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As filed with the Securities and Exchange Commission on April 2, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
______________
PUBLIC STORAGE, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-3551121 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial Classification
Code Number)
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701 Western Avenue HARVEY LENKIN
Glendale, California 91201-2397 Public Storage, Inc.
(818) 244-8080 701 Western Avenue
(Address, including zip code, and Glendale, California 91201-2397
telephone number, including area code, (818) 244-8080
of registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
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______________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
______________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
______________
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
CALCULATION OF REGISTRATION FEE
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===============================================================================================================================
Proposed Proposed
Amount Offering Maximum Maximum
to be Price Aggregate Amount of
Title of Each Class of Securities to be Registered Registered Per Share Offering Price Registration Fee
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- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value per share 750,000 shares(1) (1) (1) $6,827(1)(2)
===============================================================================================================================
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(1) This Registration Statement relates to the proposed merger of Public Storage
Properties XX, Inc. ("PSP20") into the Registrant and the conversion of
shares of common stock of PSP20 into either cash (as to up to 20% of the
outstanding shares of common stock series A of PSP20) or common stock of the
Registrant. At the merger, there will be a maximum of 860,734 shares of
common stock series A, 90,859 shares of common stock series
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B, and 257,432 shares of common stock series C, of PSP20 outstanding. The
closing price of the common stock series A of PSP20 on the American Stock
Exchange on March 30, 1998 was $22.00 per share and the book value of the
common stock series B and C of PSP20 at December 31, 1997 was $12.07 per
share. The maximum number of shares of Registrant to be issued in the
merger is 750,000. The exact number of shares of common stock of the
Registrant to be issued in the merger cannot be determined at this time.
(2) Calculated in accordance with rule 457(f)(1) and (f)(2) under the Securities
Act of 1933. $5,458 of the registration fee was previously paid in
connection with PSP20's preliminary proxy materials.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PUBLIC STORAGE PROPERTIES XX, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
MAY ___, 1998
A special meeting of shareholders of Public Storage Properties XX, Inc., a
California corporation ("PSP20"), will be held at PSP20's offices at 701 Western
Avenue, Glendale, California on May ___, 1998, at the hour of 10:00 a.m. for the
following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization between
PSP20 and Public Storage, Inc. ("PSI") described in the accompanying proxy
statement that provides for the following:
. PSP20 would be merged into PSI, which would be the surviving
corporation.
. Each outstanding share of Common Stock Series A of PSP20 (the "PSP20
Common Stock") would be converted into the right to receive a value of
$22.57 in cash, PSI common stock or a combination of the two, as
follows:
. If holders of 20% or less of the outstanding PSP20 Common Stock
elect to receive cash in the merger, shares held by PSP20
shareholders electing cash will be converted into the right to
receive $22.57 in cash for each share of PSP20 Common Stock,
subject to reduction as described below. To be effective a cash
election must be made by May ___, 1998, in accordance with the
accompanying cash election form.
. If holders of more than 20% of the outstanding PSP20 Common
Stock elect to receive cash in the merger, shares held by PSP20
shareholders electing cash will be converted into the right to
receive cash on a pro rata basis, and the balance of these
shares would be converted into PSI common stock with a market
value (as determined below) of $22.57 per share of PSP20 Common
Stock, subject to reduction as described below.
. If a PSP20 shareholder does not elect cash, all of his or her
PSP20 Common Stock will be converted into PSI common stock with
a market value (as determined below) of $22.57 per share of
PSP20 Common Stock, subject to reduction as described below.
. Shares held by PSP20 shareholders who have properly exercised
dissenter's rights under California law will be purchased by
PSP20 on the terms described under "Dissenting Shareholders'
Rights of Appraisal" in the accompanying proxy statement.
. For purposes of the merger, the market value of the PSI common stock
will be the average of the per share closing prices on the New York
Stock Exchange of the PSI common stock during the 20 consecutive
trading days ending on the fifth trading day prior to the special
meeting of the shareholders of PSP20.
. The consideration paid by PSI to PSP20 shareholders in the merger will
be reduced by the amount of cash distributions required to be paid to
PSP20 shareholders by PSP20 prior to completion of the merger
(estimated at $.93 per share) in order to satisfy PSP20's REIT
distribution requirements. The consideration received by PSP20
shareholders in the merger, however, along with any required REIT
distributions, will not be less than $22.57 per share of PSP20 Common
Stock. PSP20 shareholders would receive the required REIT distributions
upon any liquidation of PSP20, regardless of the merger.
. Additional cash distributions would be made to the PSP20 shareholders
to cause PSP20's estimated net asset value allocable to the PSP20
shareholders as of the date of the merger to be substantially
equivalent to $22.57 per share.
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. The PSP20 Common Stock and the Common Stock Series B and C of PSP20
held by PSI will be cancelled in the merger.
2. To consider and vote upon a related amendment to PSP20's bylaws to
authorize the merger in the form of Appendix E to the accompanying proxy
statement.
The Board of Directors has determined that holders of record of PSP20
Common Stock at the close of business on April 6, 1998 will be entitled to
receive notice of, and to vote at, the meeting or any adjournment of the
meeting.
Please complete, date, sign and promptly mail the enclosed proxy in the
stamped return envelope included with these materials.
You are cordially invited to attend the meeting in person. If you do
attend and you have already signed and returned the proxy, the powers of the
proxy holders named in the proxy will be suspended if you desire to vote in
person. Therefore, whether or not you presently intend to attend the meeting in
person, you are urged to complete, date, sign and return the proxy.
By Order of the Board of Directors
OBREN B. GERICH, Secretary
Glendale, California
April ___, 1998
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PUBLIC STORAGE, INC.
PUBLIC STORAGE PROPERTIES XX, INC.
PROXY STATEMENT AND PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS OF
PUBLIC STORAGE PROPERTIES XX, INC.
