place
at 10:00 a.m. on the date to be specified by the parties, which (subject to
satisfaction or waiver of the other conditions set forth in Article 6) shall be
no later than the second business day after satisfaction or waiver of the
conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices of
Mayer, Brown & Platt, 190 South LaSalle Street, Chicago, Illinois 60603, unless
another date or place is agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 6, the Company,
MSub and Acquiror shall execute and file the Articles of Merger, executed in
accordance with Title 3 and Title 8, with the State Department of Assessments
and Taxation of Maryland (the "Department"), and shall make all other filings
and recordings required under Title 3 and Title 8. The Merger shall become
effective (the "Effective Time") at such time as shall be specified in the
Articles of Merger. Following the Effective Time, the separate corporate
existence of MSub shall cease and the Company shall continue as the surviving
entity and shall succeed to and assume all the rights and obligations of MSub in
accordance with Maryland law. Unless otherwise agreed, the parties shall cause
the Effective Time to occur on the Closing Date.
1.4 EFFECTS OF MERGER ON COMPANY'S DECLARATION OF TRUST AND BYLAWS.
The Declaration of Trust (as defined herein) and Company By-laws (as defined
herein), as amended and in effect immediately prior to the Effective Time, shall
continue in full force and effect after the Merger until further amended in
accordance with applicable Maryland law.
1.5 DIRECTORS AND OFFICERS. From and after the Effective Time, the
trustees and officers of the Surviving Entity shall be those set forth on
Schedule 1.5. It is also agreed that, from and after the Effective Time, the
board of directors of the Acquiror shall be expanded by one seat and Mr. Daniel
C. Staton shall be elected as a new member of the board of directors of the
Acquiror.
1.6 EFFECT ON SHARES OF BENEFICIAL INTEREST, OPTIONS AND UNITS. The
Merger shall have no effect on the shares of common stock of Acquiror. The
effect of the Merger on the shares, options and restricted share awards of the
Company and the limited partnership interests ("Units") of Storage Trust
Properties, L.P., a Delaware limited partnership (the "Partnership") shall be
solely as provided herein and in the Articles of Merger.
1.7 [Reserved].
1.8 TRANSFER OF SECURITIES OF STORAGE REALTY MANAGEMENT CO. In
connection with the consummation of the Merger, PS Orangeco, Inc. will acquire
from
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Burnam Holding Companies Co. ("BHC") all of the outstanding securities of
Storage Realty Management Co. (the "Management Company") (other than securities
owned by the Partnership) at or after the Effective Time. Concurrently with the
execution of this Agreement, PS Orangeco, Inc. and BHC will execute an agreement
in the form attached hereto as Exhibit C agreeing, among other things, to such
transfer, on or about the Effective Time on the terms and conditions provided
therein.
1.9 MERGER CONSIDERATION. As of the Effective Time, by virtue of the
Merger and without any action on the part of any stockholder of the Company,
(a) All Company Common Shares which are held by Acquiror or any
wholly-owned subsidiary of Acquiror (including MSub) or the Company shall be
canceled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
(b) Each other outstanding Company Common Share shall be converted
into the right to receive .86 (the "Exchange Ratio") of a share of common stock
of Acquiror, par value $.01 per share ("Acquiror Common Share"), for each
Company Common Share subject to the provisions set forth in the Articles of
Merger.
(c) Immediately prior to the Effective Time, MSub shall have issued
and outstanding a sufficient number shares of stock ("MSub Stock") necessary to
consummate the Merger. At the Effective Time, each issued and outstanding share
of MSub Stock shall be converted into one validly issued, fully paid and
nonassessable share of beneficial interest of the Surviving Entity.
1.10 PAYMENT. (a) Promptly after the Effective Time, Acquiror shall
deposit (or cause to be deposited) with a bank, trust company or other person to
be designated by Acquiror and reasonably acceptable to the Company (the
"Exchange Agent"), for the benefit of the holders of Company Common Shares, for
exchange in accordance with this Article 1, Acquiror Common Shares in an amount
sufficient to pay the aggregate number of Acquiror Common Shares to be issued in
the Merger. No fractional Acquiror Common Shares shall be issued in the Merger.
Holders of Company Common Shares who would otherwise be entitled to receive
fractional Acquiror Common Shares shall instead receive cash in lieu thereof as
provided in the Articles of Merger.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Company Common Shares
immediately prior to the Effective Time (A) a letter of transmittal (the "Letter
of Transmittal") (which shall specify that delivery shall be effected, and risk
of loss and title to the Company Certificates shall pass, only upon delivery of
such Company Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Acquiror shall specify) and (B) instructions for
use in effecting the surrender of certificates evidencing Company Common Shares
("Company Certificates") in exchange for the Acquiror Common Shares with respect
to the shares of Company Common Shares formerly evidenced thereby.
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(c) Upon surrender of a Company Certificate for cancellation to the
Exchange Agent, together with the Letter of Transmittal, duly executed, and such
other documents as Acquiror or the Exchange Agent shall reasonably request, the
holder of such Company Certificate shall be entitled to receive in exchange
therefor Acquiror Common Shares which such holder has the right to receive
pursuant to the provisions of this Article 1, and the Company Certificate so
surrendered shall forthwith be canceled. Until surrendered as contemplated by
this Section 1.10, each Company Certificate shall be deemed at any time after
the Effective Time to evidence only the right to receive the Acquiror Common
Shares with respect to the shares of Company Common Shares formerly evidenced
thereby.
(d) If Acquiror Common Shares are to be delivered to a person other
than the person in whose name the certificates surrendered in exchange therefor
are registered, it shall be a condition to the payment of such Acquiror Common
Shares that the certificates so surrendered shall be properly endorsed or
accompanied by appropriate stock powers and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay to the Exchange Agent any transfer or other taxes payable by
reason of the foregoing or establish to the satisfaction of the Exchange Agent
that such taxes have been paid or are not required to be paid.
(e) Unless required otherwise by applicable law, any portion of the
aggregate Acquiror Common Shares which remain undistributed to holders of shares
of Company Common Shares two years after the Effective Time shall be delivered
to Acquiror and any holders of Company Common Shares who have not theretofore
complied with the provisions of this Article 1 shall thereafter look only to
Acquiror for payment of any Acquiror Common Shares to which they are entitled
pursuant to this Article 1. Neither Acquiror nor the Exchange Agent shall be
liable to any holder of Company Common Shares for any Acquiror Common Shares
held by Acquiror or the Exchange Agent for payment pursuant to this Article 1
which are delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.11 NO FURTHER RIGHTS. From and after the Effective Time, holders
of certificates theretofore evidencing shares of Company Common Shares shall
cease to have any rights as stockholders of the Company, except as provided
herein or by law.
1.12 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time,
the stock transfer books of the Company shall be closed and no transfer of
Company Common Shares shall be made thereafter. In the event that, after the
Effective Time, certificates for Company Common Shares are presented to
Acquiror, they shall be canceled and exchanged for Acquiror Common Shares for
each Company Common Share presented as provided in this Section 1.
1.13 STOCK OPTIONS. At least twenty (20) days prior to the Effective
Time, Acquiror shall elect either (a) or (b) below.
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(a) The Company shall take all actions necessary to provide that,
immediately prior to the Effective Time, (i) each Company Option (as hereinafter
defined), whether or not then exercisable or vested, shall become fully
exercisable and vested, (ii) each such Company Option shall be canceled, and
(iii) in consideration of such cancellation, the Company shall pay to each such
holder of Company Options an amount in cash in respect thereof equal to the
product of (1) the excess, if any, of the Closing Price (as defined below) of
the Company Shares over the exercise price per share of such Company Option and
(2) the number of Company Common Shares subject thereto. Notwithstanding
anything to the contrary herein, if it is determined that compliance with any of
the foregoing may cause any individual subject to Section 16 of the Securities
Exchange Act of 1934, as amended, to become subject to the profit recovery
provisions thereof, any Company Options held by such individual may, if such
individual so agrees, subject to the proviso to this sentence, be canceled or
purchased, as the case may be, immediately prior to the Effective Time or at
such later time as may be necessary to avoid application of such profit recovery
provisions and such individual will be entitled to receive from the Company or
the Surviving Entity an amount in cash in respect thereof equal to the product
of (1) the excess, if any, of the Closing Price of the Company Shares over the
exercise price per share of such Company Option and (2) the number of Company
Common Shares subject thereto immediately prior to the Effective Time; provided,
that the parties hereto will cooperate, including by providing alternate
arrangements, so as to achieve the intent of the foregoing without giving rise
to such profit recovery. "Closing Price" shall mean the unweighted average
closing price of a Company Common Share or Acquiror Common Share, as applicable,
reported as "New York Stock Exchange Composite Transactions" by The Wall Street
Journal (Midwest Edition) for the twenty (20) Trading Days ending on the third
Trading Day immediately prior to the Closing Date. For the purposes of the
paragraph only, "Trading Day" shall mean any day on which such shares are traded
on the NYSE.
(b) If requested by the Acquiror, the Company shall take reasonable
steps to seek to cause each Company Option to be amended, with the consent of
the holder thereof, to (i) adjust the number of shares for which such option is
thereafter exercisable by multiplying such number of shares by .86, (ii) adjust
the per share exercise price by dividing such exercise price by .86, (iii) to
provide that such option shall be exercisable for Acquiror Common Shares and
(iv) to eliminate any dividend equivalent rights or distribution equivalent
rights, it being understood that each Company Option whether or not then
exercisable or vested, shall become fully exercisable and vested immediately
prior to the Effective Time. To the extent that one or more holders do not
provide such consent, the Company shall follow the procedures outlined in
paragraph (a) above with respect to each Company Option that has not been
amended prior to the Effective time to be exercisable for Acquiror Common
Shares. The Company agrees with the Acquiror to use its reasonable efforts in
seeking such consents from the holders of Company Options; however, the ability
to obtain any such consents shall not be a condition to Closing. Upon conversion
of the number of shares and the exercise price subject to a Company Option, all
Company Options shall remain subject to the Plan's terms. Acquiror agrees to
register the shares subject to the Plan on a registration statement on Form S-8
filed with the SEC as soon as practicable following the Effective Time.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Acquiror and MSub as follows:
2.1 ORGANIZATION, STANDING AND POWER OF THE COMPANY. The Company is a
real estate investment trust duly organized and validly existing under the laws
of the state of Maryland and has the requisite power and authority to carry on
its business as now being conducted. The Company is duly qualified or licensed
to do business as a foreign real estate investment trust or other form of entity
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
material adverse effect on the business, properties, assets, financial condition
or results of operations of the Company and its Subsidiaries (as defined below)
taken as a whole (a "Company Material Adverse Effect"). Schedule 2.1 sets forth
each jurisdiction in which the Company is qualified or licensed to do business,
as well as all assumed names under which the Company conducts business in such
jurisdictions. The Company has previously made available to Acquiror complete
and correct copies of its Second Amended and Restated Declaration of Trust (the
"Declaration of Trust") and its Amended and Restated By-laws (the "Company By-
laws"), in each case, as amended to the date of this Agreement.
2.2 COMPANY SUBSIDIARIES. (a) Schedule 2.2 sets forth (i) each
Subsidiary of the Company (the "Company Subsidiaries"), (ii) the legal form of
each Company Subsidiary, including the state or country of formation, (iii) the
ownership interest therein of the Company, if not wholly-owned by the Company,
and if not wholly-owned, the identity and ownership interest of other owners of
such Company Subsidiary, (iv) each jurisdiction in which each Company Subsidiary
is qualified or licensed to do business, and (v) each assumed name under which
each Company Subsidiary conducts business in any jurisdiction. As used in this
Agreement, "Subsidiary" of any Person means any corporation, partnership,
limited liability company, joint venture or other legal entity of which such
Person (either directly or through or together with another Subsidiary of such
Person) owns a majority of the equity interests or voting power of such
corporation, partnership, limited liability company, joint venture or other
legal entity. As used herein, "Person" means an individual, corporation,
partnership, limited liability company, joint venture, association, trust,
unincorporated organization or any other legal entity.
(b) Except as set forth in Schedule 2.2, (i) all the outstanding
shares of capital stock of each Company Subsidiary that is a corporation have
been validly issued and are (A) fully paid and nonassessable, (B) owned by the
Company or by another Company Subsidiary, and (C) owned free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever (collectively, "Liens"), and (ii) all equity interests in
each Company Subsidiary that is a partnership, joint venture, limited liability
company or trust which
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are owned by the Company, by another Company Subsidiary or by the Company and
another Company Subsidiary are owned free and clear of all Liens. Each Company
Subsidiary that is a corporation is duly incorporated and validly existing under
the laws of its jurisdiction of incorporation and has the requisite corporate
power and authority to carry on its business as now being conducted, and each
Company Subsidiary that is a partnership, joint venture, limited liability
company or trust is duly organized and validly existing under the laws of its
jurisdiction of organization and has the requisite power and authority to carry
on its business as now being conducted. Each Company Subsidiary is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not have a Company Material Adverse
Effect. True and correct copies of the articles of incorporation, bylaws,
partnership agreements, joint venture and operating agreements or similar
organizational documents of each Company Subsidiary, as amended to the date of
this Agreement, have previously been made available to Acquiror.
2.3 CAPITAL STRUCTURE. (a) As of the date hereof, the authorized
shares of beneficial interest of the Company consists of 150,000,000 shares, of
which 16,076,291 Company Common Shares are issued and outstanding, and no Series
A Junior Participating Preferred Shares, $.01 par value per share (the "Company
Preferred Shares" and together with the Common Shares, the "Company Shares"),
have been issued and outstanding or have ever been issued or outstanding. As of
the date hereof, (i) 997,898 Company Common Shares are reserved for issuance
under the Company Dividend Reinvestment and Share Purchase Plan (the "Company
Dividend Reinvestment Plan"), (ii) 716,948 Company Common Shares are reserved
for issuance under the Company 1994 Share Incentive Plan (formerly known as the
1994 Share Option Plan) (as Amended and Restated, effective February 4, 1997)
(the "Company Option Plan"), and (iii) 1,176,701 Company Common Shares are
reserved for issuance subject to the exchange of issued and outstanding Units.
On the date hereof, except as set forth in this Section 2.3 or Schedules 2.3 or
2.20, no Company Shares or other securities of the Company are issued, reserved
for issuance or outstanding.
(b) Set forth in Schedule 2.3 is a true and complete list of the
following: (i) each outstanding qualified or nonqualified option to purchase
Company Shares or Units granted under the Company Option Plan or otherwise (a
"Company Option") and a total thereof, (ii) each grant of Company Shares to
employees which are subject to any risk of forfeiture ("Restricted Share
Grants") and a total thereof, and (iii) any obligation of the Company to issue
Company Shares or Units as a result of the transactions contemplated hereby
("Change in Control Share Grants") and a total thereof. The Restricted Share
Grants are included in the number of outstanding Company Common Shares set forth
in Section 2.3(a). For each Company Option held by the executive officers of the
Company, Schedule 2.3 sets forth the name of the grantee, the date of the grant,
the status of the option as qualified or nonqualified under Section 422 of the
Code, the number of Company Shares or Units subject to such option, the number
of shares or Units subject to options that are currently exercisable, the
exercise price per share or Unit, those options providing for reload options,
and the number of such shares or Units subject to share
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appreciation rights. For each Company Option held by employees of the Company or
any of the Company Subsidiaries who are not executive officers of the Company,
Schedule 2.3 sets forth the name of the grantee, the date of the grant, the
number of Company Shares or Units subject to such option and the exercise price
per share or Unit. For each Restricted Share Grant, Schedule 2.3 sets forth the
name of the grantee, the date of the grant and the number of Company Shares or
Units granted. For each Change in Control Share Grant, Schedule 2.3 sets forth
the aggregate number of Company Common Shares or Units to be issued immediately
prior to the Merger. To date, no reload options have been granted by the Company
and no amounts have been credited to the account of a holder of an option with
respect to any dividend equivalent rights or distribution equivalent rights
previously granted by the Company. On the date of this Agreement, except as set
forth in this Section 2.3 or Section 2.6 or Schedules 2.3 or 2.20, no Company
Shares or other securities of the Company or Units are issued, reserved for
issuance, or outstanding.
(c) All outstanding Company Shares are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights. There
are no bonds, debentures, notes or other indebtedness of the Company, or assets
of any other entities convertible into, or exchangeable for, securities of the
Company except as provided in this Section 2.3 or Schedule 2.20.
(d) Except as set forth in this Section 2.3 or in Schedules 2.3 or
2.20, as of the date of this Agreement there are no outstanding securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company or any Company Subsidiary is a
party or by which such entity is bound, obligating the Company or any Company
Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock, securities or other ownership interests of
the Company or any Company Subsidiary or obligating the Company or any Company
Subsidiary to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. True
and complete copies of each instrument identified on Schedule 2.3 has been made
available to Acquiror.
(e) All dividends or distributions on Company Shares which have been
authorized or declared prior to the date of this Agreement have been paid in
full.
2.4 OTHER INTERESTS. Except as set forth in Schedule 2.2 or 2.4,
neither the Company nor any Company Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any Person (other than
investments in short-term investment securities). With respect to such
interests, the Company and each such Company Subsidiary is a partner, member or
stockholder in good standing, and owns such interests free and clear of all
Liens. Neither the Company nor any of the Company Subsidiaries is in breach in
any material respect of any provision of any agreement, document or contract
governing its rights in or to the interests owned or held by it, all of which
agreements, documents and contracts have been made available to Acquiror and are
(a) set forth on a Schedule hereto, (b) unmodified except as described therein,
and (c) in full force and effect. To the Knowledge of the Company (as defined in
Section 2.28), the other parties to such agreements, documents or contracts are
not in any
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material breach of any of their respective obligations under such agreements,
documents or contracts, nor has the Company received any notice of any such
material breach.
2.5 ORGANIZATION, STANDING AND POWER OF THE PARTNERSHIP. The
Partnership is a limited partnership duly organized and validly existing under
the laws of the State of Delaware and has the requisite power and authority to
carry on its business as now being conducted. The Partnership is duly qualified
or licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a Company Material Adverse Effect. The Company has
made available to Acquiror complete and correct copies of the Amended and
Restated Operating Partnership Agreement, as amended (the "Operating Partnership
Agreement").
2.6 CAPITAL STRUCTURE OF THE PARTNERSHIP. As of the date hereof, the
number of outstanding Units consisted of 17,252,992 Units (of which 16,076,291
Units were held by the Company as general partner and 1,176,701 Units were held
by limited partners. All of the Units owned by the Company are held free and
clear of all Liens. All outstanding Units are duly authorized, validly issued,
fully paid and nonassessable (except for the Company's liability as a general
partner) and not subject to preemptive rights. There are no bonds, debentures,
notes or other indebtedness of the Partnership, or assets of any other entities
exchangeable into Units or other securities of the Partnership. All dividends or
distributions on Units which have been authorized or declared prior to the date
of this Agreement have been paid in full.