May ___, 1998
This proxy statement and prospectus relates to the proposed merger of
Public Storage Properties XX, Inc. ("PSP20") into Public Storage, Inc. ("PSI"),
which shareholders of PSP20 are being asked to approve at the upcoming special
meeting. If approved by the shareholders of PSP20, the merger would obviate
PSP20's obligation to present a proposal for the sale of PSP20's properties, as
well as increasing PSI's asset and capital base.
The merger involves certain factors that PSP20 shareholders should
consider, including the following:
. The merger has not been negotiated at arm's length. No independent
persons were hired to negotiate the term of the merger on behalf of
PSP20. No person was asked to make an offer to buy PSP20's properties.
. The investment of PSP20 shareholders is being changed from holding an
interest in a specified portfolio of properties for a fixed period to
holding an investment in an ongoing fully-integrated real estate
company.
. The level of distributions to PSP20 shareholders who receive PSI common
stock in the merger will be significantly lower after than before the
merger.
. PSP20's properties may continue to increase in value and might be able
to be sold at a higher price at a later date.
. Under California law, PSP20 shareholders will be entitled to
dissenters' rights of appraisal in connection with the merger only if
demands for payments are filed with respect to 5% or more of the
outstanding shares of PSP20 Common Stock.
. PSI and its affiliates have conflicts of interest in connection with
the merger and may receive certain benefits as a result of the merger.
In the absence of such conflicts, the terms of the merger may have been
more favorable to PSP20 shareholders.
. The public PSI shareholders are substantially limited in their ability
to control PSI. B. Wayne Hughes, the chief executive officer of PSI and
PSP20, and members of his family own 33.3% of the PSI common stock
(37.2% upon conversion of the PSI class B common stock). Also the
number of shares that may be owned by any other person is restricted.
These factors should prevent any takeover not approved by Mr. Hughes.
. The market price of PSI common stock may fluctuate following
establishment of the number of shares to be issued to PSP20
shareholders in the merger and prior to issuance and could decrease as
a result of increased selling activity following issuance of shares in
the merger and other factors, such as changes in interest rates and
market conditions.
. PSP20 shareholders who receive any cash in connection with the merger
may have a taxable gain.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROXY STATEMENT. See
"Glossary" beginning on page 87 for definitions of certain terms used in this
proxy statement.
____________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE'S SECURITIES
REGULATOR HAS APPROVED THE COMMON STOCK OF PUBLIC STORAGE, INC. TO BE ISSUED
UNDER THIS PROXY STATEMENT AND PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT
AND PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
April ___, 1998
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The merger will be effected by the Agreement and Plan of Reorganization
attached as Appendix A to this proxy statement. The merger agreement must be
approved by a majority of the outstanding shares of PSP20 Common Stock, Common
Stock Series B and Common Stock Series C, voting together as a group. The
merger agreement requires the PSP20 Common Stock Series B and C to vote with the
holders of a majority of the unaffiliated shares of PSP20 Common Stock. The
board of directors of PSP20, based on recommendations of a special committee
composed of independent directors, recommends that PSP20 shareholders vote for
the merger.
The PSI common stock is traded on the New York Stock Exchange under the
symbol "PSA". On April ___, 1998, the closing price of the PSI common stock on
the NYSE was $_____. The PSP20 Common Stock is traded on the American Stock
Exchange under the symbol "PSZ". On April ___, 1998, the closing price of the
PSP20 common stock on the AMEX was $_____.
This proxy statement is first being mailed on or about April ___, 1998 to
shareholders of record of PSP20 at the close of business on April 6, 1998.
ii
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TABLE OF CONTENTS
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Page
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Available Information............................................................ 1
Incorporation of Certain Documents by Reference.................................. 1
Cautionary Statement............................................................. 1
Summary.......................................................................... 2
Overview of Merger............................................................ 2
Summary Risk Factors.......................................................... 3
No Arm's Length Negotiation or Independent Representatives................. 3
Change from Finite Life to Infinite Life................................... 3
Lower Level of Distributions After the Merger.............................. 3
Potential Loss of Future Appreciation...................................... 3
Limitation on Dissenters' Rights of Appraisal.............................. 3
Conflicts of Interest...................................................... 4
Control and Influence by the Hughes Family and Ownership Limitations....... 4
Tax Risks -- Additional Risks to Continued REIT Qualification............. 4
Financing Risks............................................................ 4
Possible Future Dilution................................................... 4
Uncertainty Regarding Market Price of PSI Common Stock..................... 4
Merger Payments Based on Appraisals Instead of Arm's Length Negotiations... 4
Tax to PSP20 Shareholders Upon Receipt of Cash............................. 4
Benefits to Insiders.......................................................... 4
Meetings and Vote Requirements of PSP20 Shareholders.......................... 5
PSP20......................................................................... 5
PSI........................................................................... 5
Background and Reasons for the Merger......................................... 6
Potential Benefits of the Merger.............................................. 7
Detriments of the Merger...................................................... 7
Rights of Dissenting Shareholders............................................. 8
Determination of Payments to be Received by PSP20 Shareholders in
Connection with the Merger................................................... 8
Federal Income Tax Matters.................................................... 8
Recommendations; Opinions of Financial Advisor................................ 9
Recommendations of PSP20 Board of Directors to PSP20 Shareholders.......... 9
Absence of Arm's Length Negotiation........................................ 9
Fairness Opinion from Stanger.............................................. 9
Comparison of PSP20 Common Stock with PSI Common Stock........................ 10
Summary Financial Information................................................. 12
Relationships................................................................. 14
Risk Factors..................................................................... 16
No Arm's Length Negotiation or Independent Representatives.................... 16
Change from Finite Life to Infinite Life...................................... 16
Lower Level of Distributions After the Merger................................. 16
Potential Loss of Future Appreciation......................................... 16
Limitation on Dissenters' Rights of Appraisal................................. 16
Conflicts of Interest......................................................... 16
Relationships Among Parties................................................ 16
Structuring of Merger by Insiders.......................................... 16
Benefits to Insiders....................................................... 17
Control and Influence by the Hughes Family and Ownership Limitations.......... 17
Uncertainty Regarding Market Price of PSI Common Stock........................ 17
Tax to PSP20 Shareholders Who Receive Cash in the Merger...................... 17
Tax Risks..................................................................... 18
Increased Risk of Violation of Gross Income Requirements................... 18
Increased Risk of Violation of Ownership Requirements...................... 18
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iii
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Elimination of Any Accumulated Earnings and Profits........................... 18
Reduced Cash Flow to Shareholders if PSI Fails to Qualify as a REIT........... 18
Corporate Level Tax on Sale of Certain Built-In Gain Assets................... 19
Financing Risks.................................................................. 19
Dilution and Subordination.................................................... 19
Risk of Leverage.............................................................. 19
Merger Consideration Based on Appraisals Instead of Arm's Length Negotiation..... 19
Operating Risks.................................................................. 19
Value of Investment Reduced by General Risks of Real Estate Ownership......... 19
Significant Competition Among Mini-Warehouses................................. 20
Risk of Environmental Liabilities............................................. 20
Tenant Reinsurance............................................................ 20
Canadian Operations........................................................... 20
Merchandise and Portable Self Storage Companies............................... 20
Liabilities with Respect to Acquired General Partner Interests................ 21
Shares Eligible for Future Sale.................................................. 21
Benefits to Insiders................................................................ 21
The Merger.......................................................................... 22
General.......................................................................... 22
Common Stock Series B and C...................................................... 23
Background....................................................................... 23
Reasons for the Merger........................................................... 25
Alternatives to the Merger....................................................... 26
No Solicitation of Other Proposals............................................... 28
Determination of Payments to be Received by PSP20 Shareholders in Connection
with the Merger................................................................. 28
Potential Advantages of the Merger to PSP20...................................... 30
Detriments of the Merger......................................................... 30
Recommendation to PSP20 Shareholders and Fairness Analysis....................... 30
Comparison of Consideration to be Received in the Merger to Other Alternatives... 32
Real Estate Portfolio Appraisal by TNG........................................... 35
Fairness Opinion from Stanger.................................................... 37
The Merger Agreement............................................................. 41
Cash Election Procedure.......................................................... 43
Consequences to PSP20 if the Merger is Not Completed............................. 44
Costs of the Merger.............................................................. 44
Accounting Treatment............................................................. 44
Regulatory Requirements.......................................................... 45
Comparison of PSP20 Common Stock with PSI Common Stock........................... 45
Amendment to Bylaws of PSP20........................................................ 49
Approval of the Merger and Bylaw Amendment.......................................... 50
General.......................................................................... 50
Security Ownership of Certain Beneficial Owners and Management................... 50
Solicitation of Proxies.......................................................... 58
Description of PSP20's Properties................................................... 59
Description of PSI's Properties..................................................... 63
Distributions and Price Range of PSI Common Stock................................... 65
Distributions and Price Range of PSP20 Common Stock................................. 66
Description of PSI Capital Stock.................................................... 67
Common Stock..................................................................... 67
Ownership Limitations............................................................ 67
Class B Common Stock............................................................. 68
Preferred Stock.................................................................. 69
Equity Stock..................................................................... 70
Effects of Issuance of Capital Stock............................................. 70
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iv
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Dissenting Shareholders' Rights of Appraisal........................................ 71
Federal Income Tax Considerations................................................... 73
The Merger....................................................................... 73
Opinion of Counsel............................................................... 75
General Tax Treatment of PSI..................................................... 75
Consequences of the PSMI Merger on PSI's Qualification as a REIT................. 79
Taxation of U.S. Shareholders Holding PSI Common Stock........................... 82
Backup Withholding............................................................... 84
Taxation of Tax-Exempt Shareholders.............................................. 84
Taxation of Non-U.S. Shareholders................................................ 84
Recent Legislation............................................................... 84
Recent Administration Proposal................................................... 85
State and Local Taxes............................................................... 85
Legal Opinions...................................................................... 85
Experts............................................................................. 85
Independent Auditors................................................................ 86
Shareholder Proposals............................................................... 86
Glossary............................................................................ 87
Appendix A - Agreement and Plan of Reorganization between PSI and PSP20 dated as of February 13, 1998
Appendix B - Real Estate Appraisal Report by The Nicholson Group, Ltd. for PSP20 dated February 9, 1998
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated April 2, 1998
Appendix D - Chapter 13 of the California General Corporation Law Concerning Dissenters' Rights
Appendix E - Proposed Amendment to PSP20's Bylaws
Appendix F - Financial Statements of PSP20
Appendix G - Management's Discussion and Analysis of Financial Condition and Results of Operations of PSP20
</TABLE>
v
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AVAILABLE INFORMATION
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires both PSI and PSP20 to file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
This material can be inspected and copied at the Commission's public reference
facilities in Washington, D.C. and at the Regional Offices of the Commission at
7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or by accessing
the Commission's Worldwide Web site at http://www.sec.gov. This material can
also be inspected, in the case of PSI, at the NYSE, 20 Broad Street, New York,
New York 10005 and at the Pacific Exchange, Inc., 301 Pine Street, San
Francisco, California 94104, and, in the case of PSP20, at the AMEX, 86 Trinity
Place, New York, New York 10006.
PSI has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This proxy statement does not contain all the information set forth in the
Registration Statement. For further information, please refer to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by PSI with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-8389) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1997 and (ii) the Current Reports on Form 8-K dated January 15, 1998 and
February 10, 1998.
All documents filed by PSI pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this proxy statement and before the special
meeting of PSP20 shareholders will be incorporated by reference herein from the
date of filing such documents.