2.7 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) The Company has the
requisite power and authority to enter into this Agreement and, subject to the
affirmative vote of at least two-thirds of the outstanding Company Common Shares
entitled to vote thereon to approve the Merger (the "Company Shareholder
Approvals"), to consummate the transactions contemplated by this Agreement to
which the Company or any Company Subsidiary is a party. The execution and
delivery of this Agreement by the Company and the consummation by the Company or
any Company Subsidiary of the transactions contemplated by this Agreement to
which the Company or any Company Subsidiary is a party have been duly authorized
by all necessary action on the part of the Company or such Company Subsidiary,
subject to the Company Shareholder Approvals. This Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
(b) Subject to the disclosure set forth in Schedule 2.7, the
execution and delivery of this Agreement by the Company do not, and the
consummation of the transactions contemplated by this Agreement to which the
Company or any Company Subsidiary is a party and compliance by the Company with
the provisions of this Agreement will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a
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right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit under, or result in the creation of any Lien
upon any of the properties or assets of the Company or any Company Subsidiary
under, (i) the Declaration of Trust or the Company By-laws or the comparable
charter or organizational documents or partnership or similar agreement (as the
case may be) of any Company Subsidiary, in each case as amended or supplemented
to the date of this Agreement, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, reciprocal easement agreement, lease or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or any Company Subsidiary or their respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation (collectively, "Laws") applicable to the Company or any Company
Subsidiary, or their respective properties or assets, other than, in the case of
clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or
Liens that individually or in the aggregate would not (x) have a Company
Material Adverse Effect or (y) prevent the consummation of the transactions
contemplated by this Agreement. Subject to the disclosure as set forth on
Schedule 2.7, no consent, approval, order or authorization of, or registration,
declaration or filing with, any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity"), is required
by or with respect to the Company or any Company Subsidiary in connection with
the execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated by this Agreement, except for
(i) the filing with the Securities and Exchange Commission (the "SEC") of (x) a
proxy statement relating to the approval by the Company's shareholders of the
transactions contemplated by this Agreement (as amended or supplemented from
time to time, the "Proxy Statement"), (y) registration statements on appropriate
forms under the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (z)
such reports under Section 13(a) of the Exchange Act as may be required in
connection with this Agreement and the transactions contemplated by this
Agreement, (ii) the filing of listing applications with the New York Stock
Exchange (the "NYSE") and the Pacific Exchange (the "PCX") with respect to the
Acquiror Common Shares to be issued in the Merger, (iii) the acceptance for
record of the Articles of Merger by the Department, and (iv) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings (A) as may be required under (y) federal, state or local environmental
laws, or (z) the "blue sky" laws of various states, to the extent applicable, or
(B) which, if not obtained or made, would not prevent or delay in any material
respect the consummation of any of the transactions contemplated by this
Agreement or otherwise prevent the Company or any Company Subsidiary from
performing its obligations under this Agreement in any material respect or have,
individually or in the aggregate, a Company Material Adverse Effect.
(c) For purposes of determining compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "Hart-Scott Act"), the
Company confirms that (i) the conduct of its business consists solely of
investing in, owning and operating real estate for the benefit of its
shareholders and (ii) it conducts its business in accordance with the
requirements of Section 856 of the Code.
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2.8 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES;
BOOKS AND RECORDS. The Company has filed all required reports, schedules, forms,
statements and other documents with the SEC since January 1, 1996 through the
date hereof (the "Company SEC Documents"). Schedule 2.8 contains a complete list
of all Company SEC Documents filed by the Company with the SEC since January 1,
1996 and on or prior to the date of this Agreement (other than preliminary
material filed with the SEC on a confidential basis). All of the Company SEC
Documents (other than preliminary material), as of their respective filing
dates, complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act and, in each case, the rules and regulations
promulgated thereunder applicable to such Company SEC Documents. None of the
Company SEC Documents at the time of filing contained any untrue statement of a
material fact or omitted 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 were made, not misleading, except to the extent
such statements have been modified or superseded by later Company SEC Documents
filed and publicly available prior to the date of this Agreement. The
consolidated financial statements of the Company included in the Company SEC
Documents 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 ("GAAP") (except, in the case of unaudited statements, as
permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of the Company and the Company Subsidiaries, as
of the dates thereof and the consolidated results of operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). The Company has no Company Subsidiaries
which are not consolidated for accounting purposes. Except for liabilities and
obligations set forth in the Company SEC Documents or in Schedule 2.8, neither
the Company nor any of the Company Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
(i) required by GAAP to be set forth on a consolidated balance sheet of the
Company or in the notes thereto and which, individually or in the aggregate,
would have a Company Material Adverse Effect or (ii) would not alone, or in the
aggregate, be reasonably expected to have a Company Material Adverse Effect. The
books of account and other financial records of the Company and the Company
Subsidiaries have been maintained in accordance with good business practices.
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Company SEC Documents or Schedule 2.9, since the date of the most recent audited
financial statements included in the Company SEC Documents (the "Company
Financial Statement Date") the Company and the Company Subsidiaries have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of the Company and the Company
Subsidiaries taken as a whole, except for general economic changes, changes in
the United States financial markets
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generally, changes that affect REITs generally and changes that affect self-
storage real estate generally (a "Company Material Adverse Change"), nor has
there been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a Company Material Adverse Change, (b)
subject to Section 5.11, any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to any Company Common Shares, except for regular quarterly distributions (in the
case of the Company) not in excess of $0.46 per Company Common Share and per
Unit with customary record and payment dates, (c) any split, combination or
reclassification of any of Company Common Shares or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for, or giving the right to acquire by exchange or exercise,
shares of its beneficial interest or any issuance of an ownership interest in,
any Company Subsidiary except as contemplated by this Agreement, (d) any damage,
destruction or loss, whether or not covered by insurance, that has or would have
a Company Material Adverse Effect, or (e) any change made prior to the date of
this Agreement in accounting methods, principles or practices by the Company or
any Company Subsidiary materially affecting its assets, liabilities or business,
except insofar as may have been disclosed in Company SEC Documents or required
by a change in GAAP, or (f) any amendment of any employment, consulting,
severance, retention or any other agreement between the Company and any officer
or trustee of the Company.
2.10 LITIGATION. Except as disclosed in the Company SEC Documents,
Schedule 2.10 or Schedule 2.11, and other than personal injury and other routine
tort litigation arising from the ordinary course of operations of the Company
and the Company Subsidiaries which are covered by adequate insurance and which
involve less than $100,000 individually or $500,000 in the aggregate, there is
no suit, action or proceeding pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any Company Subsidiary that,
individually or in the aggregate, could reasonably be expected to (i) have a
Company Material Adverse Effect or (ii) prevent the consummation of any of the
transactions contemplated by this Agreement, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Company or any Company Subsidiary having, or which, insofar as
reasonably can be foreseen, in the future would have, any such effect.
2.11 PROPERTIES. (a) Schedule 2.11 identifies all real property owned
or leased by the Company and the Company Subsidiaries (the "Company
Properties"). Except as provided in Schedule 2.11, the Company or one or more of
the Company Subsidiaries owns fee simple title to each of the Company
Properties, which are all of the real estate properties owned by them. All such
properties are owned in each case free and clear of liens, mortgages or deeds of
trust, claims against title, charges which are liens, security interests or
other encumbrances on title ("Encumbrances") except as provided below or as
would not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect. Except as set forth in Schedule 2.20, Schedule
2.11 or Schedule 2.4, no other Person has any ownership interest in any of the
Company Properties, and any such ownership interest so scheduled does not
materially detract from the value of, or materially interfere with the present
use of, any of the Company Properties subject thereto or affected thereby.
Except as set forth in Schedule 2.11, none of the
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Company Properties is subject to any restriction on the sale or disposition
thereof or on the financing or release of financing thereon. The Company
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions") or other
Encumbrances, except for (i) Encumbrances and Property Restrictions set forth in
the Schedules, (ii) Property Restrictions imposed or promulgated by law or any
governmental body or authority with respect to real property, including zoning
regulations, which do not materially detract from the value of or present use of
any Company Property, (iii) Encumbrances and Property Restrictions disclosed on
existing title reports or existing surveys (in either case copies of which title
reports and surveys have been delivered or made available to Acquiror) which,
individually or in the aggregate, do not materially detract from the value of or
present use of any Company Property subject thereto or affected thereby
(provided that the Company specifically represents and warrants that any
Encumbrances identified on any existing title report as securing any
Indebtedness, other than the Indebtedness identified on Schedule 2.20, has been
released of record since the date of the title report in question) and (iv)
mechanics', carriers', workmen's or repairmen's liens, other Encumbrances and
Property Restrictions, if any, which, individually or in the aggregate, are not
reasonably expected to have a Company Material Adverse Effect. Schedule 2.11
lists each of the Company Properties which are under development as of the date
of this Agreement and describes the status of such development as of the date
hereof.
(b) Except as provided in Schedule 2.11, valid policies of title
insurance (each a "Company Title Insurance Policy") have been issued insuring
the Company's or the applicable Company Subsidiary's fee simple or leasehold
title, where applicable, to the Company Properties in amounts at least equal to
the purchase price thereof paid by the Company therefor, subject only to the
matters disclosed above and on the Schedules, and such policies are, at the date
hereof, in full force and effect and no claim has been made against any such
policy. A termination of the Centreville Lease, referred to in Schedule 2.11,
would not materially detract from the value or present use of the fee portion of
Company Property No. 1403. A true and correct copy of each Company Title
Insurance Policy has been previously made available to Acquiror.
(c) Except as provided in Schedule 2.11 or in the Company's capital
budget attached to the Schedules (the "Company Capital Budget"), (i) no
certificate, permit or license from any governmental authority having
jurisdiction over any of the Company Properties or any agreement, easement or
other right which is necessary to permit the lawful use and operation of the
buildings and improvements on any of the Company Properties in all material
respects or which is necessary to permit the lawful use and operation of all
driveways, roads and other means of egress and ingress to and from any of the
Company Properties in all material respects has not been obtained and is not in
full force and effect, nor, to the Knowledge of the Company does there exist any
pending threat of modification or cancellation of any of same, (ii) to the
Knowledge of the Company no written notice of any violation of any federal,
state or municipal law, ordinance, order, regulation or requirement materially
and adversely affecting any of the Company Properties in a material respect has
been issued by any governmental authority; (iii) to the Knowledge of the Company
there are no material structural defects relating to any Company
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Property; (iv) to the Knowledge of the Company there is no Company Property
whose building systems are not in working order in any material respect; or (v)
to the Knowledge of the Company, there is no physical damage or deterioration to
any Company Property in excess of $100,000 for which there is no insurance in
effect covering the cost of the restoration or which in the aggregate is
expected to result in a Company Material Adverse Effect; except in the case of
(iii), (iv) and (v) above as may arise as a result of the normal wear and tear
incurred in connection with owning and operating properties of the type owned
and operated by the Company.
(d) Except as set forth in Schedule 2.11, neither the Company nor any of
the Company Subsidiaries has received any written notice to the effect that (i)
any condemnation or rezoning proceedings are pending or threatened with respect
to any of the Company Properties or (ii) any zoning, building or similar law,
code, ordinance, order or regulation is or will be violated in any material
respect for any property by the continued maintenance, operation or use of any
buildings or other improvements on any of the Company Properties or by the
continued maintenance, operation or use of the parking areas, except for such
notices as would not reasonably be expected, individually or in the aggregate,
to materially detract from the value of or present use of any of the Company
Property subject thereto or affected thereby. No one of the "Possible Violations
of Local Codes or Ordinances" referred to in Schedule 2.11 will materially
detract from the value or present use of the Company Property to which it
relates.
(e) Except as set forth in Schedule 2.11 all of the Company Properties are
managed by the Company or a wholly-owned Company Subsidiary.
(f) Except as set forth in Schedule 2.11, all work required to be
performed, payments required to be made and actions required to be taken prior
to the date hereof pursuant to any agreement entered into with a governmental
body or authority in connection with a site approval, zoning reclassification or
other similar action relating to any Company Properties (e.g., local improvement
district, road improvement district, environmental mitigation) have been
performed, paid or taken, as the case may be, in all material respects, and,
there are no material work, payments or actions that are required after the date
hereof pursuant to such agreements, except as set forth in development or
operating budgets for such Company Properties delivered to Acquiror prior to the
date hereof.
(g) The Company and each of the Company Subsidiaries have good and
sufficient title to all their personal and non-real properties and assets
reflected in their books and records as being owned by them (including those
reflected in the consolidated balance sheet of the Company as of December 31,
1997, except as since sold or otherwise disposed of in the ordinary course of
business), free and clear of all liens and encumbrances, except such
Encumbrances reflected on Schedule 2.20 or Schedule 2.11 or on the consolidated
balance sheet of the Company as of December 31, 1997, and the notes thereto, and
except for liens for current taxes not yet due and payable, and liens or
encumbrances which are normal to the business of the Company and the Company
Subsidiaries and are not, in the aggregate, material in relation to the assets
of the Company on a consolidated basis and except also for such imperfections of
title,
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easements and encumbrances, if any, as would not materially detract from the
value of or present use of any of the Company Properties subject thereto or
affected thereby.
(h) Except as set forth in Schedule 2.11, no Company Property is currently
under development or subject to any agreement with respect to development, and
neither the Company nor any Company Subsidiary shall enter into any such
agreements between the date hereof and the Effective Time without the prior
written approval of Acquiror.
(i) All consents required from lessors under material leases of any Company
Property leased to the Company or a Company Subsidiary, or required from other
third parties, by virtue of the Merger, have been or shall have been obtained
prior to the Closing. No third party holds any rights with respect to any such
lease whereby a default by a third party could result in a termination of the
lease to the Company or the applicable Company Subsidiary without such lessee
having a right to a reasonable opportunity to cure the default.
(j) For purposes of this Section 2.11 only, the term Company Subsidiaries
includes FSA, a Louisiana Partnership and Marian Ridge IV, L.L.C.
2.12 ENVIRONMENTAL MATTERS. The Company has made available to Acquiror a
true and complete copy of the environmental reports listed on Schedule 2.12 (the
"Company Environmental Reports"). To the Company's Knowledge, after due inquiry,
the Company Environmental Reports constitute all final environmental reports
(including, without limitation, all final versions of environmental
investigations and testing or analysis made by or on behalf of the Company or
any of the Company Subsidiaries) with respect to the Company Properties in the
possession or control of the Company or any Company Subsidiary. Except (i) as
otherwise listed on Schedule 2.12 and only to the extent described therein, (ii)
for any condition that individually or in the aggregate would not be reasonably
likely to materially detract from the value of or present use of any Company
Property subject thereof or affected thereby, or (iii) that the following does
not apply to conditions arising from the storage of customer goods in storage
units at a Company Property of which the Company does not have Knowledge: (A) to
the Knowledge of the Company, after due inquiry, the Company Properties and the
operations of the Company are in compliance with all Environmental Laws (as
defined below) and all requirements of applicable permits, licenses, approvals
and other authorizations issued pursuant to Environmental Laws; (B) to the
Knowledge of the Company, after due inquiry, the Company has not caused or
suffered to occur any Release (as defined below) nor has the Company used,
stored or disposed, of any Hazardous Substance (as defined below) into the
Environment (as defined below) on, under or from any Company Property and no
condition exists on, in or under any Company Property that could result in the
incurrence of liabilities under, or any violations of or give rise to the
imposition of any Encumbrance under, any Environmental Law or under common law
pertaining to Hazardous Substances on, in or originating from any Company
Property; (C) the Company has not received any written notice of a claim under
or pursuant to any Environmental Law or under common law pertaining to Hazardous
Substances on, in, under or originating from any Company Property; (D) the
Company has no Knowledge of, after due inquiry, and has not received written
notice from any Governmental Entity or other person
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claiming, any violation of any Environmental Law or a determination to undertake
and/or request the investigation, remediation, clean-up or removal of any
Hazardous Substance released into the Environment on, in, under or from any
Company Property; and (E) no Company Property is included or, to the Knowledge
of the Company, after due inquiry, proposed for inclusion on the National
Priorities List issued pursuant to CERCLA (as defined below) by the United
States Environmental Protection Agency (the "EPA") or on the Comprehensive
Environmental Response, Compensation, and Liability Information System database
maintained by the EPA, and the Company has no Knowledge, after due inquiry, that
any Company Property has otherwise been identified in a published writing by the
EPA as a potential CERCLA removal, remedial or response site or, to the
Knowledge of the Company, after due inquiry, proposed for inclusion on any
similar list of potentially contaminated sites pursuant to any other
Environmental Law. To the Company's Knowledge, the insurance policies described
in Schedule 2.12 are valid and enforceable against the insurer and the Company
has not received any notice of cancellation or termination with respect thereto.
To the Company's Knowledge, after due inquiry, there are no underground storage
tanks, asbestos containing building materials or PCBs in, on or at any Company
Property which are reasonably expected to result in a Company Material Adverse
Effect.
As used herein, "Hazardous Substance" shall include any hazardous
substance, hazardous waste, toxic substance, pollutant, hazardous material, or
similarly designated materials including, without limitation, oil, petroleum or
any petroleum-derived substance or waste, asbestos or asbestos-containing
materials, PCBs, pesticides, explosives, radioactive materials, dioxins, urea
formaldehyde insulation or any constituent of any such substance, pollutant or
waste which is identified, regulated, prohibited or limited under any
Environmental Law (including, without limitation, materials listed in the United
States Department of Transportation Optional Hazardous Material Table, 49 C.F.R.
(S) 172.101, or in the EPA's List of Hazardous Substances and Reportable
Quantities, 40 C.F.R. Part 302) as the same may now or hereafter be amended;
"Environment" shall mean any surface water, drinking water, ground water, land
surface, subsurface strata, river sediment, buildings, structures, and ambient,
workplace and indoor and outdoor air; "Environmental Law" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. (S) 9601 et seq.) ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, as amended (42 U.S.C. (S) 6901, et seq.), the Clean Air
Act, as amended (42 U.S.C. (S) 7401, et seq.) the Clean Water Act, as amended
(33 U.S.C. (S) 1251, et seq.), the Toxic Substances Control Act, as amended (15
U.S.C. (S) 2601, et seq.), the Occupational Safety and Health Act of 1970, as
amended (29 U.S.C. (S) 651, et seq.), the Hazardous Materials Transportation
Act, as amended (49 U.S.C. (S) 1801, et seq.), and all other federal, state and
local laws, ordinances, regulations, rules and orders relating to the protection
of the environment or of human health from environmental effects; and "Release"
shall mean any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, emanating or disposing of
any Hazardous Substance into the Environment, including, without limitation, the
abandonment or discard of barrels, containers, tanks (including, without
limitation, underground storage tanks) or other receptacles containing or
previously containing any Hazardous Substance or any release, emission,
discharge or similar term, as those terms are defined or used in any
Environmental Law.
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2.13 RELATED PARTY TRANSACTIONS. Set forth in Schedule 2.13 is a list of
all arrangements, agreements and contracts entered into by the Company or any of
the Company Subsidiaries under which continuing obligations exist with (a) any
consultant, (b) any person who is an officer, trustee, director or Affiliate (as
defined below) of the Company or any of the Company Subsidiaries, any member of
the "immediate family" (as such term is defined in Item 404 of Regulation S-K
promulgated under the Securities Act) of any of the foregoing or any entity of
which any of the foregoing is an Affiliate, or (c) any person who acquired
Company Common Shares in a private placement within the preceding three years,
except those of a type available to Company employees generally. Such documents,
copies of all of which have previously been delivered or made available to
Acquiror, are listed in Schedule 2.13. As used in this Agreement, the term
"Affiliate" shall have the same meaning as such term is defined in Rule 405
promulgated under the Securities Act.
2.14 EMPLOYEE BENEFITS. As used herein, the term "Employee Plan" includes
any pension, retirement, savings, disability, medical, dental, health, life,
death benefit, group insurance, profit sharing, deferred compensation, stock
option, stock loan, bonus, incentive, vacation pay, tuition reimbursement,
severance pay, or other employee benefit plan, trust, agreement, contract,
arrangement, policy or commitment (including, without limitation, any pension
plan, as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended and the rules and regulations promulgated thereunder
("ERISA") ("Pension Plan"), and any welfare plan as defined in Section 3(l) of
ERISA ("Welfare Plan")), whether any of the foregoing is funded, insured or
self-funded, written or oral, (i) sponsored or maintained by the Company or a
trade or business under common control with the Company within the meaning of
Section 414 of the Code (each a "Controlled Group Member") and covering any
Controlled Group Member's active or former employees (or their beneficiaries),
(ii) to which any Controlled Group Member is a party or by which any Controlled
Group Member (or any of the rights, properties or assets thereof) is bound, or
(iii) with respect to which any current Controlled Group Member may otherwise
have any material liability (whether or not such Controlled Group Member still
maintains such Employee Plan). Each Employee Plan is listed on Schedule 2.14 and
true and correct copies of which plans have been made available to Acquiror.