The following documents filed by PSP20 with the Commission under Section 13
of the Exchange Act (File No. 1-10850) are incorporated herein by reference:
(i) the Annual Report on Form 10-K for the year ended December 31, 1997, as
amended by a Form 8-K/A dated April 1, 1998; and (ii) the Current Report on Form
8-K dated February 13, 1998.
PSP20 shareholders should rely on information in this proxy statement, or
in any subsequently filed document which is made part of this proxy statement,
over different information in documents previously filed. Any information in
documents previously filed different from information in this proxy statement,
or in any subsequently filed document which is made part of this proxy
statement, should be disregarded.
The merger agreement, which is attached as Appendix A to this proxy
statement, is also made part of this proxy statement.
AS NOTED ABOVE, OTHER DOCUMENTS NOT INCLUDED WITH THIS PROXY STATEMENT ARE
MADE A PART OF THIS PROXY STATEMENT. IF YOU WOULD LIKE COPIES OF THESE OTHER
DOCUMENTS (INCLUDING DOCUMENTS FILED AFTER THE DATE OF THIS PROXY STATEMENT)
FREE OF CHARGE, PLEASE WRITE OR CALL THE INVESTOR SERVICES DEPARTMENT, 701
WESTERN AVENUE, GLENDALE, CALIFORNIA 91201-2397 OR BY TELEPHONE AT (818) 244-
8080. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD
BE MADE BY APRIL ___, 1998. DOCUMENTS WILL BE SENT BY FIRST CLASS MAIL WITHIN
ONE BUSINESS DAY AFTER YOUR REQUEST IS RECEIVED.
PSP20 SHAREHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT OR IN DOCUMENTS TO WHICH PSP20 SHAREHOLDERS HAVE BEEN REFERRED.
PSI AND PSP20 HAVE NOT AUTHORIZED ANYONE TO PROVIDE PSP20 SHAREHOLDERS WITH
INFORMATION THAT IS DIFFERENT.
CAUTIONARY STATEMENT
Statements contained in this proxy statement that are not based on
historical fact are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "continue" or similar terms, variations of those
terms or the negative of those terms. Cautionary statements set forth in "Risk
Factors" and elsewhere in this proxy statement identify important factors that
could cause actual results to differ materially from those in the forward-
looking statements.
1
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SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this proxy statement, including the
appendices. See "Glossary" beginning on page 87 for definitions of certain
terms used in this proxy statement.
OVERVIEW OF MERGER
The merger agreement provides for the following:
. PSP20 will be merged into PSI, which will be the surviving corporation.
. Each outstanding share of PSP20 Common Stock will be converted into the
right to receive a value of $22.57 in cash, PSI common stock or a
combination of the two, as follows:
. If holders of 20% or less of the outstanding PSP20 Common Stock
elect to receive cash in the merger, shares held by PSP20
shareholders electing cash will be converted into the right to
receive $22.57 in cash for each share of PSP20 Common Stock,
subject to reduction as described below. To be effective a cash
election must be made by May ___, 1998, in accordance with the
accompanying cash election form.
. If holders of more than 20% of the outstanding PSP20 Common Stock
elect to receive cash in the merger, shares held by PSP20
shareholders electing cash will be converted into the right to
receive cash on a pro rata basis, and the balance of these shares
would be converted into PSI common stock with a market value (as
determined below) of $22.57 per share of PSP20 Common Stock,
subject to reduction as described below.
. If a PSP20 shareholder does not elect cash, all of his or her PSP20
Common Stock will be converted into PSI common stock with a market
value (as determined below) of $22.57 per share of PSP20 Common
Stock, subject to reduction as described below.
. Shares held by PSP20 shareholders who have properly exercised
dissenters' rights under California law will be purchased by PSP20
on the terms described under "Dissenting Shareholders' Rights of
Appraisal."
. For purposes of the merger, the market value of the PSI common stock
will be the average of the per share closing prices on the NYSE of the
PSI common stock during the 20 consecutive trading days ending on the
fifth trading day prior to the special meeting of the shareholders of
PSP20.
. The consideration paid by PSI to PSP20 shareholders in the merger will
be reduced by the amount of cash distributions required to be paid to
PSP20 shareholders by PSP20 prior to completion of the merger
(estimated at $.93 per share) in order to satisfy PSP20's REIT
distribution requirements. The consideration received by PSP20
shareholders in the merger, however, along with any required REIT
distributions, will not be less than $22.57 per share of PSP20 Common
Stock. PSP20 shareholders would receive the required REIT distributions
upon any liquidation of PSP20, regardless of the merger.
. Additional cash distributions would be made to the PSP20 shareholders
to cause PSP20's estimated net asset value allocable to the PSP20
shareholders as of the date of the merger to be substantially
equivalent to $22.57 per share.
. The PSP20 Common Stock and PSP20 Common Stock Series B and C held by
PSI will be cancelled in the merger.
See "The Merger - Determination of Payments to be Received by PSP20
Shareholders in Connection with the Merger." For a description of the terms of
the merger, see "The Merger - The Merger Agreement."
2
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The shares of PSP20 Common Stock Series B and C are owned by PSI and by
Hughes. After the merger, each share of Common Stock Series B and C (other than
shares held by PSI which will be cancelled in the merger) will be converted (or
deemed to be converted) into the right to receive PSI common stock (valued as in
the case of the PSP20 Common Stock) in the amount of $10.90. In addition,
holders of PSP20 Common Stock Series B and C will receive (i) any additional
distributions equal to the amount by which PSP20's estimated net asset value
allocable to holders of PSP20 Common Stock Series B and C as of the date of the
merger exceeds the amounts in the preceding sentence and (ii) any required REIT
distributions payable to the holders of the PSP20 Common Stock. See "The
Merger - Determination of Payments to be Received by PSP20 Shareholders in
Connection with the Merger." The PSP20 Common Stock Series B and C will be
voted with the majority of shares of PSP20 Common Stock held by unaffiliated
owners.
The PSI common stock is listed on the NYSE, and the PSP20 Common Stock is
listed on the AMEX. On February 12, 1998, the last full trading day prior to
the first announcement of the merger, the reported closing sales price per share
of PSI common stock on the NYSE was $32 7/16 and the reported closing sales
prices per share of PSP20 Common Stock on the AMEX was $21 5/8. On April ___,
1998, the last full trading day prior to the date of this proxy statement, the
reported closing sales prices per share of PSI and PSP20 Common Stock were
$_____ and $_____, respectively.
SUMMARY RISK FACTORS
The merger involves certain risks and detriments that should be considered
by PSP20 shareholders, including the following:
. No Arm's Length Negotiation or Independent Representatives. The merger
has not been negotiated at arm's length. No independent persons were
hired to negotiate the terms of the merger on behalf of PSP20. If such
persons had been hired, the terms of the merger may have been more
favorable to PSP20 shareholders. In addition, no other person was asked
to make an offer to buy PSP20's properties. Such offers could have
generated higher prices.
. Change from Finite Life to Infinite Life. The investment of PSP20
shareholders who receive PSI common stock is being changed from holding
an interest in specified properties for a fixed period to holding an
investment in an ongoing integrated real estate company. PSI changes
its portfolio of properties from time to time without approval of
shareholders, does not plan to sell its assets within a fixed period of
time and is engaged in all aspects of the mini-warehouse industry,
including property development and management. PSP20 shareholders who
receive PSI common stock in the merger will be able to liquidate their
investment only by selling their shares. The market value of their
shares may or may not reflect the full fair market value of PSP20's
assets.
. Lower Level of Distributions After the Merger. The level of
distributions to PSP20 shareholders who receive PSI common stock in the
merger is expected to be lower after the merger than before. Based on a
market price of PSI common stock of $32 7/16 and the current regular
quarterly distribution rate for PSI ($.22 per share) and PSP20 ($.28
per share), PSP20 shareholders would receive approximately $.13 (46%)
less in regular quarterly distributions per share of PSP20 Common Stock
after the merger from PSI than before the merger from PSP20 and
approximately $.01 less per share in regular quarterly distributions
for each $2 1/4 (7%) increase in the market price of PSI common stock
above $32 7/16.
. Potential Loss of Future Appreciation. PSP20's properties may increase
in value and might be able to be sold at higher prices at a later date.
. Limitation on Dissenters' Rights of Appraisal. Under California law,
PSP20 shareholders will be entitled to dissenters' rights of appraisal
in connection with the merger only if demands for payment are filed
with respect to 5% or more of the outstanding shares of PSP20 Common
Stock.
3
<PAGE>
. Conflicts of Interest. PSI and its affiliates, which are affiliated
with PSP20, have conflicts of interest in the merger and may receive
certain benefits as a result of the merger. In the absence of these
conflicts, the terms of the merger may have been more favorable to
PSP20 shareholders.
. Control and Influence by the Hughes Family and Ownership Limitations.
The public PSI shareholders are substantially limited in their ability
to control PSI. The Hughes family owns 33.8% of the PSI common stock
(37.2% upon conversion of the PSI class B common stock). Also, the
number of shares that may be owned by any other person is restricted.
These ownership factors should prevent any takeover of PSI not approved
by Mr. Hughes.
. Uncertainty Regarding Market Price of PSI Common Stock. The market
price of PSI common stock may fluctuate following establishment of the
number of shares to be issued to PSP20 shareholders in the merger and
prior to issuance. In addition, the market price could decrease because
of sales of shares issued in the merger and for other reasons.
. Tax to PSP20 Shareholders Upon Receipt of Cash. PSP20 shareholders who
receive any cash in connection with the merger may recognize a taxable
gain. In addition, the required REIT distributions will be taxable to
PSP20 shareholders as ordinary income.
. Tax Risks Additional Risks to Continued REIT Qualification. PSI is
subject to tax risks, including risks as to PSI's continued
qualification as a REIT.
. Financing Risks. In acquiring properties, PSI, unlike PSP20, has
incurred debt ($104 million at December 31, 1997) and may continue to
incur debt. The incurrence of debt increases the risk of loss of
investment.
. Possible Future Dilution. The interest of PSI shareholders can be
reduced through the issuance of additional stock by PSI. PSI has
outstanding ($922 million), and intends to issue additional, preferred
stock that prevents payment of distributions on PSI common stock unless
distributions are paid on the preferred stock.
. Merger Payments Based on Appraisals Instead of Arm's Length
Negotiations. Payments to the PSP20 shareholders are based on an
independent third party appraisal of PSP20's properties. However,
appraisals are opinions as of the date specified and are subject to
certain assumptions. The true value of these properties may be higher
or lower than their appraised value.
BENEFITS TO INSIDERS
The merger involves certain benefits to PSI, including the following:
. Liquidation Proposal. If approved by the PSP20 shareholders, the merger
would obviate the obligation to present the PSP20 shareholders with a
liquidation proposal in 1999.
. Acquisition of Mini-Warehouses. The merger will enable PSI, which is
seeking to increase its ownership of mini-warehouses, to acquire an
additional seven mini-warehouses.
. Issuance of Capital Stock. The merger will enable PSI, which is also
seeking to expand its capital base, to issue approximately 588,500
shares of common stock (assuming no cash elections).
4
<PAGE>
MEETINGS AND VOTE REQUIREMENTS OF PSP20 SHAREHOLDERS
<TABLE>
<S> <C>
Meeting Date May ___, 1998 at 10:00 a.m.
Record Date April 6, 1998
Purpose To approve the merger and proposed bylaw
amendment
Shares Outstanding 860,734 shares of PSP20 Common Stock
348,291 shares of PSP20 Common Stock Series B
and C
Vote Required Majority of outstanding shares of PSP20 Common
Stock and PSP20 Common Stock Series B and C,
voting together as a class*
Percentage Ownership of Total Combined
Outstanding Shares of Common Stock and 29.8%
Common Stock Series B and C by PSI and
Hughes
</TABLE>
_______________
* In accordance with PSP20's bylaws, the PSP20 Common Stock Series B and C
will be voted with the holders of a majority of the unaffiliated shares of
PSP20 Common Stock.