With respect to the Employee Plans:
(a) Except as disclosed in Schedule 2.14, no Controlled Group Member
has any continuing liability under any Welfare Plan which provides for
continuing benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment, except as
may be required by section 4980B of the Code or Section 601 (et seq.) of
ERISA, or under any applicable state law, and at the expense of the
participant or the beneficiary of the participant.
(b) Except as disclosed in Schedule 2.14, each Employee Plan complies
in all material respects with the applicable requirements of ERISA, the
Code and any other applicable law governing such Employee Plan, and each
Employee Plan has at all times been properly administered in all material
respects in accordance with all such requirements of law, and in accordance
with its terms to the extent consistent with all
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such requirements of law. Each Pension Plan which is intended to be
qualified is qualified under Section 401(a) of the Code, has received a
favorable determination letter from the IRS stating that such Plan meets
the requirements of Section 401(a) of the Code and no event has occurred
which would jeopardize the qualified status of any such plan under Section
401(a) of the Code, respectively. No lawsuits, claims (other than routine
claims for benefits) or complaints to, or by, any person or governmental
entity have been filed or are pending, the Company has received no notice
of such a lawsuit, claim or complaint and, to the Knowledge of the Company,
there is no fact or contemplated event which would be expected to give rise
to any such lawsuit, claim (other than routine claims for benefits) or
complaint with respect to any Employee Plan. Without limiting the
foregoing, the following are true with respect to each Employee Plan:
(i) all Controlled Group Members have filed or caused to be
filed every material return, report, statement, notice, declaration
and other document required by any law or governmental agency,
federal, state and local (including, without limitation, the IRS and
the Department of Labor) with respect to each such Employee Plan, each
of such filings has been complete and accurate in all material
respects and no Controlled Group Member has incurred any material
liability in connection with such filings;
(ii) all Controlled Group Members have delivered or caused to
be delivered to every participant, beneficiary and other party
entitled to such material, all material plan descriptions, returns,
reports, schedules, notices, statements and similar materials,
including, without limitation, summary plan descriptions and summary
annual reports, as are required under Title I of ERISA, the Code, or
both, and no Controlled Group Member has incurred any material
liability in connection with such deliveries;
(iii) all contributions and payments with respect to Employee
Plans that are required to be made by a Controlled Group Member with
respect to periods ending on or before the Closing Date (including
periods from the first day of the current plan or policy year to the
Closing Date) have been, or will be, made or accrued before the
Closing Date in accordance with the appropriate plan document or
insurance contracts or arrangements or as otherwise required by ERISA
or the Code;
(iv) with respect to each such Employee Plan, to the extent
applicable, the Company has made available to Acquiror true and
complete copies of (A) plan documents, or any and all other documents
that establish the existence of the plan, trust, arrangement,
contract, policy or commitment and all amendments thereto, (B) the
most recent determination letter, if any, received from the IRS, (C)
the three most recent Form 5500 Annual Reports (and all schedules and
reports relating thereto), and (D) all related trust agreements,
insurance contracts or other funding agreements that implement each
such Employee Plan.
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(c) Except as disclosed in Schedule 2.14, with respect to each
Employee Plan, there has not occurred, and no person or entity is
contractually bound to enter into, any "prohibited transaction" within the
meaning of Section 4975(c) of the Code or Section 406 of ERISA, which
transaction is not exempt under Section 4975(d) of the Code or Section 408
of ERISA.
(d) Except as disclosed in Schedule 2.14, no Controlled Group Member
has maintained or been obligated to contribute to any Employee Plan
subject to Code Section 412 or Title IV of ERISA. With respect to each
Employee Plan set forth on Schedule 2.14, the Company represents that each
such Employee Plan has been completely terminated in accordance with all
Code and ERISA requirements for a "standard termination" (as defined in
4041(b) of ERISA), as applicable on the termination date.
(e) Except as disclosed in Schedule 2.14, with respect to each pension
plan maintained by any Controlled Group Member, such Plans provide the Plan
Sponsor the authority to amend or terminate the plan at any time, subject
to applicable requirements of ERISA and the Code.
2.15 EMPLOYEE MATTERS. Schedule 2.15 lists the employee handbooks of the
Company and each of the Company Subsidiaries currently in effect. A copy of
each such employee handbook has previously been made available to Acquiror.
Except as set forth in Schedule 2.15, such handbooks fairly and accurately
summarize all material employee policies, vacation policies and payroll
practices of the Company and the Company Subsidiaries. Neither the Company nor
any of the Company Subsidiaries is a party to, or bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or other labor organization, nor has the Company or any of the Company
Subsidiaries agreed that any unit of their employees is appropriate for
collective bargaining. No union or other labor organization has been certified
as bargaining representative for any of the Company's employees. To the
Knowledge of the Company there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or threatened
involving employees of the Company or any of the Company Subsidiaries.
2.16 TAXES. (a) Each of the Company and the Company Subsidiaries has filed
all tax returns and reports required to be filed by it (after giving effect to
any filing extension properly granted by a Governmental Entity having authority
to do so) and has paid (or the Company has paid on its behalf) all Taxes (as
defined below) shown or reflected on such returns and reports as required to be
paid by it except (i) as set forth in Schedule 2.16, or (ii) real estate taxes
that are being contested in good faith by appropriate proceedings and for which
the Company or the applicable Company Subsidiary shall have set aside on its
books adequate reserves. The Company has provided Acquiror true and correct
copies of its and the Partnership's 1996 and 1997 federal income tax returns.
The most recent audited financial statements contained in the Company SEC
Documents reflect an adequate reserve for all material Taxes payable or accrued
by the Company and the Company Subsidiaries for all taxable periods and portions
thereof
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through the date of such financial statements. Since the Company Financial
Statement Date, the Company has incurred no liability for taxes under Sections
857(b), 860(c) or 4981 of the Code, including, without limitation, any tax
arising from a prohibited transaction described in Section 857(b)(6) of the
Code, and neither the Company nor any Company Subsidiary has incurred any
liability for taxes other than in the ordinary course of business. No
deficiencies for any Taxes have been proposed, asserted or assessed pursuant to
a "30-day letter" or notice of deficiency sent by the IRS, or otherwise
proposed, asserted or assessed against the Company or any of the Company
Subsidiaries. No waivers of the time to assess any such Taxes have been
executed by the Company or any Company Subsidiary and, to the Knowledge of the
Company, no requests for such waivers are pending. For purposes of the
representations made in this Section 2.16(a), no violation of those
representations shall be treated as occurring to the extent that the
circumstance potentially creating the violation would not produce a Company
Material Adverse Effect. As used in this Agreement, "Taxes" shall include all
federal, state, local and foreign income, property, sales, franchise,
employment, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, together with penalties, interest or additions to Tax with
respect thereto.
(b) The Company (i) for all taxable years commencing with its formation
through December 31, 1997, has been subject to federal income taxation as a REIT
within the meaning of Section 856 of the Code and has satisfied all requirements
to qualify as a REIT for such years, (ii) has operated, and intends to continue
to operate, in such a manner as to qualify as a REIT for the taxable year ending
December 31, 1998, and thereafter until the Effective Time, (iii) has not taken
or omitted to take any action which would reasonably be expected to (A) result
in any rents paid by the tenants of the Properties to be excluded from the
definition of "rents from real property" under Section 856(d)(2)(C) of the Code,
or (B) otherwise result in a challenge to its status as a REIT, and no such
challenge is pending or, to the Company's Knowledge, threatened by the IRS, (iv)
except to the extent indicated in Schedule 2.16, the Company's federal income
tax returns for 1996 and 1997 have not reported (directly or indirectly through
any other entity) from any of the Company Properties or other activities any
income other than income described in Sections 856(c)(2) and 856(c)(3) (income
qualifying under the 95% and 75% gross income tests applicable to REITs), (v)
has indicated on Schedule 2.16 the states in which it is required to file income
or franchise tax returns and whether it files as a REIT in those states, and for
those states in which it files as a REIT, the Company meets the requirements,
applied for state, rather than federal purposes, of clauses (i) , (ii), and
(iii) of this Section 2.16(b), (vi) does not hold directly or indirectly any
assets that are subject to an election to defer gain pursuant to IRS Notice 88-
19 and (vii) and the Company Subsidiaries have not made, and are not obligated
to make, any "excess parachute payments" as described in Section 280G of the
Code, with the possible exception of payments required under the employment or
severance agreements listed on Schedule 2.3. Each Company Subsidiary which is a
partnership, joint venture or limited liability company (i) has been since its
formation and continues to be treated for federal income tax purposes as a
partnership and not as a corporation or an association taxable as a corporation
or ignored as a separate entity, as the case may be, and (ii) has not since its
formation owned any assets (including, without limitation, securities) that
would cause the Company to violate Section 856(c)(4) of the Code. The Company
since its formation has not owned stock or
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securities of any entity that would cause the Company to have violated or to
violate Section 856(c)(4) of the Code.
2.17 NO PAYMENTS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS. Set forth
in Schedule 2.3 and Schedule 2.17 is a true and complete list of all cash and
non-cash payments, rights to property or other contract rights which will become
payable, accelerated or vested to or in each employee, officer, trustee or
director of the Company or any Company Subsidiary as a result of the Merger.
Except as described in Schedule 2.3 and Schedule 2.17, or as otherwise provided
for in this Agreement, there is no employment or severance contract, or other
agreement requiring payments, cancellation of indebtedness or other obligation
to be made on a change of control or otherwise as a result of the consummation
of any of the transactions contemplated by this Agreement, with respect to any
employee, officer, trustee or director of the Company or any Company Subsidiary.
2.18 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker,
financial advisor or other person, other than Merrill Lynch & Co., is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of the Company or any Company Subsidiary.
2.19 COMPLIANCE WITH LAWS. Except as disclosed in the Company SEC
Documents or in Schedules 2.7 or 2.11, neither the Company nor any of the
Company Subsidiaries has violated or failed to comply with any statute, law,
ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations, except to the
extent that such violation or failure would not have a Company Material Adverse
Effect.
2.20 CONTRACTS; DEBT INSTRUMENTS. (a) Except as disclosed in the Company
SEC Documents or in Schedule 2.20, there is no contract or agreement that
purports to limit in any material respect the names or the geographic location
in which the Company or any Company Subsidiary may conduct its business.
Neither the Company nor any Company Subsidiary has received a written notice
that the Company or any Company Subsidiary is in violation of or in default
under (nor to the Knowledge of the Company does there exist any condition which
upon the passage of time or the giving of notice or both would cause such a
violation of or default under) any material loan or credit agreement, note,
bond, mortgage, indenture, lease, permit, concession, franchise, license or any
other material contract, agreement, arrangement or understanding, to which it is
a party or by which it or any of its properties or assets is bound, except as
set forth in Schedule 2.20, nor does such a violation or default exist, except
to the extent that such violation or default, individually or in the aggregate,
would not have a Company Material Adverse Effect.
(b) Except for any of the following expressly identified in Company SEC
Documents, Schedule 2.20 sets forth a list of each loan or credit agreement,
note, bond, mortgage, indenture and any other agreement and instrument pursuant
to which any Indebtedness of the Company or
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any Company Subsidiary, other than Indebtedness payable to the Company or a
Company Subsidiary, is outstanding or may be incurred (collectively, the "Debt
Documents"), as well as the amount outstanding under each Debt Document as of
September 30, 1998. For purposes of this Section 2.20, "Indebtedness" shall
mean, to the extent any such item exceeds $100,000, (i) indebtedness for
borrowed money, whether secured or unsecured, (ii) obligations under conditional
sale or other title retention agreements relating to property purchased by such
person, (iii) capitalized lease obligations, (iv) obligations under interest
rate cap, swap, collar or similar transaction or currency hedging transactions
(valued at the termination value thereof), and (v) guarantees of any such
indebtedness of any other person; but Indebtedness shall not include trade
payables incurred in the ordinary course of business payable within 60 days.
(c) To the extent not set forth in response to the requirements of Section
2.20(b), Schedule 2.20 sets forth each interest rate cap, interest rate collar,
interest rate swap, currency hedging transaction, and any other agreement
relating to a similar transaction to which the Company or any Company Subsidiary
is a party or an obligor with respect thereto.
(d) Except as set forth in Schedule 2.20, neither the Company nor any of
the Company Subsidiaries is party to any agreement which would restrict any of
them from prepaying any of their Indebtedness without penalty or premium at any
time or which requires any of them to maintain any amount of Indebtedness with
respect to any of the Company Properties.
(e) Neither the Company nor any of the Company Subsidiaries is a party to
any agreement relating to the management of any of the Company Properties except
the agreements described in Schedule 2.20 (the "Third Party Management
Agreements"). True and complete copies of the Third Party Management Agreements
have previously been made available to Acquiror.
(f) Neither the Company nor any of the Company Subsidiaries is a party to
any agreement pursuant to which the Company or any Company Subsidiary manages
any real properties other than Company Properties, except for the agreements
described in Schedule 2.20 (the "Outside Property Management Agreements").
(g) Except for budgeted construction disclosed in the Company Capital
Budget or in Schedule 2.24, Schedule 2.20 lists all agreements entered into by
the Company or any of the Company Subsidiaries relating to the development or
construction of, or additions or expansions to, any Company Properties which are
currently in effect and under which the Company or any of the Company
Subsidiaries currently has, or expects to incur, an obligation in excess of
$100,000. True and correct copies of such agreements have previously been
delivered or made available to Acquiror.
(h) Schedule 2.20 lists all agreements entered into by the Company or any
of the Company Subsidiaries providing for the sale of, or option to sell, any
Company Properties or the purchase of, or option to purchase, any real estate
which are currently in effect.
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(i) Except as set forth in Schedule 2.20, neither the Company nor any
Company Subsidiary has any continuing contractual liability (i) for
indemnification or otherwise under any agreement relating to the sale of real
estate previously owned, whether directly or indirectly, by the Company or any
Company Subsidiary, except for standard indemnification provisions entered into
in the normal course of business, (ii) to pay any additional purchase price for
any of the Company Properties, or (iii) to make any reprorations or adjustments
to prorations involving an amount in excess of $50,000 (other than real estate
taxes) that may previously have been made with respect to any property currently
or formerly owned by the Company.
(j) Except as set forth in Schedule 2.20, neither the Company nor any
Company Subsidiary has entered into or is subject, directly or indirectly, to
any "Tax Protection Agreements," true and correct copies of which have been made
available to Acquiror. As used herein, a Tax Protection Agreement is an
agreement, oral or written, (A) that has as one of its purposes to permit a
person or entity to take the position that such person or entity could defer
federal taxable income that otherwise might have been recognized upon a transfer
of property to the Partnership or any other Company Subsidiary that is treated
as a partnership for federal income tax purposes, and (B) that (i) prohibits or
restricts in any manner the disposition of any assets of the Company or any
Company Subsidiary, (including, without limitation, requiring the Company or any
Company Subsidiary to indemnify any person for any tax liabilities resulting
from any such disposition), (ii) requires that the Company or any Company
Subsidiary maintain, or put in place, or replace, indebtedness, whether or not
secured by one or more of the Company Properties, or (iii) requires that the
Company or any Company Subsidiary offer to any person or entity at any time the
opportunity to guarantee or otherwise assume, directly or indirectly, the risk
of loss for federal income tax purposes for indebtedness or other liabilities of
the Company or any Company Subsidiary.
(k) Except as set forth in Schedule 2.20, there are no material outstanding
contractual obligations of the Company or any Company Subsidiary to provide any
funds to, or make any investment (in the form of a loan, capital contribution or
otherwise) in, any Company Subsidiary or any other Person.
(l) Except as set forth in Schedule 2.20, there are no outstanding
contracts that are not terminable upon 30 days notice which require annual
payments in excess of $150,000.
2.21 OPINION OF FINANCIAL ADVISOR. The Company has received the opinion of
Merrill Lynch & Co. Incorporated, dated November 12, 1998 that the consideration
to be received by the shareholders of the Company is fair from a financial point
of view as of the date of the opinion letter, a signed copy of which has been
provided to Acquiror.
2.22 STATE TAKEOVER STATUTES; WAIVER OF OWNERSHIP LIMITATION. The Company
has taken all action necessary to exempt the transactions contemplated by this
Agreement from (i) the operation of any "fair price," "moratorium," "control
share acquisition" "business combination" or any other anti-takeover statute or
similar statute enacted under the state or federal laws of the United States or
similar statute or regulation (a "Takeover Statute")
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and (ii) any ownership restrictions or limitations set forth in the Declaration
of Trust or Company By-Laws.
2.23 REGISTRATION STATEMENT. The information relating to and provided by
the Company and the Company Subsidiaries included in the Registration Statement
(as defined in Section 5.1) will not, as of the effective date of the
Registration Statement, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
2.24 DEVELOPMENT PROPERTIES. Schedule 2.24 lists all agreements entered
into by the Company or any of the Company Subsidiaries relating to the
development or construction of, or additions or expansions to, any real
properties which are currently in effect. To the Knowledge of the Company,
there is no present reason to believe that there are any adverse physical
conditions (e.g., soil instability) or adverse rights of third parties (e.g.,
easements which substantially and adversely affect the usability of the
property) which were not taken into consideration when the Company or Company
Subsidiary committed to such development or construction, or additions or
expansions, and which would have the effect of causing the value added by such
development or construction, or additions or expansions, to be materially less
than the cost of such development or construction, or additions or expansions.
2.25 INVESTMENT COMPANY ACT OF 1940. Neither the Company nor any of the
Company Subsidiaries is, or at the Effective Time will be, required to be
registered under the Investment Company Act of 1940, as amended (the "1940
Act").
2.26 TRADEMARKS, PATENTS AND COPYRIGHTS. Except as set forth in Schedule
2.26, or to the extent the inaccuracy of any of the following (or the
circumstances giving rise to such inaccuracy) individually or in the aggregate
would not have a Company Material Adverse Effect, the Company and each Company
Subsidiary owns or possesses adequate licenses or other legal rights to use all
patents, patent rights, trademarks, trademark rights, trade names, trade name
rights, copyrights, service marks, trade secrets, applications for trademarks
and for service marks, know-how and other proprietary rights and information
used or held for use in connection with the business of the Company and the
Company Subsidiaries as currently conducted or as contemplated to be conducted,
and the Company has no Knowledge of any assertion or claim challenging the
validity of any of the foregoing. The conduct of the business of the Company
and the Company Subsidiaries as currently conducted and as contemplated to be
conducted did not, does not and will not infringe in any way any patent, patent
right, license, trademark, trademark right, trade name, trade name right,
service mark, or copyright of any third party that, individually or in the
aggregate, could have a Company Material Adverse Effect. To the Company's
Knowledge, there are no infringements of any proprietary rights owned by or
licensed by or to the Company or any Company Subsidiary that individually or in
the aggregate could have a Company Material Adverse Effect.
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2.27 INSURANCE. Except as set forth on Schedule 2.27, each of the Company
and the Company Subsidiaries is, and has been continuously since January 1,
1997, insured with financially responsible insurers in such amounts and against
such risks and losses as are customary for companies conducting the business as
conducted by the Company and the Company Subsidiaries during such time period.