PSP20
PSP20 is a REIT organized as a California corporation that was formed to
succeed to the business of Public Storage Properties XX, Ltd., a California
limited partnership (the "PSP20 Partnership"), in a reorganization transaction
completed on August 27, 1991. PSP20 owns seven mini-warehouses in five states.
All of these facilities are operated under the "Public Storage" name. See
"Description of PSP20's Properties." The PSP20 Common Stock is traded on the
AMEX under the symbol "PSZ".
PSP20's properties are managed by PSI. PSP20's operations are under the
general supervision of its three-member board of directors, consisting of an
executive officer of PSI and two other directors. See "- Relationships."
PSI
PSI is a fully integrated, self-administered and self-managed REIT,
organized as a California corporation that acquires, develops, owns and operates
mini-warehouses, which are self-service facilities offering storage space for
personal and business use. PSI is the largest owner and operator of mini-
warehouses in the United States. Through an affiliate, PSI also owns and
operates business parks containing commercial and industrial rental space. At
December 31, 1997, PSI had equity interests (through direct ownership, as well
as general and limited partnership and capital stock interests) in 1,136
properties located in 38 states, consisting of 1,073 mini-warehouse facilities
and 63 business parks.
In a series of mergers among Public Storage Management, Inc. and its
affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger
of PSMI into Storage Equities, Inc. ("SEI") (the "PSMI Merger"), SEI became
self-administered and self-managed, acquired substantially all of PSMI's United
States real estate interests and was renamed "Public Storage, Inc." In
addition, the outstanding capital stock of PSMI was converted into an aggregate
of 29,449,513 shares of PSI common stock (exclusive of shares of PSI common
stock held by PSMI prior to the PSMI Merger) and 7,000,000 shares of PSI class B
common stock.
The principal executive offices of PSI and PSP20 are located at 701 Western
Avenue, Glendale, California 91201-2397. The telephone number is (818) 244-
8080.
5
<PAGE>
BACKGROUND AND REASONS FOR THE MERGER
THE MERGER HAS BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO ARE
EXECUTIVE OFFICERS OF PSI AND PSP20. A SPECIAL COMMITTEE COMPOSED OF THE
INDEPENDENT DIRECTORS OF PSP20, VERN O. CURTIS AND JACK D. STEELE, HAVE REVIEWED
AND RECOMMENDED FOR APPROVAL THE TERMS OF THE MERGER, AND THE BOARD OF DIRECTORS
OF PSP20, BASED ON RECOMMENDATIONS OF ITS SPECIAL COMMITTEE WHICH THE BOARD OF
DIRECTORS HAS ADOPTED, AND ON THE OPINION OF A FINANCIAL ADVISOR IN WHICH IT
CONCURS, BELIEVES THAT THE MERGER IS FAIR TO THE PUBLIC PSP20 SHAREHOLDERS, AND
RECOMMENDS THAT PSP20 SHAREHOLDERS VOTE FOR THE MERGER. THE MERGER HAS NOT BEEN
NEGOTIATED AT ARM'S LENGTH, AND ONE OF THE THREE MEMBERS OF THE PSP20 BOARD OF
DIRECTORS HAS SUBSTANTIAL CONFLICTS OF INTEREST.
PSP20 was organized to succeed to the business of the PSP20 Partnership in
a reorganization transaction completed in August 1991. As a result of the
reorganization, PSP20 included a provision in its bylaws that required its
shareholders be presented with a proposal in 1999 to sell or finance all or
substantially all of its properties. See "The Merger - Background." IF
APPROVED BY THE PSP20 SHAREHOLDERS, THE MERGER WOULD OBVIATE PSP20'S OBLIGATION
TO PRESENT SUCH A PROPOSAL TO ITS SHAREHOLDERS. IF NOT APPROVED, PSP20 WOULD
CONTINUE TO BE OBLIGATED TO PRESENT SUCH A PROPOSAL TO ITS SHAREHOLDERS IN 1999.
The special committee and the PSP20 Board of Directors believe that the
proposed merger is consistent with this bylaw provision. In the merger, PSP20
would be disposing of its properties to PSI for value, i.e., PSI common stock
and cash (if cash elections are made), and PSP20's corporate existence would
cease. Furthermore, the consideration to be received in the merger is based on
the appraised value of PSP20's assets and PSP20 shareholders have the right,
with respect to up to 20% of the outstanding PSP20 Common Stock (less any
dissenting shares), to receive cash in the merger. The applicable bylaw
provision does not (i) define the terms "sale," "liquidation" or "financing,"
(ii) specify what types of transactions would satisfy the requirement imposed by
this bylaw provision or (iii) preclude sales of PSP20's properties to PSI.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification. Between
September 1994 and June 1997, PSI merged with 16 REITs which, like PSP20, had
been organized by PSMI to succeed to the business of predecessor partnerships.
On November 12, 1997, the PSP20 Board of Directors reappointed the special
committee to consider and make recommendations to the PSP20 Board of Directors
and shareholders regarding a possible merger with PSI. On February 13, 1998,
the PSP20 Board of Directors based on recommendations of its special committee,
which were adopted by the PSP20 Board of Directors, approved the merger and
determined to recommend that the PSP20 shareholders vote for the merger. The
special committee was advised by Robert A. Stanger & Co., Inc. ("Stanger"), as
financial adviser, and Hogan & Hartson L.L.P., as legal counsel.