Except as set forth on Schedule 2.27, neither the Company nor any Company
Subsidiary has received any notice of cancellations or termination with respect
to any material insurance policy of the Company or any Company Subsidiary. The
insurance policies of the Company and each Company Subsidiary are valid and
enforceable policies in all material respects.
2.28 DEFINITION OF KNOWLEDGE OF THE COMPANY. As used in this Agreement,
the phrase "to the Knowledge of the Company" (or words of similar import) means
the knowledge of those individuals identified in Schedule 2.28.
2.29 VOTE REQUIRED. Except for the Company Shareholder Approvals and any
Partnership approvals as may be required, no other vote or consent by the
equity-holders of the Company or any Company Subsidiary (whether by agreement,
under applicable law or otherwise) is required to approve this Agreement and the
transactions contemplated hereby.
2.30 RIGHTS AGREEMENT. The Company has amended its Rights Agreement so as
to provide that Acquiror will not become an "Acquiring Person" as a result of
the approval, execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror and MSub represents and warrants to the Company as follows:
3.1 ORGANIZATION, STANDING AND POWER OF ACQUIROR. Acquiror is a
corporation duly organized and validly existing under the laws of the State of
California and has the requisite power and authority to carry on its business as
now being conducted. MSub is a corporation duly organized and validly existing
under the laws of the State of Maryland and has the requisite power and
authority to carry on its business as now being conducted. Acquiror is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a material adverse
effect on the business, properties, assets, financial condition or results of
operations of Acquiror and its Subsidiaries (as defined below) taken as a whole
(an "Acquiror Material Adverse Effect"). Acquiror has previously made available
to the Company complete and correct copies of its Articles of Incorporation and
the Acquiror By-laws, in each case, as amended to the date of this Agreement.
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3.2 ACQUIROR SUBSIDIARIES. (a) Schedule 3.2 sets forth (i) each Subsidiary
of Acquiror (the "Acquiror Subsidiaries"), (ii) the legal form of each Acquiror
Subsidiary, including the state or country of formation and (iii) the ownership
interest therein of Acquiror, if not wholly-owned by Acquiror, and if not
wholly-owned, the identity and ownership interest of other owners of such
Acquiror Subsidiary.
(b) Except as set forth in Schedule 3.2, (i) all the outstanding shares of
capital stock of each Acquiror Subsidiary that is a corporation have been
validly issued and are (A) fully paid and nonassessable, (B) owned by Acquiror
or by another Acquiror Subsidiary, and (C) owned free and clear of all Liens,
and (ii) all equity interests in each Acquiror Subsidiary that is a partnership,
joint venture, limited liability company or trust which are owned by Acquiror,
by another Acquiror Subsidiary or by Acquiror and another Acquiror Subsidiary
are owned free and clear of all Liens. Each Acquiror Subsidiary that is a
corporation is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the requisite corporate power and
authority to carry on its business as now being conducted, and each Acquiror
Subsidiary that is a partnership, joint venture, limited liability company or
trust is duly organized and validly existing under the laws of its jurisdiction
of organization and has the requisite power and authority to carry on its
business as now being conducted. Each Acquiror Subsidiary is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed, individually or in the
aggregate, would not have an Acquiror Material Adverse Effect. True and correct
copies of the articles of incorporation, bylaws, partnership agreements, joint
venture and operating agreements or similar organizational documents of each
Acquiror Subsidiary, as amended to the date of this Agreement, have previously
been made available to the Company.
3.3 CAPITAL STRUCTURE. (a) As of the date hereof, the authorized shares of
stock of Acquiror consist of (i) 200,000,000 shares of common stock ("Acquiror
Common Shares"), 115,705,929 of which were issued and outstanding, (ii)
7,000,000 shares of Class B common stock ("Acquiror Class B Common Stock"), all
of which were issued and outstanding (iii) 50,000,000 shares of preferred stock,
11,129,650 of which were issued and outstanding and (iv) 200,000,000 shares of
equity stock, 225,000 shares of which were issued and outstanding. As of the
date hereof, (i) 7,000,000 Acquiror Common Shares were reserved for issuance
upon conversion of the Acquiror Class B Common Stock, (ii) 4,938,809 Acquiror
Common Shares were reserved for issuance under Acquiror's stock option and
incentive plans and (iii) up to 500,000 Acquiror Common Shares were reserved for
issuance in connection with the merger of PS Partners VIII Merger Co., Inc. into
PS Partners VIII, Ltd., a California Limited Partnership. On the date hereof,
except as set forth in this Section 3.3 or Schedule 3.3, no Acquiror Common
Shares or other voting securities of Acquiror were issued, reserved for issuance
or outstanding.
(b) All outstanding Acquiror Common Shares are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights. There
are no bonds, debentures, notes or other indebtedness of Acquiror, or assets of
any other entities exchangeable
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into Acquiror Shares having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of Acquiror may vote.
(c) Except as set forth in this Section 3.3 or in Schedule 3.3, as of the
date of this Agreement there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any kind
to which Acquiror or any Acquiror Subsidiary is a party or by which such entity
is bound, obligating Acquiror or any Acquiror Subsidiary to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock, voting securities or other ownership interests of Acquiror or any
Acquiror Subsidiary or obligating Acquiror or any Acquiror Subsidiary to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking.
(d) Except as set forth in Schedule 3.3, all dividends or distributions on
Acquiror Shares which have been authorized or declared prior to the date of this
Agreement have been paid in full.
3.4 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) Acquiror and MSub have
the requisite power and authority to enter into this Agreement and to consummate
the transactions contemplated by this Agreement to which Acquiror, MSub or any
Acquiror Subsidiary is a party. The execution and delivery of this Agreement by
Acquiror, MSub or any Acquiror Subsidiary and the consummation by Acquiror and
MSub of the transactions contemplated by this Agreement to which Acquiror, MSub
or any Acquiror Subsidiary is a party have been duly authorized by all necessary
action on the part of Acquiror, MSub or such Acquiror Subsidiary. This
Agreement has been duly executed and delivered by Acquiror and MSub and
constitutes a valid and binding obligation of Acquiror and MSub, enforceable
against Acquiror and MSub in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
(b) Except as set forth in Schedule 3.4, the execution and delivery of
this Agreement by Acquiror and MSub does not, and the consummation of the
transactions contemplated by this Agreement to which Acquiror, MSub or any
Acquiror Subsidiary is a party and compliance by Acquiror and MSub with the
provisions of this Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any material
obligation or to loss of a material benefit under, or result in the creation of
any Lien upon any of the properties or assets of Acquiror or any Acquiror
Subsidiary under, (i) the Articles of Incorporation or the Acquiror By-laws, the
MSub articles of incorporation or the MSub bylaws or the comparable charter or
organizational documents or partnership or similar agreement (as the case may
be) of any Acquiror Subsidiary, in each case as amended or supplemented to the
date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, reciprocal easement agreement, lease or other agreement, instrument,
permit, concession, franchise or license applicable to Acquiror, MSub or any
Acquiror Subsidiary or their respective properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any
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Laws applicable to Acquiror, MSub or any Acquiror Subsidiary, or their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have an Acquiror Material Adverse
Effect or (y) prevent the consummation of the transactions contemplated by this
Agreement. Except as set forth on Schedule 3.4, no consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Acquiror, MSub or any Acquiror
Subsidiary in connection with the execution and delivery of this Agreement by
Acquiror or the consummation by Acquiror and MSub of the transactions
contemplated by this Agreement, except for (i) the filing with the SEC of (x)
the Proxy Statement, (y) registration statements on appropriate forms under the
Securities Act and the Exchange Act, and (z) such reports under Section 13(a) of
the Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (ii) the filing of listing
applications with the NYSE and PCX with respect to the Acquiror Common Shares to
be issued in the Merger, (iii) the filing of the Articles of Merger with the
Department, and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations and filings (A) as are set forth in Schedule 3.4,
(B) as may be required under (y) federal, state or local environmental laws, or
(z) the "blue sky" laws of various states, to the extent applicable, or (C)
which, if not obtained or made, would not prevent or delay in any material
respect the consummation of any of the transactions contemplated by this
Agreement or otherwise prevent Acquiror, MSub or any Acquiror Subsidiary from
performing its obligations under this Agreement in any material respect or have,
individually or in the aggregate, an Acquiror Material Adverse Effect.
(c) For purposes of determining compliance with the Hart-Scott Act,
Acquiror confirms that it conducts its business in accordance with the
requirements of Section 856 of the Code.
3.5 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
Acquiror has filed all required reports, schedules, forms, statements and other
documents with the SEC since January 1, 1996 through the date hereof (the
"Acquiror SEC Documents"). Schedule 3.5 contains a complete list of all Acquiror
SEC Documents filed by Acquiror with the SEC since January 1, 1996 and on or
prior to the date of this Agreement (other than preliminary material filed with
the SEC on a confidential basis and filings made pursuant to Section 16(a) of
the Exchange Act). All of the Acquiror SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act and, in each case, the rules and regulations promulgated thereunder
applicable to such Acquiror SEC Documents. None of the Acquiror SEC Documents at
the time of filing contained any untrue statement of a material fact or omitted
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
were made, not misleading, except to the extent such statements have been
modified or superseded by later Acquiror SEC Documents filed and publicly
available prior to the date of this Agreement. The consolidated financial
statements of Acquiror included in the Acquiror SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
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published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of Acquiror and the Acquiror Subsidiaries, as of
the dates thereof and the consolidated results of operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Acquiror has no Acquiror Subsidiaries which are
not consolidated for accounting purposes. Except for liabilities and
obligations set forth in the Acquiror SEC Documents or in Schedule 3.5, neither
Acquiror nor any of the Acquiror Subsidiaries has any liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) required by
GAAP to be set forth on a consolidated balance sheet of Acquiror or in the notes
thereto and which, individually or in the aggregate, would have an Acquiror
Material Adverse Effect.
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Acquiror SEC Documents or Schedule 3.6, since the date of the most recent
audited financial statements included in the Acquiror SEC Documents (the
"Acquiror Financial Statement Date") Acquiror and the Acquiror Subsidiaries have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of Acquiror and the Acquiror
Subsidiaries taken as a whole, except for general economic changes, changes in
the United States financial markets generally, changes that affect REITs
generally and changes that affect self-storage real estate generally (an
"Acquiror Material Adverse Change"), nor has there been any occurrence or
circumstance that with the passage of time would reasonably be expected to
result in an Acquiror Material Adverse Change, (b) except for regular quarterly
distributions through the date hereof (in the case of Acquiror) not in excess of
$0.22 per Acquiror Common Share with customary record and payment dates, any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any Acquiror Common Shares,
(c) any split, combination or reclassification of any of Acquiror Common Shares
or any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, or giving the right to acquire by
exchange or exercise, shares of its beneficial interest or any issuance of an
ownership interest in, any Acquiror Subsidiary except as contemplated by this
Agreement, (d) any damage, destruction or loss, whether or not covered by
insurance, that has or would have an Acquiror Material Adverse Effect, or (e)
any change made prior to the date of this Agreement in accounting methods,
principles or practices by Acquiror or any Acquiror Subsidiary materially
affecting its assets, liabilities or business, except insofar as may have been
disclosed in Acquiror SEC Documents or required by a change in GAAP, or (f) any
amendment of any employment, consulting, severance, retention or any other
agreement between Acquiror and any officer or director of Acquiror.
3.7 LITIGATION. Except as disclosed in the Acquiror SEC Documents, and
other than personal injury and other routine tort litigation arising from the
ordinary course of
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operations of Acquiror and the Acquiror Subsidiaries (a) which are covered by
adequate insurance or (b) for which all material costs and liabilities arising
therefrom are reimbursable pursuant to common area maintenance or similar
agreements, there is no suit, action or proceeding pending or, to the Knowledge
of Acquiror, threatened against or affecting Acquiror or any Acquiror Subsidiary
that, individually or in the aggregate, could reasonably be expected to (i) have
an Acquiror Material Adverse Effect or (ii) prevent the consummation of any of
the transactions contemplated by this Agreement, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against Acquiror or any Acquiror Subsidiary having, or which,
insofar as reasonably can be foreseen, in the future would have, any such
effect.
3.8 PROPERTIES. Except as provided in Schedule 3.8, Acquiror or one or
more of the Acquiror Subsidiaries owns fee simple title to each of the real
property owned or leased by Acquiror and Acquiror Subsidiaries (the "Acquiror
Properties"), which are all of the real estate properties owned by them. All
such properties are owned in each case free and clear of Encumbrances (except as
provided below or as would not reasonably be expected to have, individually or
in the aggregate, an Acquiror Material Adverse Effect). No other Person has any
ownership interest in any of the Acquiror Properties, and any such ownership
interest so scheduled does not materially detract from the value of, or
materially interfere with the present use of, any of the Acquiror Properties
subject thereto or affected thereby. The Acquiror Properties are not subject to
any Property Restrictions or other Encumbrances, except for (i) Property
Restrictions imposed or promulgated by law or any governmental body or authority
with respect to real property, including zoning regulations, provided they would
not reasonably be expected to have, individually or in the aggregate, an
Acquiror Material Adverse Effect, (ii) Encumbrances and Property Restrictions
disclosed on existing title reports or existing surveys, which Encumbrances and
Property Restrictions, in any event, are not reasonably expected to have,
individually or in the aggregate, an Acquiror Material Adverse Effect, and (iii)
mechanics', carriers', workmen's or repairmen's liens, other Encumbrances and
Property Restrictions, if any, which, individually or in the aggregate, are not
reasonably expected to have an Acquiror Material Adverse Effect. To the
Knowledge of Acquiror (i) there are no material structural defects relating to
any Acquiror Property; (ii) there is no Acquiror Property whose building systems
are not in working order in any material respect; or (iii) there is no material
physical damage or deterioration to Acquiror Properties for which there is no
insurance in effect covering the cost of the restoration which in each case in
the aggregate is expected to result in an Acquiror Material Adverse Effect;
except in each case above as may arise as a result of the normal wear and tear
incurred in connection with owning and operating properties of the type owned
and operated by the Acquiror.
3.9 ENVIRONMENTAL MATTERS. Except (i) for matters that have been fully
reserved for in Acquiror Financial Statements, (ii) for any condition that
individually or in the aggregate would not be reasonably likely to have an
Acquiror Material Adverse Effect, or (iii) that the following does not apply to
conditions arising from the storage of customer goods in storage units at an
Acquiror Property for which Acquiror does not have Knowledge: (A) to the
Knowledge of Acquiror, after due inquiry, the operations of Acquiror are in
compliance with all
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Environmental Laws and all requirements of applicable permits, licenses,
approvals and other authorizations issued pursuant to Environmental Laws; (B) to
the Knowledge of Acquiror, after due inquiry, Acquiror has not caused or
suffered to occur any Release of any Hazardous Substance into the Environment
on, under or from any Acquiror Property, and no condition exists on, in or under
any Acquiror Property that could result in the incurrence of liabilities under,
or any violations of any Environmental Law or give rise to the imposition of any
Encumbrance, under any Environmental Law; (C) Acquiror has not received any
written notice of a claim under or pursuant to any Environmental Law or under
common law pertaining to Hazardous Substances on, in under or originating from
any Acquiror Property; (D) Acquiror has no Knowledge of, after due inquiry, and
has not received written notice from any Governmental Entity or other person
claiming, any violation of any Environmental Law or a determination to undertake
and/or request the investigation, remediation, clean-up or removal of any
Hazardous Substance released into the Environment on, in, under or from any
Acquiror Property; and (E) no Acquiror Property is included or, to the Knowledge
of Acquiror, after due inquiry, proposed for inclusion on the National
Priorities List issued pursuant to CERCLA by the EPA or on the Comprehensive
Environmental Response, Compensation, and Liability Information System database
maintained by the EPA, and Acquiror has no Knowledge, after due inquiry, that
any Acquiror Property or Storage Land has otherwise been identified in a
published writing by the EPA as a potential CERCLA removal, remedial or response
site or, to the Knowledge of the Acquiror, after due inquiry, proposed for
inclusion on any similar list of potentially contaminated sites pursuant to any
other Environmental Law.
3.10 TAXES. (a) Each of Acquiror and the Acquiror Subsidiaries has filed
all tax returns and reports required to be filed by it (after giving effect to
any filing extension properly granted by a Governmental Entity having authority
to do so) and has paid (or Acquiror has paid on its behalf) all Taxes (as
defined below) shown or reflected on such returns and reports as required to be
paid by it except (i) as set forth in Schedule 3.10, or (ii) real estate taxes
for which Acquiror or the applicable Acquiror Subsidiary shall have set aside on
its books adequate reserves. The most recent audited financial statements
contained in the Acquiror SEC Documents reflect an adequate reserve for all
material Taxes payable or accrued by Acquiror and the Acquiror Subsidiaries for
all taxable periods and portions thereof through the date of such financial
statements. Since the Acquiror Financial Statement Date, Acquiror has incurred
no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code,
including, without limitation, any tax arising from a prohibited transaction
described in Section 857(b)(6) of the Code, and neither Acquiror nor any
Acquiror Subsidiary has incurred any liability for taxes other than in the
ordinary course of business. No deficiencies for any Taxes have been proposed,
asserted or assessed pursuant to a "30-day letter" or notice of deficiency sent
by the IRS, or, to the Knowledge of Acquiror, otherwise proposed, asserted or
assessed against Acquiror or any of the Acquiror Subsidiaries. Except as set
forth in Schedule 3.10, no waivers of the time to assess any such Taxes have
been executed by Acquiror or any Acquiror Subsidiary and, to the Knowledge of
Acquiror, no requests for such waivers are pending. For purposes of the
representations made in this Section 3.10(a), no violation of those
representations shall be treated as occurring to the extent that the
circumstance potentially creating the violation would not produce an Acquiror
Material Adverse Effect.
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(b) Acquiror (i) for all taxable years commencing with January 1, 1981
through December 31, 1997, has been subject to taxation as a REIT within the
meaning of Section 856 of the Code and has satisfied all requirements to qualify
as a REIT for such years, (ii) has operated, and intends to continue to operate,
in such a manner as to qualify as a REIT for the taxable year ending December
31, 1998, and thereafter until the Effective Time or such later time as the
board of directors of Acquiror determines that it is no longer in the best
interests of Acquiror to continue to qualify as a REIT and (iii) has not taken
or omitted to take any action which would reasonably be expected to (A) result
in any rents paid by the tenants of the Acquiror Properties to be excluded from
the definition of "rents from real property" under Section 856(d)(2)(C) of the
Code, or (B) otherwise result in a challenge to its status as a REIT, and no
such challenge is pending or, to Acquiror's Knowledge, threatened by the IRS.
Each Acquiror Subsidiary which is a partnership, joint venture or limited
liability company (i) has been since its formation and continues to be treated
for federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation or ignored as a separate entity, as the
case may be, and (ii) has not since its formation owned any assets (including,
without limitation, securities) that would cause Acquiror to violate Section
856(c)(4) of the Code. Acquiror during the period commencing January 1, 1981
through the present has not owned stock or securities of any entity that would
cause Acquiror to have violated or to violate Section 856(c)(4) of the Code.
3.11 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment
banker, financial advisor or other person is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
Acquiror or any Acquiror Subsidiary.
3.12 COMPLIANCE WITH LAWS. Except as disclosed in the Acquiror SEC
Documents or in Schedule 3.4, neither Acquiror nor any of the Acquiror
Subsidiaries has violated or failed to comply with any statute, law, ordinance,
regulation, rule, judgment, decree or order of any Governmental Entity
applicable to its business, properties or operations, except to the extent that
such violation or failure would not have an Acquiror Material Adverse Effect.
3.13 STATE TAKEOVER STATUTES. Acquiror has taken all action
necessary to exempt the transactions contemplated by this Agreement between
Acquiror and the Company and its Affiliates from the operation of Takeover
Statutes.
3.14 REGISTRATION STATEMENT. The information relating to Acquiror
and the Acquiror Subsidiaries included in the Registration Statement (as defined
in Section 5.1) will not, as of the effective date of the Registration
Statement, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.15 INVESTMENT COMPANY ACT OF 1940. Neither Acquiror nor any of the
Acquiror Subsidiaries is, or at the Effective Time will be, required to be
registered under the 1940 Act.
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3.16 TRADEMARKS, PATENTS AND COPYRIGHTS. Except to the extent the
inaccuracy of any of the following (or the circumstances giving rise to such
inaccuracy) individually or in the aggregate would not have an Acquiror Material
Adverse Effect, Acquiror and each Acquiror Subsidiary owns or possesses adequate
licenses or other legal rights to use all trademarks, trade names, trade name
rights, copyrights, service marks, applications for trademarks and for service
marks and other proprietary rights and information used or held for use in
connection with the business of Acquiror and the Acquiror Subsidiaries as
currently conducted or as contemplated to be conducted, and Acquiror has no
Knowledge of any assertion or claim challenging the validity of any of the
foregoing. The conduct of the business of Acquiror and the Acquiror Subsidiaries
as currently conducted and as contemplated to be conducted did not, does not and
will not infringe in any way any patent, license, trademark, trademark right,
trade name, trade name right, service mark, or copyright of any third party
that, individually or in the aggregate, could have an Acquiror Material Adverse
Effect.
3.17 DEFINITION OF KNOWLEDGE OF ACQUIROR. As used in this Agreement,
the phrase "to the Knowledge of Acquiror" (or words of similar import) means the
knowledge of those individuals identified in Schedule 3.17.
3.18 VOTE REQUIRED. No vote or consent by the equity-holders of
Acquiror, MSub or any Acquiror Subsidiary (whether by agreement, under
applicable law or otherwise) is required to approve this Agreement and the
transactions contemplated hereby.
ARTICLE 4
COVENANTS
4.1 ACQUISITION PROPOSALS. Prior to the Effective Time, the Company
agrees that:
(a) neither it nor any of the Company Subsidiaries shall initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its shareholders) with respect to a merger, acquisition,
tender offer, exchange offer, consolidation, sale of assets or similar
transaction involving all or any significant portion of the assets or any equity
securities of the Company or any of the Company Subsidiaries, other than the
transactions contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal;
(b) it will direct, and will use its best efforts not to permit its
officers, trustees, employees, agents or financial advisors to engage in any of
the activities described in Section 4.1(a);
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(c) it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and will take the necessary steps to inform
the individuals or entities referred to in Section 4.1(b) of the obligations
undertaken in this Section 4.1; and
(d) it will notify Acquiror immediately if the Company receives any
such inquiries or proposals, or any requests for such information, or if any
such negotiations or discussions are sought to be initiated or continued with
it;
provided, however, that nothing contained in this Section 4.1 shall prohibit the
Board of Trustees of the Company from (i) furnishing information to or entering
into discussions or negotiations with, any person or entity that makes an
unsolicited Acquisition Proposal, if, and only to the extent that (A) the Board
of Trustees of the Company determines in good faith that such action is
appropriate for the Board of Trustees to comply with its duties imposed by law,
(B) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, the Company provides written notice to
Acquiror to the effect that it is furnishing information to, or entering into
discussions with, such person or entity, and (C) subject to any confidentiality
agreement with such person or entity (which the Company determined in good faith
was required to be executed in order for the Board of Trustees to comply with
its duties to shareholders imposed by law), the Company keeps Acquiror informed
of the status (not the terms) of any such discussions or negotiations, and (ii)
to the extent applicable, complying with Rule 14e-2 or Rule 14d-9 promulgated
under the Exchange Act with regard to an Acquisition Proposal. Nothing in this
Section 4.1 shall (x) permit the Company to terminate this Agreement (except as
specifically provided in Article 7 hereof), (y) permit the Company to enter into
an agreement with respect to an Acquisition Proposal during the term of this
Agreement (it being agreed that during the term of this Agreement, the Company
shall not enter into an agreement with any Person that provides for, or in any
way facilitates, an Acquisition Proposal (other than a confidentiality agreement
in customary form executed as provided above)) or (z) affect any other
obligation of the Company under this Agreement; provided, however, that the
Board of Trustees of the Company may approve and recommend a Superior
Acquisition Proposal and, in connection therewith, withdraw or modify its
approval or recommendation of this Agreement and the Merger. As used herein,
"Superior Acquisition Proposal" means a bona fide Acquisition Proposal made by a
third party which a majority of the members of the Board of Trustees of the
Company determines in good faith to be more favorable to the Company's
shareholders from a financial point of view than the Merger and which the Board
of Trustees of the Company determines is reasonably capable of being
consummated.
4.2 CONDUCT OF THE COMPANY'S BUSINESS PENDING MERGER. Prior to the
Effective Time, except as (i) contemplated by this Agreement, (ii) set forth in
Schedule 4.2, or (iii) consented to in writing by Acquiror, the Company shall,
and shall cause each of the Company Subsidiaries to, conduct its business only
in the usual, regular and ordinary course and in substantially the same manner
as heretofore conducted, and, irrespective of whether or not in the ordinary
course of business, the Company shall, and shall cause each of the Company
Subsidiaries to:
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(a) use its reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers
and employees;
(b) confer on a regular basis with one or more representatives of
Acquiror to report operational matters of materiality, including renewal of
yellow page advertisements or listings, as well as in connection with
filings made with the Securities and Exchange Commission, Internal Revenue
Service and any other material regulatory body; and, subject to Section
4.1, any proposals to engage in material transactions;
(c) promptly notify Acquiror of any material emergency, of any
Company Material Adverse Change or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated);
(d) promptly deliver to Acquiror true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(e) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect at the Company
Financial Statement Date, except as may be required by the SEC, applicable
law or GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided the Company notifies
Acquiror that it is availing itself of such extensions and provided such
extensions do not adversely affect the Company's status as a qualified REIT
under the Code;
(g) not make or rescind any express or deemed election relative to
Taxes (unless required by law or necessary to preserve the Company's status
as a REIT or the status of any Company Subsidiary as a partnership for
federal or state income tax purposes or as a qualified REIT subsidiary
under Section 856(i) of the Code, as the case may be);
(h) other than in connection with those development agreements set
forth in Schedule 2.24 and binding contracts executed on or prior to the
date hereof as set forth in Schedule 2.20, not acquire, enter into any
option to acquire, or exercise an option or contract to acquire, additional
real property, incur additional indebtedness except for working capital
under its revolving line(s) of credit such that the outstanding borrowings
under the revolving line(s) of credit do not exceed $115,000,000 in the
aggregate, exercise its option to increase its revolving line of credit
without providing reasonable prior notice to Acquiror of its intention to
exercise such option, renew any borrowings under its revolving line(s) of
credit for a period of time other than the shortest permissible renewal
period, encumber assets or commence construction of, or enter into any
agreement or commitment to develop or construct other real estate projects;
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(i) not amend its Declaration of Trust, Company By-laws, code of
regulations or partnership agreement or comparable charter or
organizational document or the articles of incorporation, by-laws,
partnership agreement, joint venture agreement or comparable charter or
organization document of any Company Subsidiary without Acquiror's prior
written consent, which shall not be unreasonably withheld or delayed;
(j) issue no and make no change in the number of shares of capital
stock, membership interests or units of limited partnership interest issued
and outstanding or reserved for issuance, other than pursuant to (i) those
items disclosed in Schedule 2.3; (ii) the conversion of any outstanding
Units, in accordance with the terms thereof; (iii) the Company Dividend
Reinvestment Plan with respect to Company Common Shares the Company is
committed to issue; and (iv) the Company Option Plan.
(k) grant no options (including any options under the Company Options
Plan) or other right or commitment relating to its shares of beneficial
interest or capital stock, membership interests or units of limited
partnership interest or any security convertible into its shares of
beneficial interest or capital stock, membership interests or units of
limited partnership interest, or any security the value of which is
measured by shares of beneficial interest, or any security subordinated to
the claim of its general creditors;
(l) except (i) as provided in Section 5.11 hereof, (ii) in connection
with the use of Company Common Shares to pay the exercise price or tax
withholding in connection with equity-based employee benefit plans by the
participants therein, or (iii) for dividends and distributions by a Company
Subsidiary to the Company or a Company Subsidiary, not (x) authorize,
declare, set aside or pay any dividend or make any other distribution or
payment with respect to any shares of its beneficial interest or capital
stock, or (y) directly or indirectly redeem, purchase or otherwise acquire
any shares of beneficial interest, shares of capital stock, membership
interests or units of partnership interest or any option, warrant or right
to acquire, or security convertible into, shares of beneficial interest,
shares of capital stock, membership interests, or units of partnership
interest;
(m) except as set forth on Schedule 2.20, not sell, lease, mortgage,
subject to Lien or otherwise dispose of any Company Property or any other
material part of its assets, individually or in the aggregate, except in
the ordinary course of business;
(n) except as set forth on Schedule 2.4, not make any loans, advances
or capital contributions to, or investments in, any other Person, other
than loans, advances and capital contributions to Company Subsidiaries in
the ordinary course of business consistent with prior practice;
(o) not pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past
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practice, or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) furnished to Acquiror or
incurred in the ordinary course of business consistent with past practice;
(p) except as reflected in the Company Capital Budget, not enter into
any commitment, contractual obligation, capital expenditure or transaction
(each, a "Commitment"), other than the renewal of its insurance policies in
the ordinary course of business after providing reasonable prior notice to
Acquiror of such renewal, which may result in total payments or liability
by or to it in excess of $50,000 or aggregate Commitments in excess of
$400,000, provided that the Company will not enter into any Commitment with
respect to any of the expansion or development projects identified in Parts
3 and 4 of the Company Capital Budget without the prior approval of
Acquiror;
(q) except with respect to Company Subsidiaries, not guarantee the
indebtedness of another Person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another Person
or enter into any arrangement having the economic effect of any of the
foregoing;
(r) not enter into or amend any agreement or arrangement with any
consultant or Affiliate of the Company or any of the Company Subsidiaries
other than additional agreements or arrangements with consultants involving
an aggregate commitment of less than $100,000;
(s) except as provided in the Severance and Retention Program, not
increase any compensation other than pursuant to the terms of employment
agreements previously entered into or (i) enter into or amend any
employment agreement or other arrangement with its trustees, executive
officers or employees other than in the ordinary course of business
consistent with past practice, other than waivers by employees of benefits
under such agreements, or (ii) enter into any employment agreement or
arrangement with any other Person not currently an employee of the Company
or a Company Subsidiary other than in the ordinary course of business
consistent with past practice, provided that any such agreement or
arrangement is terminable at will at the option of the Company or the
Company Subsidiary;
(t) except as otherwise provided in Section 1.13 or Section 5.9, not
adopt any new employee benefit plan or amend any existing plans, options or
rights, except for changes which are required by law and changes which are
not more favorable to participants than provisions presently in effect;
(u) not change the ownership of any of its Subsidiaries;
(v) not accept a promissory note in payment of the exercise price
payable under any option to purchase Company Common Shares;
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(w) not enter into or amend or otherwise modify or waive any rights
under any agreement or arrangement with the persons that are affiliates, or
as of the date hereof, officers, directors or employees, of Company or any
Company Subsidiary;
(x) except as provided in Schedule 2.11 or Schedule 2.20, not
directly or indirectly or through a subsidiary, merge or consolidate with,
acquire all or substantially all of the assets of, or acquire the
beneficial ownership of a majority of the outstanding capital stock or
other equity interest in any person or entity;
(y) suspend the Company Dividend Reinvestment Plan, effective as of
the date of this Agreement; and
(z) continue to qualify as a REIT prior to the Effective Time and not
enter into any prohibited transaction as defined in Section 857(b)(6) of
the Code.
4.3 CONDUCT OF ACQUIROR'S BUSINESS PENDING MERGER. Prior to the Effective
Time, except as (i) contemplated by this Agreement, (ii) set forth in Schedule
4.3 or (iii) consented to in writing by the Company, Acquiror shall, and shall
cause each of the Acquiror Subsidiaries to, conduct its business only in the
usual, regular and ordinary course and in substantially the same manner as
heretofore, and, irrespective of whether or not in the ordinary course of
business, Acquiror shall, and shall cause each of the Acquiror Subsidiaries to:
(a) use its reasonable efforts to preserve intact its business
organizations and goodwill, and will use its reasonable best efforts to
keep available the services of its officers and employees to the extent
reasonably deemed to be in Acquiror's interests;
(b) confer upon reasonable request with one or more representatives
of the Company to report operational matters of materiality;
(c) promptly notify the Company of any material emergency or any
Acquiror Material Adverse Change or of any material governmental
complaints, investigations or hearings (or communications indicating that
the same may be contemplated);
(d) promptly deliver to the Company true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(e) maintain its books and records in accordance with GAAP
consistently applied and not change in any material manner any of its
methods, principles or practices of accounting in effect at the Acquiror
Financial Statement Date, except as may be required by the SEC, applicable
law or GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted
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by law, provided such extensions do not adversely affect Acquiror's status
as a qualified REIT under the Code; and
(g) continue to qualify as a REIT prior to the Effective Time and not
enter into any prohibited transaction as defined in Section 857(b)(6) of
the Code.
4.4 OTHER ACTIONS. Each of the Company on the one hand and Acquiror on the
other hand shall not take, and shall use its reasonable best efforts to cause
their Subsidiaries not to take, any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"Knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "Knowledge" qualification) that are not so
qualified becoming untrue in any material respect, or (iii) except as
contemplated by Section 4.1, any of the conditions to the Merger set forth in
Article 6 not being satisfied.
4.5 FILING OF CERTAIN REPORTS. Acquiror shall timely file the reports
required to be filed by it under the Exchange Act and the rules and regulations
adopted by the SEC thereunder, and it will take such further action as the
Company or Acquiror may reasonably request, all to the extent required from time
to time to enable such Affiliate to sell Acquiror Common Shares received by such
Affiliate in the Merger without registration under the Securities Act pursuant
to (i) Rule 145(d)(1) under the Securities Act, as such Rule may be amended from
time to time, or (ii) any successor rule or regulation hereafter adopted by the
SEC.
4.6 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Effective Time, the
Company shall promptly cause to be prepared and delivered to Acquiror a list
(reasonably satisfactory to counsel for Acquiror) identifying all persons who,
at the time of the Company Shareholders Meeting, may be deemed to be
"affiliates" of the Company as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act (the "Affiliates"). The Company shall use its
reasonable best efforts to cause each person who is identified as an Affiliate
in such list to deliver to the Company on or prior to the Effective Time a
written agreement, in the form previously approved by the parties hereto, that
such Affiliate will not sell, pledge, transfer or otherwise dispose of any
Acquiror Common Shares issued to such Affiliate pursuant to the Merger, except
pursuant to an effective registration statement under the Securities Act or in
compliance with Rule 145. Acquiror shall be entitled to place legends as
specified in such written agreements on the certificates representing any
Acquiror Common Shares to be received by such Affiliates pursuant to the terms
of this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the Acquiror Common Shares, consistent with the terms of such
agreements.
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ARTICLE 5
ADDITIONAL COVENANTS
5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT; THE COMPANY SHAREHOLDERS MEETING. (a) The Company and Acquiror shall
use their reasonable best efforts to prepare and file with the SEC a preliminary
Proxy Statement, in form and substance satisfactory to each of Acquiror and the
Company and such registration statements under the Securities Act and Exchange
Act as may be required (collectively, the "Registration Statement") as soon as
practicable following the date of this Agreement. Each of the Company and
Acquiror shall promptly use its reasonable best efforts to (i) respond to any
comments of the SEC and (ii) have the Registration Statement declared effective
under the Securities Act and Exchange Act and the rules and regulations
promulgated under such acts as promptly as practicable after such filing and to
keep the Registration Statement effective as long as is necessary to consummate
the Merger. The Company will use its reasonable best efforts to cause the Proxy
Statement to be mailed to the Company's shareholders as promptly as practicable
after the Registration Statement is declared effective under the Securities Act.
The Company agrees to date its Proxy Statement as of the approximate date of
mailing to the Company shareholders. Each party will notify the other promptly
of the receipt of any comments from the SEC and of any request by the SEC for
amendments or supplements to the Registration Statement or the Proxy Statement
or for additional information and will supply the other with copies of all
correspondence between such party or any of its representatives and the SEC,
with respect to the Registration Statement or the Proxy Statement. The
Registration Statement and the Proxy Statement shall comply in all material
respects with all applicable requirements of law. Whenever any event occurs
with respect to the Registration Statement or to be set forth in an amendment or
supplement to the Registration Statement or the Proxy Statement, Acquiror or the
Company, as the case may be, shall promptly inform the other of such occurrences
and cooperate in filing with the SEC and/or mailing to the shareholders of the
Company such amendment or supplement to the Proxy Statement. Acquiror also
shall take any action, if any, required to be taken under any applicable state
securities or "blue sky" laws in connection with the issuance of shares of
beneficial interest of Acquiror pursuant to the Merger, and the Company shall
furnish all information concerning the Company and the holders of Company Shares
and rights to acquire Company Shares as may be reasonably requested in
connection with any such action.
(b) The Company will, as soon as practicable following the date of
this Agreement (but in no event sooner than 20 business days following the date
the Proxy Statement is mailed to the shareholders of the Company), convene and
hold a meeting of its shareholders (the "Company Shareholders Meeting" for the
purpose of obtaining Company Shareholder Approvals. The Company will, through
its Board of Trustees, recommend to its shareholders approval of this Agreement,
the Merger and the transactions contemplated by this Agreement and the Company
will use its reasonable best efforts to obtain such approval; provided, that
prior to the Company Shareholders Meeting, such recommendation may be withdrawn,
modified or amended to the extent that, as a result of the commencement or
receipt of a proposal constituting
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a Superior Acquisition Proposal, the Board of Trustees of the Company determines
in good faith that such withdrawal, modification or amendment is appropriate.
(c) If on the date for the Company Shareholders Meeting established
pursuant to Section 5.1(c) of this Agreement, the Company has not received a
sufficient number of proxies to approve the Merger (but less than one-third of
the outstanding Company Common Shares have voted against the Merger), then the
Company shall adjourn its shareholders meetings until the first to occur of (i)
the date ten (10) days after the originally scheduled date of the shareholders
meetings or (ii) the date on which the requisite number of proxies approving the
Merger has been obtained or proxies have been received representing at least
two-thirds of its outstanding Company Common Shares which voted against the
Merger.
5.2 ACCESS TO INFORMATION: CONFIDENTIALITY. Subject to the
requirements of confidentiality agreements with third parties, each of the
Company and Acquiror shall, and shall cause each of the Company Subsidiaries and
Acquiror Subsidiaries, respectively, to afford to the other party and to the
officers, employees, accountants, counsel, financial advisors and other
representatives of such other party, reasonable access during normal business
hours prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
the Company and Acquiror shall, and shall cause each of the Company Subsidiaries
and Acquiror Subsidiaries, respectively, to furnish promptly to the other party
(a) a copy of each report, schedule, registration statement and other document
filed by it during such period pursuant to the requirements of federal or state
securities laws and (b) all other information concerning its business,
properties and personnel as such other party may reasonably request, as well as
internal monthly reports prepared in the ordinary course of business. Each of
the Company and Acquiror shall, and shall cause the Company Subsidiaries and
Acquiror Subsidiaries, respectively, to use commercially reasonable efforts to
cause its officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to, hold any nonpublic information in
confidence to the extent required by, and in accordance with, and will comply
with the provisions of the letter agreement dated as of August 24, 1998 between
the Company and Acquiror (the "Confidentiality Agreement").