The PSP20 Board of Directors and its special committee believe that the
consideration being offered in the merger compares favorably with the trading
price of the PSP20 Common Stock immediately prior to the first announcement of
the merger and during other periods, a range of estimated going-concern values
per share of PSP20 Common Stock, an estimated liquidation value per share of
PSP20 Common Stock and the book value per share of PSP20 Common Stock. The
PSP20 Board of Directors and its special committee recognize that this
comparison is subject to significant assumptions, qualifications and
limitations. See "The Merger - Comparison of Consideration to be Received in
the Merger to Other Alternatives."
Prior to concluding that the merger should be proposed to PSP20
shareholders, the PSP20 Board of Directors and its special committee considered
three alternatives to the merger: liquidation, continued operation and an
amendment to PSP20's organizational documents. Based on a comparison of the
potential benefits and detriments of the merger with the other alternative, the
PSP20 Board of Directors and its special committee have concluded that the
merger is more attractive to PSP20 shareholders than any of the alternatives
considered. The PSP20 Board of Directors did not solicit any other proposals
for the acquisition of PSP20 or its properties. See "The Merger - No
Solicitation of Other Proposals."
6
<PAGE>
In comparing the merger to other alternatives, the PSP20 Board of Directors
and its special committee noted the following:
Liquidation. The PSP20 Board of Directors and its special committee do not
believe this is an opportune time to sell PSP20's properties because they may
continue to appreciate in value. The merger provides PSP20 shareholders with
the opportunity either to convert their investment into an investment in PSI,
which like PSP20 primarily owns mini-warehouses, on a tax-free basis (to the
extent that PSP20 shareholders receive only PSI common stock) or to receive cash
based on the appraised value of PSP20's properties as to a portion of their
investment. However, if PSP20 liquidated its assets through asset sales to
unaffiliated third parties, PSP20 shareholders would not need to rely upon a
real estate portfolio appraisal to estimate the fair market value of PSP20's
properties.
Continued Operation. Nothing requires the liquidation or merger of PSP20
at this time. PSP20 is operating profitably. Continued operation should
provide PSP20 shareholders with continued distributions of net operating cash
flow and participation in future appreciation of PSP20's properties, as well as
avoiding many of the risks described under "Risk Factors." However, continued
operation would fail to secure the potential benefits of the merger described
under "The Merger - Potential Advantages of the Merger."
Amendment of PSP20's Bylaws. An amendment to PSP20's bylaws to remove the
restrictions on investment of cash flow and PSP20's issuance of securities would
permit PSP20 to take advantage of investment opportunities and to grow as new
investments are made. However, the PSP20 Board of Directors and its special
committee believe that PSI's larger capital base and greater liquidity and
diversification better enable PSI to take advantage of investment opportunities
and to raise investment capital.
POTENTIAL BENEFITS OF THE MERGER
The following are the principal potential benefits to PSP20 shareholders
who receive PSI common stock:
. Acquisition of Additional Properties. Following the merger, PSP20
shareholders will be investors in an entity with a larger asset base
and market capitalization than PSP20. PSI has grown and is expected to
continue to grow, as new investments are made.
. Increased Liquidity. PSP20 has 860,734 shares of PSP20 Common Stock
listed on the AMEX (1,209,025 shares upon conversion of the PSP20
Common Stock Series B and C into PSP20 Common Stock) with an average
daily trading volume during the 12 months ended December 31, 1997 of
800 shares. In comparison, PSI has approximately 112 million shares of
PSI common stock listed on the NYSE (approximately 76 million of which
are freely tradeable) with an average daily trading volume during the
12 months ended December 31, 1997 of 98,000 shares. Given PSI's greater
market capitalization and trading volume than of PSP20, shareholders
who receive PSI common stock in the merger are likely to enjoy a more
active trading market and increased liquidity for their shares.
. Tax-Free Treatment if Only PSI Common Stock is Received. The merger is
intended to qualify as a tax-free reorganization. Assuming such
qualification, no taxable gain or loss will be recognized in connection
with the merger by PSP20 shareholders who exchange their PSP20 Common
Stock solely for PSI common stock. However, the required REIT
distributions will be taxable to PSP20 shareholders as ordinary income.
Hughes, who has little tax basis in his PSP20 Common Stock, has advised
PSI and PSP20 that he intends to exchange his PSP20 Common Stock solely
for PSI common stock. See "Federal Income Tax Considerations - The
Merger."
DETRIMENTS OF THE MERGER
For a summary of certain risks and detriments of the merger, refer to
"- Summary Risk Factors" beginning on page 3.
7
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
Under California law, PSP20 shareholders will be entitled to dissenters'
rights only if demands for payment are filed with respect to 5% or more of the
outstanding shares of PSP20 Common Stock.
A dissenting PSP20 shareholder who wishes to require PSP20 to purchase his
or her shares of Common Stock of PSP20 must:
(1) vote against the merger any or all of the shares of PSP20 Common
Stock entitled to be voted (shares of PSP20 Common Stock not voted are not
considered to be voted against the merger and will not be counted toward
the 5% minimum for dissenters' rights to exist); provided that if a PSP20
shareholder votes part of the shares entitled to be voted in favor of the
merger, and fails to specify the number of shares voted, it is conclusively
presumed under California law that such shareholder's approving vote is
with respect to all shares entitled to be voted;
(2) make written demand upon PSP20 or its transfer agent, which is
received not later than the date of the meeting of PSP20 shareholders,
setting forth the number of shares of PSP20 Common Stock demanded to be
purchased and a statement as to claimed fair market value of such shares at
February 12, 1998; and
(3) submit for endorsement, within 30 days after the date on which
the notice of approval of the merger by the PSP20 shareholders is mailed to
PSP20 or its transfer agent the certificates representing any shares in
regard to which demand for purchase is being made, or to be exchanged for
certificates of appropriate denominations so endorsed, with a statement
that the shares are dissenting shares.
The provisions of California law are technical in nature and complex.
PSP20 shareholders desiring to exercise appraisal rights and to obtain appraisal
of the fair value of their shares should consult counsel, since the failure to
comply strictly with these provisions may result in a waiver or forfeiture of
their appraisal rights. A copy of applicable provisions of California law is
attached hereto as Appendix D. See "Dissenting Shareholders' Rights of
Appraisal."