5.3 BEST EFFORTS; NOTIFICATION. (a) Subject to the terms and
conditions herein provided, the Company and Acquiror shall: (i) use all
reasonable best efforts to cooperate with one another in (A) determining which
filings are required to be made prior to the Effective Time with, and which
consents, approvals, permits or authorizations are required to be obtained prior
to the Effective Time from, governmental or regulatory authorities of the United
States, the several states and foreign jurisdictions and any third parties in
connection with the execution and delivery of this Agreement, and the
consummation of the transactions contemplated by such agreements and (B) timely
making all such filings and timely seeking all such consents, approvals, permits
and authorizations, (ii) use all reasonable best efforts to obtain in writing
any consents required from third parties to effectuate the Merger, such consents
to be in form reasonably satisfactory to the Company and Acquiror, and (iii) use
all reasonable best efforts to take, or cause to be taken, all other action and
do, or cause to he done, all other things necessary,
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proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purpose of this
Agreement, the proper officers, trustees and directors of the Company and
Acquiror shall take all such necessary action.
(b) The Company shall give prompt notice to Acquiror and MSub, and
Acquiror and MSub shall give prompt notice to the Company, (i) if any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becomes untrue or inaccurate in any respect or any
such representation or warranty that is not so qualified becomes untrue or
inaccurate in any material respect or (ii) of the failure by it to comply with
or satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
5.4 COSTS OF TRANSACTION. In the event that the Merger is not
consummated, each of Acquiror and the Company shall pay their own costs and
expenses relating to the Merger and the other transactions contemplated by this
Agreement; provided, however, that all printing costs and SEC filing fees in
connection with the Merger shall be paid 50% by the Company and 50% by Acquiror
and, provided further, that this Section 5.4 shall in no way affect the rights
and obligations of the parties hereto under Article 7.
5.5 TAX TREATMENT; TAX ELECTIONS. (a) Each of Acquiror and the
Company shall use its reasonable best efforts to cause the Merger to qualify as
a reorganization under the provisions of Sections 368(a) of the Code and to
obtain the opinions of counsel referred to in Sections 6.2(e) and 6.3(f).
(b) Acquiror shall prepare and file, on a timely basis, all Federal
and state income tax returns and shall use its reasonable best efforts to so
prepare and file all other Tax returns and reports required to be filed from and
after the Effective Time (whether such return or report related to a time period
prior to, at, or after the Effective Time) for the Company, the Company
Subsidiaries and any entity taxed as a partnership reflected in Schedule 5.5 (i)
in good faith and for returns relating to periods through and/or including the
Effective Time on a basis and in a manner consistent with past Company practice
and with similar prior returns and reports of the Company, the Company
Subsidiaries or such partnership (unless Acquiror determines in good faith that
such method is incorrect) and (ii) with respect to any Federal income tax return
of the Company for the time period ending contemporaneously with the Effective
Time, on a basis and in a manner that seeks to preserve the qualification of the
Company as a real estate investment trust within the meaning of Section 856 of
the Code.
5.6 PUBLIC ANNOUNCEMENTS. Acquiror and the Company will consult with
each other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other written public statements with respect
to the transactions contemplated by this Agreement, including the Merger, and
shall not issue any such press release or make any
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such written public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange. The parties agree that
the initial press release to be issued with respect to the transactions
contemplated by this Agreement will be in the form agreed to by the parties
hereto prior to the execution of this Agreement.
5.7 LISTING. Prior to the Effective Time, Acquiror shall use its
best efforts to have the NYSE and PCX approve for listing, upon official notice
of issuance, the Acquiror Common Shares to be issued in the Merger and listed on
the NYSE and PCX after the Effective Time.
5.8 TRANSFER AND GAINS TAXES. Acquiror and the Company shall
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added stock transfer and stamp
taxes, any transfer, recording, registration and other fees and any similar
taxes which are imposed upon the Company or Acquiror or their respective
subsidiaries and become payable in connection with the transactions contemplated
by this Agreement (together with any related interests, penalties or additions
to tax, "Transfer and Gains Taxes"). From and after the Effective Time,
Acquiror shall pay or cause to be paid, without deduction or withholding from
any consideration or amounts payable to the holders of beneficial interests in
the Company, all Transfer and Gains Taxes.
5.9 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS. (a) BENEFIT PLANS.
After the Effective Time, all employees of the Company who are employed by
Acquiror shall, at the option of Acquiror, either continue to be eligible to
participate in an "employee benefit plan", as defined in Section 3(3) of ERISA,
currently maintained by the Company which is, at the option of Acquiror,
continued by Acquiror, or alternatively shall be eligible to participate in the
same manner as other similarly situated employees of Acquiror in any "employee
benefit plan," as defined in Section 3(3) of ERISA, sponsored or maintained by
Acquiror for similarly situated employees after the Effective Time. With
respect to each such employee benefit plan, service with the Company or any
Company Subsidiary (as applicable) shall be included for purposes of determining
eligibility to participate and vesting (if applicable). With respect to medical
benefits provided by Acquiror on and after the Closing Date, coverage that would
otherwise be denied due to a preexisting illness shall be provided to those
employees who had such coverage under a plan sponsored by Acquiror, the Company
or any of the Acquiror Subsidiaries or Company Subsidiaries before the Closing
Date.
(b) RETENTION PROGRAM. Prior to the Effective Time, the Company and
Acquiror shall adopt a retention program (the "Retention Program") attached
hereto as Exhibit D. The Retention Program shall allow for the payment of cash
retention payments ("Retention Payments") among certain employees of the Company
and the Company Subsidiaries, in lieu of any and all other severance payments,
but exclusive of and not in lieu of any bonus or other compensation accrued in
the ordinary course of business with respect to services rendered in 1998 to the
Effective Date, all in accordance with past practice, as compensation for
remaining employed by the Company or a Company Subsidiary until the Effective
Time. Acquiror shall
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maintain the Retention Program in accordance with the terms thereof. In no event
shall the Company adopt or agree to any other severance or retention program in
addition to the Retention Program, except as otherwise specifically set forth in
this Agreement. Neither the Retention Program nor any other term of this
Agreement shall require Acquiror to continue the employment of any employee of
the Company after the Effective Time.
(c) WITHHOLDING. The Company shall require each employee who
exercises a Company Option, receives Company Common Shares pursuant to any
existing commitment, receives any payment pursuant to Section 5.9(d) hereof, or
otherwise receives any payment from the Company as a result of the transactions
contemplated by this Agreement, to pay to the Company in cash or Company Common
Shares an amount sufficient to satisfy in full the Company's obligation to
withhold Taxes incurred by reason of such exercise, issuance or receipt.
(d) PAYMENTS. The compensation, benefits, payments, accelerations,
share options and share appreciation rights of the executives and trustees of
the Company, as set forth in Schedule 2.17, shall be satisfied at the Effective
Time or as otherwise set forth in this Agreement in accordance with the terms
set forth in Schedule 2.17.
(e) RETENTION. Acquiror shall have no obligation to retain any
employee of the Company or any Company Subsidiary after the Effective Time.
5.10 INDEMNIFICATION. (a) From and after the Effective Time,
Acquiror shall provide exculpation and indemnification for each person who is
now or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, an officer, trustee or director of the Company or any Company
Subsidiary (the "Indemnified Parties") which is the same as the exculpation and
indemnification provided to the Indemnified Parties by the Company (including
advancement of expenses, if so provided) immediately prior to the Effective Time
in its Declaration of Trust and Company By-laws, in any separate indemnification
agreements between the Company and its trustees or officers or in any other
Employee Plan as in effect at the close of business on the date hereof;
provided, that such exculpation and indemnification covers actions on or prior
to the Effective Time, including, without limitation, all transactions
contemplated by this Agreement. Acquiror shall obtain and maintain in effect at
the Effective Time and continuing until the sixth anniversary thereof "run-off"
trustees and officers liability insurance with a coverage amount and other terms
and conditions no less favorable to the Indemnified Parties than under the
Company's current trustees and officers liability insurance policy covering the
trustees and officers of the Company with respect to their service as such prior
to the Effective Time. The premium for such policy shall be paid in full at the
Effective Time. If Acquiror has directors' and officers' insurance, such
insurance shall apply to all directors and officers of Acquiror serving as such
during the period such coverage is in effect.
(b) The provisions of this Section 5.10 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Acquiror and the Company. Acquiror agrees to pay all
costs and expenses (including fees and expenses of counsel) that may
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be incurred by any Indemnified Party or his or her heirs or his or her personal
representatives in successfully enforcing the indemnity or other obligations of
Acquiror under this Section 5.10. The provisions of this Section 5.10 shall
survive the Merger and are in addition to any other rights to which an
Indemnified Party may be entitled.
(c) In the event that Acquiror or any of its respective successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 5.10, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each trustee, director and officer covered hereby.
(d) To the extent permitted by law, all rights of indemnification for
the benefit of any trustee or officer of the Company shall be mandatory rather
than permissive.
(e) Any determination required to be made with respect to whether a
party's conduct complies with the standards set forth in the applicable articles
or incorporation, declaration of trust, bylaws or other appropriate document or
under applicable law shall be made by a neutral party mutually agreed to by the
Indemnified Party and Acquiror.
5.11 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS. From and after the
date of this Agreement, the Company shall not make any dividend or distribution
to its shareholders without the prior written consent of Acquiror; provided,
however, the written consent of Acquiror shall not be required for the
authorization and payment of quarterly distributions with respect to the Company
Common Shares (and, if required, Units), on a per share (or per Unit) basis as
follows: (a) with respect to the fourth quarter of 1998, of up to $0.46 per
share (the "Fourth Quarter Dividend"), provided that, although the Fourth
Quarter Dividend may be declared by the Company's Board of Trustees in the
fourth quarter of 1998 to shareholders of record as of a date in that quarter
selected by the Company's Board of Trustees, the Fourth Quarter Dividend shall
not be paid to shareholders prior to January 1, 1999 or later than January 31,
1999; and (b) subsequent to the Fourth Quarter Dividend, with respect to any
quarter of 1999 prior to the Effective Time, of up to $0.22 per share multiplied
by the Exchange Ratio. The Company shall coordinate with the Acquiror the
payment of any dividends with respect to any quarter of 1999, it being the
intention of the parties that holders of the Company Common Shares shall not
receive two dividends, or fail to receive one dividend, for any single calendar
quarter with respect to their Company Common Shares or any Acquiror Common
Share. Notwithstanding anything in this Section 5.11 to the contrary, at or
prior to the Effective Time, the Company shall make dividend payments the
Company is required to make by the Code in order to maintain REIT status and
those which are sufficient to eliminate any federal income tax liability for its
taxable year ending at the Effective Time.
5.12 STORAGE TRUST PROPERTIES, L.P. If and to the extent any Limited
Partner (as defined in the Amended and Restated Agreement of Limited Partnership
dated as of
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November 16, 1994, as amended (the "Partnership Agreement") delivers a Notice of
Conversion (as defined in the Partnership Agreement) in accordance with Section
4.2(e) of the Partnership Agreement, the Acquiror covenants and agrees for the
benefit of the Limited Partners that it will agree to either (a) provide shares
of the Acquiror rather than shares of the Company, as adjusted by the Exchange
Ratio, otherwise in accordance with the terms of Section 4.2(e) of the
Partnership Agreement or (b) pay the Redemption Amount to any such Limited
Partner in accordance with the terms of Section 8.6 provided that such
Redemption Amount will be based upon the Value (as defined in the Partnership
Agreement) of a share of common stock of the Acquiror, multiplied by the
Exchange Ratio, rather than a common share of the Company. Acquiror agrees to
register the shares issuable upon conversion of Units on a Form S-3 filed with
the SEC as soon as practicable following the Effective Time.
5.13 NOTICES. Each of MSub and the Company shall provide such notice
to its shareholders of the Merger and other transactions contemplated hereby as
is required under Maryland law.
ARTICLE 6
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) SHAREHOLDER APPROVALS. This Agreement, the Merger and the
transactions contemplated by this Agreement shall have been approved and adopted
by the Company Shareholder Approvals.
(b) LISTING OF SHARES. The NYSE and PCX shall have approved for
listing the Acquiror Common Shares to be issued in the Merger and to be listed
on the NYSE and PCX after the Effective Time, subject to official notice of
issuance.
(c) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities and Exchange Act and shall not be the
subject of any stop order or proceedings by the SEC seeking a stop order.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions contemplated hereby
shall be in effect.
6.2 CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of
Acquiror and MSub to effect the Merger and to consummate the other transactions
contemplated
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to occur on the Closing Date are further subject to the following conditions,
any one or more of which may be waived in writing by Acquiror:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
as of the date of this Agreement and as of the Closing Date, as though made on
and as of the Closing Date, except to the extent the representation or warranty
is expressly limited by its terms to another date, except for general economic
changes, changes in the United States financial markets generally, changes that
affect REITs generally and changes that affect self-storage real estate
generally, and Acquiror shall have received a certificate (which certificate may
be qualified by Knowledge to the same extent as the representations and
warranties of the Company contained herein are so qualified) signed on behalf of
the Company by the chief executive officer or the chief financial officer of the
Company, in such capacity, to such effect. For the purposes of this Section
6.2(a), the representations and warranties of the Company shall be deemed true
and correct unless the breach of such representations and warranties, in the
aggregate, could reasonably be expected to have a Company Material Adverse
Effect; provided, however, that if any representation and warranty is already
qualified in any respect by materiality or as to material adverse effect, the
materiality qualification in such representation and warranty shall not apply.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Acquiror shall
have received a certificate signed on behalf of the Company by the chief
executive officer or the chief financial officer of the Company, in such
capacity, to such effect.
(c) OPINION RELATING TO REIT AND PARTNERSHIP STATUS. Acquiror shall
have received an opinion of Mayer, Brown & Platt or other nationally recognized
outside counsel, reasonably satisfactory to Acquiror, that, (i) the Company is
organized and has operated in conformity with the requirements for qualification
as a REIT under the Code (with customary exceptions, assumptions and
qualifications and based upon customary representations) and (ii) the
Partnership is treated for federal income tax purposes as a partnership, and not
as a corporation or association taxable as a corporation (with customary
exceptions, assumptions and qualifications and based upon customary
representations).
(d) OTHER TAX OPINION. Acquiror shall have received an opinion dated
the Closing Date from A. Timothy Scott, counsel to Acquiror, based upon
customary certificates and representation letters, and dated the Closing Date,
to the effect that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Code.
(e) CONSENTS. Subject to the disclosures set forth on Schedule 6.2,
all consents and waivers (including, without limitation, waivers of rights of
first refusal) from third parties necessary in connection with the consummation
of the transactions contemplated by this Agreement shall have been obtained,
other than such consents and waivers from third parties,
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which, if not obtained, would not result, individually or in the aggregate, in
an Acquiror Material Adverse Effect or a Company Material Adverse Effect.
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger and to consummate the other transactions
contemplated to occur on the Closing Date is further subject to the following
conditions, any one or more of which may be waived in writing by the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Acquiror set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date, as though made on and
as of the Closing Date, except to the extent the representation or warranty is
expressly limited by its terms to another date, and except to the extent that
any inaccuracies of such representations and warranties are a result of general
economic changes, changes in the United States financial markets generally,
changes that affect REITs generally or changes that affect self-storage real
estate, and the Company shall have received a certificate (which certificate may
be qualified by Knowledge to the same extent as the representation and
warranties of Acquiror contained herein are so qualified) signed on behalf of
Acquiror, the chief executive officer and the chief financial officer of such
party to such effect. For the purposes of this Section 6.3(a), the
representations and warranties of Acquiror shall be deemed true and correct
unless the breach of such representations and warranties, in the aggregate,
could reasonably be expected to have an Acquiror Material Adverse Effect;
provided, however, that if any representation and warranty is already qualified
in any respect by materiality or as to material adverse effect, the materiality
qualification in such representation and warranty shall not apply.
(b) PERFORMANCE OF OBLIGATIONS OF ACQUIROR. Acquiror shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and the Company shall
have received a certificate of Acquiror signed on behalf of Acquiror by the
chief executive officer or the chief financial officer of Acquiror, in such
capacity, to such effect.
(c) OPINION RELATING TO REIT STATUS. The Company shall have received
an opinion of Hogan & Hartson or other nationally recognized outside counsel,
reasonably satisfactory to the Company, that Acquiror is organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code (with customary exceptions, assumptions and qualifications and based
upon customary representations).
(d) OTHER TAX OPINION. The Company shall have received an opinion
dated the Closing Date from Mayer, Brown & Platt, or other nationally recognized
outside counsel, based upon customary certificates and representation letters
and dated the Closing Date, to the effect that the Merger will qualify as a
reorganization under the provisions of Section 368(a) of the Code.
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(e) CONSENTS. All consents and waivers (including, without
limitation, waivers or rights of first refusal) from third parties necessary in
connection with the consummation of the transactions contemplated hereby shall
have been obtained, other than such consents and waivers from third parties,
which, if not obtained, would not result, individually or in the aggregate, in
an Acquiror Material Adverse Effect or a Company Material Adverse Effect.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior
to the filing of the Articles of Merger with the Department, whether before or
after either of the Shareholder Approvals are obtained:
(a) by mutual written consent duly authorized by both the Board of
Trustees of the Company and Board of Directors of Acquiror;
(b) by Acquiror, upon a breach of any representation, warranty,
covenant, obligation or agreement on the part of the Company set forth in this
Agreement, in either case such that the conditions set forth in Section 6.2(a)
or Section 6.2(b), as the case may be, would be incapable of being satisfied by
June 30, 1999 (or as otherwise extended);
(c) by the Company, upon a breach of any representation, warranty,
covenant obligation or agreement on the part of Acquiror set forth in this
Agreement, in either case such that the conditions set forth in Section 6.3(a)
or Section 6.3(b), as the case may be, would be incapable of being satisfied by
June 30, 1999 (or as otherwise extended);
(d) by either Acquiror or the Company, if any judgment, injunction,
order, decree or action by any Governmental Entity of competent authority
preventing the consummation of the Merger shall have become final and
nonappealable;
(e) by either Acquiror or the Company, if the Merger shall not have
been consummated before June 30, 1999; provided, in the case of termination
pursuant to this Section 7.1(e), the terminating party shall not have breached
in any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in this Section;
(f) by either Acquiror or the Company if, upon a vote at a duly held
Company Shareholders Meeting or any adjournment thereof, the Company Shareholder
Approvals shall not have been obtained as contemplated by Section 5.1;
(g) by the Company, if prior to the Company Shareholders Meeting, the
Board of Trustees of the Company shall have withdrawn or modified its approval
or recommendation of
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the Merger or this Agreement in connection with, or approved or recommended, a
Superior Acquisition Proposal; and
(h) by Acquiror if prior to the Company Shareholders Meeting, the
Board of Trustees of the Company shall have withdrawn or modified in any manner
adverse to Acquiror its approval or recommendation of the Merger or this
Agreement in connection with, or approved or recommended, any Superior
Acquisition Proposal.
7.2 CERTAIN FEES AND EXPENSES. If this Agreement shall be terminated
(i) pursuant to Section 7.1(g) or 7.1(h), then the Company will pay Acquiror
(provided the Company was not entitled to terminate this Agreement pursuant to
Section 7.1(c) at the time of such termination) a fee equal to the Break-Up Fee
(as defined below), or (ii) pursuant to Section 7.1(b), then the Company will
pay Acquiror (provided the Company was not entitled to terminate this Agreement
pursuant to Section 7.1(c) at the time of such termination) an amount equal to
the Break-Up Expenses (as defined below). If this Agreement shall be terminated
pursuant to Section 7.1(c), then Acquiror will pay the Company (provided
Acquiror was not entitled to terminate this Agreement pursuant to Section 7.1(b)
at the time of such termination), an amount equal to the Break-Up Expenses. If
this Agreement shall be terminated pursuant to Section 7.1(f), then the Company
shall pay Acquiror (provided the Company was not entitled to terminate this
Agreement pursuant to Section 7.1(c)) an amount equal to the Break-Up Expenses,
provided the Closing Price of the Acquiror Common Shares was equal to or greater
than $26.50. If the Merger is not consummated (other than due to the termination
of this Agreement pursuant to Section 7.1(a), 7.1(c), 7.1(d), 7.1(e) or 7.1(f),
or by Acquiror pursuant to 7.1(e)), and at the time of the termination of this
Agreement an Acquisition Proposal has been received by the Company, and either
prior to the termination of this Agreement or within twelve (12) months
thereafter the Company or any Company Subsidiary enters into any written
Acquisition Proposal which is subsequently consummated (whether or not such
Acquisition Proposal is the same Acquisition Proposal which had been received at
the time of the termination of this Agreement), then the Company shall pay the
Break-Up Fee to Acquiror less any Break-Up Expenses previously paid to Acquiror
by reason of clause (ii) of the first sentence of Section 7.2. The payment of
the Break-Up Fee shall be compensation and liquidated damages for the loss
suffered by Acquiror as a result of the failure of the Merger to be consummated
and to avoid the difficulty of determining damages under the circumstances and
neither party shall have any other liability to the other after the payment of
the Break-Up Fee. The Break-Up Fee shall be paid by the Company and to
Acquiror, or the Break-Up Expenses shall be paid by the Company to Acquiror or
Acquiror to the Company (as applicable), in immediately available funds within
fifteen (15) days after the date of the event giving rise to the obligation to
make such payment occurred. As used in this Agreement, "Break-Up Fee" shall be
an amount equal to $12,000,000 plus Break-Up Expenses (to the extent not
previously paid). The "Break-Up Expenses" payable to Acquiror or the Company,
as the case may be (the "Recipient"), shall be an amount equal to the lesser of
(i) $500,000 and (ii) the Recipient's out-of-pocket expenses, which shall
include a reasonable allocation of time for in-house counsel, incurred in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, all attorneys', accountants' and investment
bankers' fees and expenses). The right to receive (i) the Break-Up Expenses by
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Acquiror or Company, as applicable, or (ii) the Break-Up Fee by Acquiror, are
referred to below as the "Break-Up Payments." Notwithstanding the above, to the
extent that the right to receive a Break-Up Payments in a taxable year would
create excessive bad income ("EBI") for the recipient (the "Payee"), the right
to receive the portion of the Break-Up Payments that would create EBI shall be
deferred, or potentially extinguished, as set forth below. The right to receive
a Break-Up Payments shall be treated as creating EBI for the Payee to the extent
that the right to receive the amount, when taken into account with other gross
income of the Payee for that year, would cause the Payee to violate for that
taxable year either the 75% or 95% gross income tests described in Sections
856(c)(2) or 856(c)(3) of the Code.
Any amount deferred in a particular taxable year pursuant to the
preceding sentences shall become payable in the next succeeding year(s); but
only to the extent that it would not then create EBI. To the extent that any
deferred amount would continue to create EBI after it has been carried forward
for seven years (applying first in, first out principles), that portion shall no
longer be an obligation of the payor. Notwithstanding the foregoing, Break-Up
Payments that would otherwise be considered EBI under the preceding provisions
shall be made if and to the extent the Payee, as a condition precedent, obtains
an opinion of tax counsel or private ruling from the IRS that the receipt of
such excess amounts would not adversely affect the Payee's ability to qualify as
a REIT. If a Break-up Payment is inadvertently made in an amount in excess of
the limitations set forth above, such excess payments shall be treated as a loan
from the payor to the Payee, to be repaid as soon as practicable following
discovery of the overpayment. The purpose of these provisions dealing with EBI
is to protect the REIT status of the Payees, and these provisions shall be
interpreted and applied so as to accomplish that purpose.
7.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Acquiror as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Acquiror, or the Company, other than the last
sentence of Section 5.2, Section 7.2, this Section 7.3 and Article 8; provided
that (a) if this Agreement is terminated by Acquiror pursuant to Section 7.1(b),
the Company shall not be entitled to any of the benefits of Section 7.2, or (b)
if this Agreement is terminated by the Company pursuant to Section 7.1(c),
Acquiror shall not be entitled to any of the benefits of Section 7.2.
7.4 AMENDMENT. This Agreement may be amended by the parties in
writing by action of their respective Boards of Trustees and Board of Directors
at any time before or after any Shareholder Approvals are obtained and prior to
the filing of the Articles of Merger with the Department; provided, however,
that, after the Company Shareholder Approvals are obtained, no such amendment,
modification or supplement shall be made which by law requires the further
approval of shareholders without obtaining such further approval.
7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other party, (b) waive any inaccuracies in the representations
and warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c)
51
<PAGE>
subject to the proviso of Section 7.4, waive compliance with any of the
agreements or conditions of the other party contained in this Agreement. Any
agreement on the part of a party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of those rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement of either the Company or the Acquiror shall survive the Effective
Time.
8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to the
parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
(a) if to the Company, to: Daniel C. Staton
Michael G. Burnam
Storage Trust Realty
2407 Rangeline Street
Columbia, Missouri 65202
Phone: (573) 499-4799
Fax No. (573) 442-5554
with a copy to: Edward Schneidman
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Phone: (312) 782-0600
Fax No. (312) 701-7711
(b) if to Acquiror or to MSub, to: B. Wayne Hughes
Chairman and CEO
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Phone: 818-244-8080
Fax No.: 818-548-9288
52
<PAGE>
with a copy to: David Goldberg
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Phone: 818-244-8080
Fax No.: 818-548-9288
All notices shall be deemed given only when actually received.
8.3 INTERPRETATION. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement, the
Confidentiality Agreement and the other agreements entered into in connection
with the transactions contemplated hereby (a) constitute the entire agreement
and supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter of this Agreement and (b)
except as provided in Section 5.9 (with respect to the Company Schedule 5.9
Employees who do not receive Retention and Severance Program letters) and
Section 5.10 ("Third Party Provisions") and Section 5.12 (with regard to Storage
Trust Properties, L.P.), are not intended to confer upon any person other than
the parties hereto any rights or remedies. The Third Party Provisions may be
enforced by the beneficiaries thereof or on behalf of the beneficiaries thereof
by the trustees and officers of the Company had been trustees or officers of the
Company prior to the Effective Time.
8.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations under this Agreement shall be assigned or delegated, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
53
<PAGE>
8.8 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Missouri or California or in any Missouri or California
State court, this being in addition to any other remedy to which they are
entitled at law or in equity. In addition, each of the parties hereto (a)
consents to submit itself (without making such submission exclusive) to the
personal jurisdiction of any federal court located in the State of Missouri or
California or any Missouri or California State court in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
8.9 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
8.10 NON-RECOURSE TO DIRECTORS, TRUSTEES AND OFFICERS. This Agreement and
all documents, agreements, understandings and arrangements relating hereto have
been entered into or executed on behalf of the Company by the undersigned in his
capacity as a trustee or officer of the Company, which has been formed as a
Maryland real estate investment trust, and not individually, and neither the
trustees, officers nor shareholders of the Company shall be personally bound or
have any personal liability hereunder. Acquiror shall look solely to the assets
of the Company for satisfaction of any liability of the Company with respect to
this Agreement and any other agreements to which it is a party. Acquiror will
not seek recourse or commence any action against any of the shareholders of the
Company or any of their personal assets, and will not commence any action for
money judgments against any of the directors or officers of the Company or seek
recourse against any of their personal assets, for the performance or payment of
any obligation of the Company hereunder or thereunder.
54
<PAGE>
IN WITNESS WHEREOF, Acquiror and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written above.
STORAGE TRUST REALTY
By: /s/ Daniel C. Staton
_____________________________________
Name: Daniel C. Staton
Title: Chairman
PUBLIC STORAGE, INC.
By: /s/ David Goldberg
_____________________________________
Name: David Goldberg
Title: Senior Vice President
NEWCO MERGER SUBSIDIARY, INC.
By: /s/ David Goldberg
_____________________________________
Name: David Goldberg
Title: President
55
<PAGE>
Annex B
November 12, 1998
Board of Trustees
Storage Trust Realty
2407 Rangeline Street
Columbia, Missouri 65202
Dear Members of the Board of Trustees:
Storage Trust Realty ("Storage Trust" or the "Company"), Public Storage,
Inc. ("Public Storage") and Newco Merger Subsidiary, Inc. ("Newco") have entered
into an Agreement and Plan of Merger dated as of November 12, 1998 (the
"Agreement") pursuant to which Newco will be merged with Storage Trust in a
transaction (the "Merger") in which each of the Company's outstanding common
shares of beneficial interest, par value $.01 per share (the "Company Shares"),
will be converted into the right to receive .86 shares (the "Merger
Consideration") of common stock of Public Storage and each outstanding share of
Newco will be converted into the right to receive one newly issued share of
Storage Trust. In connection with the consummation of the Merger and
concurrently with the execution of the Agreement, PS Orangeco, Inc. and Burnam
Holding Companies Co. will execute an agreement pursuant to which PS Orangeco,
Inc. will acquire from Burnam Holding Companies Co. all of the outstanding
securities of Storage Realty Management Co. (other than securities owned by
Storage Trust Properties, L.P.) at or about the time of the execution of the
Agreement.
You have asked us whether, in our opinion, the Merger Consideration is fair
from a financial point of view to the holders of Company Shares, other than
Public Storage and its affiliates.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed certain publicly available business and financial information
relating to the Company and Public Storage that we deemed to be
relevant;
2. Reviewed certain information, including financial forecasts, relating
to the business, earnings, funds from operations, cash flow, assets,
liabilities and prospects of the Company and of Public Storage after
giving effect to the Merger;
3. Discussed with members of senior management of the Company the
reasonableness of the aggregate amount of the expected cost savings
resulting from potential synergies from the Merger (together, the
"Expected Synergies");
4. Conducted discussions with members of senior management of the Company
and Public Storage concerning the matters described in clauses (1) and
(2) above, as well as their respective businesses and prospects;
<PAGE>
Annex B
5. Reviewed the market prices and valuation multiples for the Company
Shares and the shares of common stock of Public Storage (the "Public
Storage Shares") and compared them with those of certain publicly
traded companies that we deemed to be relevant;
6. Reviewed the results of operations of the Company and Public Storage,
and compared them with those of certain publicly traded companies that
we deemed to be relevant;
7. Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
8. Participated in certain discussions and negotiations among
representatives of the Company and Public Storage and their financial
and legal advisors with respect to the Merger;
9. Reviewed the potential pro forma impact of the Merger;
10. Reviewed a draft dated November 11, 1998 of the Agreement; and
11. Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, real estate, market and monetary
conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or Public Storage or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the Company
or Public Storage. With respect to the financial forecast information furnished
to or discussed with us by the Company or Public Storage, we have assumed that
they have been reasonably prepared and reflect the best currently available
estimates and judgment of the Company's or Public Storage's management as the
case may be, and with respect to the Expected Synergies, Merrill Lynch also
assumed the reasonableness of such amounts based upon its discussions with
Storage Trust. We have further assumed that the Merger will qualify as a tax-
free reorganization for United States federal income tax purpose. We have also
assumed that the final form of the Agreement was substantially similar to the
last draft we reviewed.
Our opinion is necessarily based upon market, economic, and other
conditions as they exist and can be evaluated on, and on the information made
available to us as of, the date hereof. We have assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of any of the transactions
contemplated. We have also assumed that the combined entity will continue to
qualify after the Merger as a REIT for federal income tax purposes.
<PAGE>
Annex B
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have in the past provided financial advisory and financing
services to the Company and Public Storage, and may continue to do so and have
received, and may receive, fees for the rendering of such services. In addition,
in the ordinary course of our business, we may actively trade the Company Shares
and other securities of the Company, Public Storage Shares and other securities
of Public Storage for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Trustees of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the Merger, or any
matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Company Shares will trade following the announcement of the Merger or as to the
prices at which the Public Storage Shares will trade following the consummation
of the Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration is fair from a financial point
of view to the holders of Company Shares, other than Public Storage or its
affiliates.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
ITEM 20. INDEMNIFICATION OF DIRECTORS, OFFICERS AND AGENTS.
In August 1988, the Registrant's Articles of Incorporation were amended (as
approved by the shareholders in August 1988) to provide that the Registrant may
indemnify the agents of the Registrant 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 Registrant 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 Registrant to indemnify directors and
executive officers to the maximum extent permitted under California law and
prohibit the Registrant 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 Registrant believes the
indemnification agreements will assist it in attracting and retaining qualified
individuals to serve as directors and executive officers of the Registrant.
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.
(a) 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:
A. To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933.
B. 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>
C. 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 (1)A. and (1)B. 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 (5)
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.
S-2
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1993 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-3
<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 8th day of December, 1998.
PUBLIC STORAGE, INC.
By: /s/ Harvey Lenkin
-----------------------
Harvey Lenkin, President
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.
SIGNATURE CAPACITY DATE
/s/ B. Wayne Hughes Chairman of the Board, Chief December 8, 1998
------------------- Executive Officer and Director
B. Wayne Hughes (principal executive officer)
/s/ Harvey Lenkin President and Director December 8, 1998
-------------------
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Vice President and Director December 8, 1998
--------------------
B. Wayne Hughes, Jr.
/s/ John Reyes Senior Vice President and Chief December 8, 1998
-------------------- Financial Officer (principal
John Reyes financial officer and principal
accounting officer)
/s/ Robert J. Abernethy Director December 8, 1998
--------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director December 8, 1998
--------------------
Dann V. Angeloff
/s/ William C. Baker Director December 8, 1998
-------------------
William C. Baker
S-4
<PAGE>
/s/ Thomas J. Barrack, Jr. Director December 8, 1998
---------------------
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director December 8, 1998
----------------------
Uri P. Harkham
S-5
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger by and among Storage Trust Realty, Public
Storage, Inc. and Newco Merger Subsidiary, Inc. dated as of November 12,
1998 (filed as Annex A to the Proxy Statement and Prospectus).
3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 33-54557 and incorporated herein by
reference.
3.2 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series A. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock,
Series B. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the 9.20% Cumulative
Preferred Stock, Series B. Filed with Registrant's Registration
Statement No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Cumulative
Preferred Stock, Series C. Filed with Registrant's Registration
Statement No. 33-54557 and incorporated herein by reference.
3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock,
Series D. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.50% Cumulative Preferred Stock, Series D and
incorporated herein by reference.
3.8 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series E. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 10% Cumulative Preferred Stock, Series E and
incorporated herein by reference.
3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock,
Series F. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.75% Cumulative Preferred Stock, Series F and
incorporated herein by reference.
3.10 Certificate of Determination for the Convertible Participating
Preferred Stock. Filed with Registrant's Registration Statement No. 33-
63947 and incorporated herein by reference.
3.11 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 33-63947 and incorporated herein
by reference.
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock,
Series G. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8-7/8% Cumulative Preferred Stock, Series G and
incorporated herein by reference.
3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock,
Series H. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8.45% Cumulative Preferred Stock, Series H and
incorporated herein by reference.
S-6
<PAGE>
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.
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 with Registrant's Registration
Statement No. 333-61045 and incorporated herein by reference.
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 Form of Opinion of Mayer, Brown & Platt on tax matters. Filed herewith.
8.2 Form of Opinion of A. Timothy Scott 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.
S-7
<PAGE>
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.
*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.
10.8 Amended and Restated Agreement of Limited Partnership of Storage Trust
Properties, L.P., as amended by the First Amendment thereto. Filed with
Storage Trust's Annual Report on Form 10-K for the year ended December
31, 1994 and with Storage Trust's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
*10.9 Storage Trust Realty 1994 Share Incentive Plan. Filed with Storage
Trust's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by reference.
*10.10 Storage Trust Realty Retention Bonus Plan effective as of November
12, 1998. Filed herewith.
23.1 Consent of Independent Auditors (Public Storage). Filed herewith.
23.2 Consent of Independent Auditors (Storage Trust). Filed herewith.
23.3 Consent of David Goldberg (included in Exhibit 5.1).
23.4 Form of Consent of Mayer, Brown & Platt (included in Exhibit 8.1).
23.5 Form of Consent of A. Timothy Scott (included in Exhibit 8.2).
23.6 Form of Consent of Merrill Lynch & Co. Filed herewith.
99.1 Proxy card for Storage Trust Realty. Filed herewith.
99.2 Opinion of Merrill Lynch & Co. dated November 12, 1998 (filed as Annex
B to the Proxy Statement and Prospectus).
_________________________
*Compensatory benefit plan
S-8
<PAGE>
Exhibit 5.1
DAVID GOLDBERG
Senior Vice President and General Counsel
of Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
December 8, 1998
Public Storage, Inc.
701 Western Avenue
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 14,837,575 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 Matters"
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
[FORM OF MAYER, BROWN & PLATT TAX OPINION]
____________ __, 199_
Storage Trust Realty
2407 Rangeline Street
Columbia, MO 65202
Re: Material Federal income tax consequences of the Merger of
Storage Trust Realty with a subsidiary of Public Storage, Inc.
Dear Ladies and Gentlemen:
You have requested our opinions that (i) the merger (the "Merger") of
Storage Trust Realty, a Maryland real estate investment trust ("STR"), with a
subsidiary (the "Subsidiary") of Public Storage, Inc., a California corporation
("PSI"), pursuant to the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of November 12, 1998, [as amended], by and between STR, the Subsidiary
and PSI will qualify as a reorganization within the meaning of section 368 of
the Internal Revenue Code of 1986, as amended, (the "Code"), and that STR and
PSI will each be a party to the reorganization within the meaning of section
368(b) of the Code, as required by section 6.3(d) of the Merger Agreement, and
(ii) the tax disclosures under the Section "Material Federal Income Tax
Consequences" -- "The Merger"in the proxy statement and prospectus (the "Proxy
Statement and Prospectus") included as part of the registration statement (the
"Registration Statement") on Form S-4 (file no. 333-_____) as amended through
the date of this opinion is accurate in all material respects as to matters of
law and legal conclusions.
In providing these opinions, we have relied on (i) the description of the
transaction as set forth in the Merger Agreement and the exhibits thereto, (ii)
the description of the transaction as set forth in the Proxy Statement and
Prospectus included as part of the Registration Statement and the exhibits
thereto, (iii) representations provided by STR concerning certain facts
underlying and relating to the Merger and (vi) representations provided by PSI
concerning certain facts underlying and relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that:
(i) the Merger will qualify as a reorganization within the meaning of
section 368 of the Code, and that STR and PSI will each be a party to the
reorganization within the meaning of section 368(b) of the Code, and
<PAGE>
Storage Trust Realty
_______ __, 1998
Page 2
(ii) the summaries of Federal income tax consequences set forth in the
Proxy Statement and Prospectus under the headings -- "Material Federal
Income Tax Consequences" -- "The Merger" are accurate in all material
respects as to matters of law and legal conclusions.
This opinion is based on current provisions of the Code, the Treasury
regulations promulgated thereunder, and the interpretation of the Code and such
regulations by the courts and the Internal Revenue Service, as they are in
effect and exist at the date of this opinion. It should be noted that statutes,
regulations, judicial decisions and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
material change that is made after the date hereof in any of the foregoing bases
for our opinion could adversely affect our conclusions.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to this firm under the headings --
"Material Federal Income Tax Consequences" -- "The Merger" in the Proxy
Statement and Prospectus.
Sincerely,
MAYER, BROWN & PLATT
AVD/JBO
<PAGE>
Exhibit 8.2
[Form of Tax Opinion]
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)
________ __, 1999
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201
Re: Storage Trust Merger -- Tax Opinion
-----------------------------------
Ladies & Gentlemen:
As Senior Vice President and Tax Counsel of Public Storage, Inc.
("PSI"), I have examined the registration statement filed by PSI on Form S-4
with the Securities and Exchange Commission on December 7, 1998, as amended
through the date of this opinion (the "Registration Statement"). Unless
otherwise defined in this opinion letter, capitalized terms used below have the
same meanings as set forth in the Registration Statement. The Registration
Statement includes the proxy statement and prospectus relating to the proposed
merger of Newco Merger Subsidiary, Inc. ("Merger Sub") (which is a wholly owned
subsidiary of PSI) with and into Storage Trust Realty ("Storage Trust") (the
"Merger"), pursuant to that certain Agreement and Plan of Merger by and among
Storage Trust, PSI, and Merger Sub, dated as of November 12, 1998 (the "Merger
Agreement"). In the Merger, each outstanding share of Storage Trust common
stock will be converted into the right to receive 0.86 shares of PSI common
stock.
In connection with the Merger, you have requested my opinions that:
(1) the discussion in the Registration Statement under the heading "Material
Federal Income Tax Consequences," to the extent that it describes matters of
federal income tax law, is correct in all material respects, (2) the Merger will
constitute a "reorganization" under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code") and that each of Public Storage and Storage
Trust will be a party to the reorganization within the meaning of Code Section
368(a), and (3) that PSI is organized in conformity with the requirements for
qualification as a real estate investment trust ("REIT") as defined in Code
Sections 856 to 860 and its proposed method of operation following the Merger
will enable PSI to continue to meet the requirements for qualification as a
REIT.
In preparing this opinion, I examined such documents as I considered
necessary or appropriate for purposes of issuing this opinion, including the
Registration Statement (including related annexes and exhibits, such as the
Merger Agreement) and PSI's Restated Articles of Incorporation. 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
<PAGE>
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201
Page 2
the past and as to the contemplated assets, operations and activities of PSI in
the future and in a certificate of an officer of Storage Trust regarding the
assets, operations and activities of Storage Trust in the past and as to the
contemplated assets, operations and activities of Storage Trust in the future.
I have also assumed that the Merger will be effective and will qualify as a
statutory merger under applicable state law, and that since the date of its
organization, Storage Trust has qualified, and through the effective time of the
Merger, will continue to qualify, as a REIT under the Code.
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 representations or statements made to the knowledge of any person
are correct without that or any similar qualification, 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 or Storage
Trust 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 "Material Federal Income Tax Consequences," to the extent that it
describes matters of federal income tax law, is correct in all material
respects;
(2) the Merger will constitute a "reorganization" under Code
Section 368(a) and that each of Public Storage and Storage Trust will be a
party to the reorganization within the meaning of Code Section 368(a); and
(3) PSI is organized in conformity with the requirements for
qualification as a REIT as defined in Sections 856 to 860 of the Internal
Revenue Code and its proposed method of operation following the Merger will
enable Public Storage to continue to meet the requirements for
qualification as a REIT.
<PAGE>
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201
Page 3
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 of its assets, the levels of distributions to
shareholders, the diversity of its stock ownership, and the lack of C
corporation earnings and profits. These matters also may be affected by the
past history of Storage Trust and by future operations of the historical Storage
Trust assets. As is noted above, I have relied upon representations with
respect to these matters and will not review or audit PSI's (or Storage Trust'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
(1) Storage Trust has been or currently is taxable as a REIT, (2) PSI satisfied
or continued to satisfy the stock ownership and gross income requirements
applicable to REITs following the PSMI Merger, or (3) whether PSI had current or
accumulated earnings and profits following the PSMI Merger. (For a discussion of
certain considerations related to the latter two 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, and
among other things, express no opinion regarding the tax consequences for
Storage Trust shareholders who may be 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, or individuals who received Storage
Trust stock or the right to receive Storage Trust stock pursuant to stock
options or in other compensatory transactions). 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
<PAGE>
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201
Page 4
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 Storage Trust 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.
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 Matters" in
the Registration Statement and to the filing of this opinion or a form 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,
<PAGE>
EXHIBIT 10.10
STORAGE TRUST REALTY RETENTION BONUS PLAN
-----------------------------------------
SECTION 1
---------
General
-------
1.1. Purpose and Effective Date. Storage Trust Realty (the "REIT") has
--------------------------
established Storage Trust Realty Retention Bonus Plan (the "Plan"), effective as
of November 12, 1998, the "Effective Date" of the Plan as set forth herein. The
purpose of the Plan is to provide retention bonus payments for eligible
employees of the Employers (as defined in subsection 1.2) who are in the employ
on the Employers on the day that the Agreement and Plan of Merger by and among
the REIT, Public Storage, Inc. and Newco Merger Subsidiary, Inc. dated as of
November 12, 1998 becomes effective (the "Effective Time").
1.2. Affiliates. For purposes of the Plan, the term "Affiliate" means
----------
Storage Trust Properties, L.P. and Storage Realty Management Co. Any Affiliate
that, with the consent of the Company, adopts the Plan for the benefit of its
eligible employees shall be referred to herein as an "Adopting Affiliate". The
REIT and each Adopting Affiliate shall be referred to herein collectively as the
"Employers" and individually as an "Employer".
1.3. Plan Administration. The authority to control and manage the
-------------------
operation and administration of the Plan shall be vested in a Committee
consisting of one or more members who shall be appointed by and may be removed
by the Company.
1.4. Source of Payments. The obligations of the Employers under the Plan
------------------
are purely contractual. Any amount payable under the terms of the Plan shall be
paid from the general assets of the Employers and no trust or other separate
fund shall be established for this purpose.
1.5. Notices. Any notice or document required to be filed under the Plan
-------
shall be considered to be properly filed if delivered or mailed by registered
mail, postage prepaid, to the Committee, in care of the REIT, at its corporate
headquarters or such other address the REIT has designated for such purpose
hereunder and communicated to Participants. Any notice required under the Plan
may be waived by the person entitled thereto.
1.6. Action by Employers. Any action required or permitted to be taken
-------------------
under the Plan by an Employer that is a corporation shall be by resolution of
its Board of Directors or Board of Trustees, as appropriate, by the Committee or
by a duly authorized officer of the Employer, or by such other person or entity
as may be designated by the Board of Directors of the Employer. Any action
required or permitted to be taken under the Plan by an Employer that is a
partnership shall be taken by a general partner of such partnership or by a duly
authorized officer thereof.
<PAGE>
1.7. Gender and Number. Where the context admits, words in any gender
-----------------
shall include any the other gender, words in the singular shall include the
plural, and the plural shall include the singular.
1.8. Governing Laws. The Plan shall be construed and administered in
--------------
accordance with the internal laws of the State of Maryland, to the extent that
such laws are not preempted by the laws of the United States of America.
1.9. Plan Year. The initial Plan Year shall be the period beginning on
---------
the Effective Date and ending on December 31, 1998. Thereafter, the Plan Year
shall be the calendar year.
1.10. Plan Not Guarantee of Employment. The Plan does not constitute a
--------------------------------
guarantee of employment by the Employers, and participation in the Plan will not
give any individual the right to be retained in the employ of the Employers, nor
any right or claim to any benefit under the Plan, unless such right or claim has
specifically arisen under the Plan. The Employers reserve all of their rights
to discharge employees at-will or to amend or modify any of the terms and
conditions of their employment.
SECTION 2
---------
Participation
-------------
2.1. Participation. Each employee of an Employer identified on the
-------------
attached Exhibit A, other than Michael G. Burnam, P. Crismon Burnam, Stephen M.
Dulle, Greg Darus or any other employee of an Employer who is a party to a
written employment agreement, severance agreement or retention agreement
relating to his employment, continued employment or termination of employment
with an Employer, shall become a "Participant" in the Plan on the Effective
Date. In the event a Participant terminates employment with his Employer before
the Effective Time, the Committee in its sole discretion may make the employee
who takes the Participant's position, if he is not already a Participant, a
Participant.
2.2. Duration of Participation. A Participant who is entitled to payment
-------------------------
of a benefit under the provisions of Section 3 shall remain a Participant in the
Plan until the full amount of his benefit has been paid.
SECTION 3
---------
Retention Bonus
---------------
3.1. Entitlement to and Amount of Retention Bonus. Subject to the terms
--------------------------------------------
and conditions of the Plan, each Participant will be entitled to a "Retention
Bonus" in the amount
-2-
<PAGE>
indicated next to his name on Exhibit A if he is an employee of an Employer on
the Effective Time. In the event a Participant or a person indicated in Section
2.1 terminates employment with his Employer before the Effective Time, the
Committee will decide how to allocate the Retention Bonus and/or the unused
severance amount indicated next to his name on Exhibit A. Similarly, in the
event an employee becomes a Participant after the Effective Date and is an
employee of an Employer on the Effective Time, the Committee will determine the
amount of such Participant's Retention Bonus, if any, provided that the
aggregate Retention Bonuses payable under the Plan together with the aggregate
severance payments to the persons indicated in Section 2.1 (named or otherwise
pursuant to that section) under any employment or severance agreement will not
exceed $2 million in the aggregate.
3.2. Payment of Retention Benefit. The Retention Benefit described in
----------------------------
subsection 3.1 shall be payable in a lump sum cash payment as soon as
practicable (but in no event later than 15 days) after the Effective Time.
3.3. Nonalienation. Participants shall not have any right to pledge,
-------------
hypothecate, anticipate, or in any way create a lien upon any benefits provided
under the Plan, and no benefits payable hereunder shall be assignable in
anticipation of payment, either by voluntary or involuntary acts, or by
operation of law. Nothing in this subsection 3.3 shall limit a Participant's
rights or powers to dispose of his property by will, limit any rights or powers
which his executor or administrator would otherwise have with regard to benefits
to which a Participant is entitled hereunder, or restrict any right of set-off,
counterclaim or recoupment which the Employers may otherwise have against any
Participant.
3.4. Withholding. All payments with respect to a Participant under the
-----------
Plan will be subject to such deductions as may be required to be made pursuant
to law, government regulations or order, or by agreement with or consent of the
recipient. All tax liability of the recipient resulting from the payments under
the Plan shall be the responsibility of the recipient.
3.5. Other Benefits. Benefits under the Plan shall not be taken into
--------------
account for purposes of benefit accrual under any qualified retirement plan
maintained by the Employers.
3.6. Benefits on Death. In the event of a Participant's death after
-----------------
becoming entitled to a benefit under the Plan but before complete payment of his
benefit, his benefit shall be paid to his estate.
SECTION 4
---------
Committee
---------
4.1. Duties and Authority of Committee. Except as otherwise specifically
---------------------------------
provided in this Section 4, in administering and interpreting the Plan, the
Committee shall have the following
-3-
<PAGE>
discretionary authority, powers, rights, and duties in addition to those vested
in it elsewhere in the Plan:
(a) to enforce the Plan in accordance with its terms and with such
applicable rules of procedure and regulations as may be adopted by the
Committee;
(b) to determine conclusively all questions arising under the Plan,
including the power to determine the eligibility of employees and the
rights of Participants to benefits under the Plan, to interpret and
construe the provisions of the Plan, and to remedy any ambiguities,
inconsistences or omissions of whatever kind; and
(c) to employ or utilize agents, attorneys, accountants or other persons
(who may also be employed by or represent the Employers) for such
purposes as the Committee considers necessary or desirable to
discharge its duties.
The Committee shall act by a majority of its then members, by meeting or by
writing filed without a meeting.
4.2. Committee Decision Final. To the extent permitted by law, any
------------------------
interpretation of the Plan and any decision on any matter within the discretion
of the Committee made by it in good faith shall be binding on all persons. A
misstatement or other mistake of fact shall be corrected when it becomes known,
and the Committee shall make such adjustment on account thereof as it considers
equitable and practicable.
4.3. Exercise of Committee Duties. Notwithstanding any other provisions of
----------------------------
the Plan, the Committee shall discharge its duties hereunder solely in the
interests of the Participants entitled to benefits under the Plan and for the
exclusive purpose of providing benefits to Participants according to the terms
and conditions of the Plan. In exercising its authority under the Plan, the
Committee may allocate all or any part of its responsibilities and powers to any
one or more of its members and may delegate all or any part of its
responsibilities and powers to any person or persons selected by it.
4.4. Indemnification of the Committee. The members of the Committee shall
--------------------------------
be indemnified by the Employers against any and all liabilities, losses, costs
and expenses (including legal fees and expenses) of whatsoever kind and nature
which may be imposed on, incurred by, or asserted against the Committee or any
member thereof by reason of duties or responsibilities hereunder if the
Committee or such member did not act dishonestly or in willful violation of the
law or regulation under which such liability, loss, cost or expense arises.
4.5. Interested Committee Member. A member of the Committee may not decide
---------------------------
or determine any matter or question concerning his own benefits under the Plan
or how such benefits are to be paid unless such decision could be made by him
under the Plan if he were not a member of the Committee.
-4-
<PAGE>
SECTION 5
---------
Amendment or Termination
------------------------
5.1. Amendment or Termination. The REIT may amend or terminate the Plan at
------------------------
any time to take effect retroactively or otherwise; provided, however, that no
amendment or termination shall adversely affect the Plan benefits, if any,
payable with respect to Participants whose employment with the Employers
terminated prior to such amendment or termination of the Plan; and provided
further that, during the period between the Effective Time and the payment of
benefits to Participants who are in the employ of an Employer on such date, the
Plan may not be terminated or amended to adversely affect the rights of
Participants.
5.2. Successors. The obligations and rights of the Employers under the Plan
----------
shall be binding upon, and inure to the benefit of, any assignee or successor in
interest to an Employer (whether direct or indirect, by purchase, merger,
consolidation or otherwise). None of the Employers shall merge or consolidate
with any other corporation, or liquidate or dissolve without making suitable
arrangements for the payment of any benefits which are or may become payable
under the Plan.
-5-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Public Accountants and 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 Proxy Statement and Prospectus of Public Storage, Inc. and
Storage Trust Realty 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.
/S/ ERNST & YOUNG LLP
Los Angeles, California
December 7, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Storage Trust Realty
related to its merger with Public Storage, Inc. and to the incorporation by
reference therein of our reports indicated below, filed with the Securities and
Exchange Commission.
Financial Statements Date of Auditors' Report
Consolidated Financial Statements and January 23, 1998, except for the last
schedule of Storage Trust Realty three paragraphs of Note 10, as to
included and incorporated by which the date is February 9, 1998.
reference in its Annual Report (Form
10-K) for the year ended December
31, 1997.
Historical Summary of Combined January 15, 1998
Statement of Gross Revenues and
Direct Operating Expenses for the
year ended December 31, 1997 of the
Reported Facilities which include
Personal Mini Storage, Sentry Mini
Self Storage and Beach Self Storage
included in Current Report on Form
8-K/A dated April 30, 1998.
Historical Summary of Combined January 20, 1998
Statement of Gross Revenues and
Direct Operating Expenses for the
year ended December 31, 1997 of the
Reported Facilities which include A
Storage Depot (I-85), A Storage
Depot (Old Dixie Hwy.), A Storage
Depot (Covington Hwy.), A Storage
Depot (Maxwell Rd.), A Storage Depot
(North Main Street), A Storage Depot
(Bolton Rd), A Storage Depot (GA
Hwy. 85), A Storage Depot (Rutledge
Rd.) and A Storage Depot (Buford
Rd.) included in Current Report on
Form 8-K/A dated April 30, 1998.
Historical Summary of Statement of February 6, 1998
Gross Revenues and Direct Operating
Expenses for the year ended December
31, 1997 of the Reported Facility -
Daniels Self Storage included in
Current Report on Form 8-K/A dated
April 30, 1998.
Historical Summary of Combined Gross March 23, 1998
Revenues and Direct Operating
Expenses for the year ended December
31, 1997 of the Reported Facilities
which include U-Stor-It (Brighton
Park, Chicago, IL), U-Stor-It (Carol
Stream, IL), U-Stor-It
(Carpentersville, IL), U-Stor-It
(Ford City, Chicago, IL), U-Stor-It
(Geneva, IL), U-Stor-It (Naperville,
IL), U-Stor-It (Aurora, IL),
U-Stor-It (River Grove, IL),
U-Stor-It (St. Charles), U-Stor-It
(Streamwood, IL), and U-Stor-It (Big
Timber, Elgin, IL) included in
Current Report on Form 8-K/A dated
August 14, 1998.
Historical Summary of Gross Revenues April 24, 1998
and Direct Operating Expenses for
the year ended December 31, 1997 of
the Reported Facility - A AAA Key
Self Storage included in Current
Report on Form 8-K/A dated August
14, 1998.
Historical Summary of Gross Revenues July 1, 1998
and Direct Operating Expenses for
the year ended December 31, 1997 of
the Reported Facility - All Star
Storage included in Current Report
on Form 8-K/A dated August 14, 1998.
Chicago, Illinois /s/ Ernst & Young LLP
December 7, 1998
<PAGE>
Exhibit 23.6
FORM OF CONSENT OF MERRILL LYNCH
We hereby consent to the use of our opinion letter dated November 12, 1998
to the Board of Trustees of Storage Trust Realty included as Annex B to the
Proxy Statement and Prospectus which forms a part of the Registration Statement
on Form S-4 relating to the proposed merger of Newco Merger Subsidiary, Inc., a
wholly owned subsidiary of Public Storage Inc., with Storage Trust Realty and to
the references to such opinion in such Proxy Statement and Prospectus under the
captions "The Merger--Opinion of Storage Trust's Financial Advisor," "The
Merger--Background of the Merger" and "The Merger--Recommendations of the
Storage Trust Board of Trustees; Reasons for the Merger," and to the inclusion
of the foregoing opinion as "Annex B" to the above mentioned Proxy Statement and
Prospectus. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, (the "Securities Act") or the rules and regulations of
the Securities Exchange Commission thereunder (the "SEC"), nor do we thereby
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities
Act, or the rules and regulations of the SEC thereunder.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By: ________________________________
Director
December 3, 1998
<PAGE>
Exhibit 99.1
STORAGE TRUST REALTY
PROXY SOLICITED ON BEHALF OF BOARD OF TRUSTEES FOR
SPECIAL MEETING OF SHAREHOLDERS -- ___________ __, 1999
The undersigned, having received the Notice of Special Meeting of Shareholders
and accompanying Proxy Statement and Prospectus, appoints Michael G. Burnam and
P. Crismon Burnam, and each or either of them, as proxies, with full power of
substitution and resubstitution, to represent the undersigned and to vote all
common shares of Storage Trust Realty which the undersigned is entitled to vote
at the Special Meeting of Shareholders of the Company to be held on __________
__, 1999 and any and all adjournments thereof, in the manner specified.
1. Approval of the Merger Agreement dated November 12, 1998, by and among
Storage Trust Realty, Public Storage, Inc. and Newco Merger Subsidiary, Inc.,
and the transactions contemplated thereby.
[_] FOR [_] AGAINST [_] ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" PROPOSAL NUMBER 1.
Should any other matters requiring a vote of the shareholders arise, including
matters incident to the conduct of the meeting, the above named proxies are
authorized to vote the same in accordance with their best judgment in the
interest of the Company. The Board of Trustees is not aware of any matter which
is to be presented for action at the meeting other than the matters set forth
herein.
Dated: , 1999
------------ --
(SEAL)
---------------------------------
(SEAL)
---------------------------------
(Please sign exactly as name or names appear
hereon. Executors, administrators, trustees
or other representatives should so indicate
when signing.)