DETERMINATION OF PAYMENTS TO BE RECEIVED BY PSP20 SHAREHOLDERS IN CONNECTION
WITH THE MERGER
In connection with the merger, PSP20 shareholders will receive the net
asset value or $22.57 per share of PSP20 Common Stock. PSP20's net asset value
is the sum of (a) the appraised value of PSP20's real estate assets determined
by an independent appraiser, The Nicholson Group, Ltd. ("TNG"), as of October 1,
1997, plus (b) the estimated book values of PSP20's non-real estate assets as of
April 30, 1998, less (c) PSP20's estimated liabilities as of April 30, 1998 and
less (d) the amount of PSP20's net asset value allocable to the PSP20 Common
Stock Series B and C (estimated at $3,798,000, or $10.90 per share, plus the
required REIT distributions payable to holders of the PSP20 Common Stock Series
B, if any). Additional distributions would be made to PSP20 shareholders to
cause PSP20's estimated net asset value allocable to the PSP20 Common Stock as
of the date of the merger to be substantially equivalent to $22.57 per share.
The consideration paid to PSP20 shareholders by PSI in the merger will be
reduced by the amount of the required REIT distributions paid to PSP20
shareholders by PSP20 prior to completion of the merger. See "The Merger -
Determination of Payments to be Received by PSP20 Shareholders in Connection
with the Merger." However, the consideration received by PSP20 shareholders in
the merger along with the required REIT distributions (which will be paid in
cash) will not be less than $22.57 per share of PSP20 Common Stock.
FEDERAL INCOME TAX MATTERS
The merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
No gain or loss would be recognized by PSP20 shareholders who receive solely PSI
common stock in exchange for their PSP20 Common Stock. Gain or loss would be
recognized by PSP20 shareholders who receive solely cash in exchange for their
PSP20 Common Stock in an amount equal to the
8
<PAGE>
difference between their adjusted basis in their PSP20 Common Stock and the
amount of cash received in exchange therefor. Gain or loss would be recognized
by a PSP20 shareholder who receives a combination of PSI common stock and cash
in exchange for his or her PSP20 Common Stock in an amount equal to the
difference between such PSP20 shareholder's adjusted basis in his or her PSP20
Common Stock and the sum of (1) the fair market value of the PSI common stock
received and (2) the amount of cash received, but only to the extent of the
amount of cash received. The required REIT distributions would not be treated as
cash paid in exchange for the PSP20 Common Stock, but rather as a dividend
taxable to all recipients as ordinary income. See "Federal Income Tax
Considerations - The Merger."
RECOMMENDATIONS; OPINIONS OF FINANCIAL ADVISOR
RECOMMENDATIONS OF PSP20 BOARD OF DIRECTORS TO PSP20 SHAREHOLDERS. Based
upon an analysis of the merger, the special committee and the PSP20 Board of
Directors have concluded that (i) the terms of the merger are fair to PSP20
shareholders, (ii) after comparing the potential benefits and detriments of the
merger with those of several alternatives, the merger is more advantageous to
PSP20 shareholders than such alternatives and (iii) PSP20 shareholders should
vote for the merger. The merger has not been negotiated at arm's length and one
of the three members of the PSP20 Board of Directors has substantial conflicts
of interest.
The special committee and the PSP20 Board of Directors based their
conclusions on the following factors: (i) PSP20's bylaws require a proposal for
the sale or financing of PSP20's properties in 1999; (ii) the merger provides
PSP20 shareholders with a choice of converting their investment into an
investment in PSI or, with respect to up to 20% of the outstanding PSP20 Common
Stock (less any dissenting shares), receiving cash for their investment; (iii)
PSP20's properties have been appraised by TNG and PSP20 has received a fairness
opinion from Stanger relating to the consideration to be received in the merger;
(iv) the merger is required to be approved by a majority of the shares of PSP20
Common Stock and Common Stock Series B and C, counted together as a single
class, with the shares of PSP20 Common Stock Series B and C voting with a
majority of the shares of PSP20 Common Stock held by unaffiliated owners and,
subject to certain limitations, PSP20 shareholders will have the right to
exercise dissenters' rights; and (v) based on certain significant assumptions,
qualifications and limitations, the consideration being offered in the merger
compares favorably with other alternatives.
ABSENCE OF ARM'S LENGTH NEGOTIATION. The terms of the merger are not the
result of arm's length negotiation. The PSP20 Board of Directors believes that
the absence of independent representatives to negotiate the merger does not
undermine the fairness of the merger because the terms of the merger have been
reviewed and approved by the special committee, which is comprised of
independent directors. The special committee relied on the fairness opinion and
appraisal, which are subject to certain limitations.
FAIRNESS OPINION FROM STANGER. Stanger was engaged by PSP20 through the
special committee to deliver a written summary of its determination as to the
fairness of the consideration to be received in the merger, from a financial
point of view, to the public PSP20 shareholders. The full text of the opinion
is set forth in Appendix C to this proxy statement. Subject to the assumptions,
qualifications and limitations contained therein, the fairness opinion concludes
that, as of the date of the fairness opinion, the consideration to be received
in the merger is fair to the public PSP20 shareholders, from a financial point
of view. In arriving at its opinion, Stanger considered, among other things,
the independent appraised value of the portfolio of PSP20's properties, the
estimated liquidation value of PSP20 prepared by PSP20, based upon liquidation
of the portfolio on a property-by-property basis, financial analyses and
projections prepared by PSP20 concerning the going-concern value from continuing
operation of each of PSP20 as a stand-alone entity, and a comparison of the
historical market prices of the PSP20 Common Stock with the consideration
offered in the merger. Stanger was not requested to, and therefore did not:
(i) select the method of determining the consideration offered in the merger;
(ii) make any recommendation to the PSP20 shareholders with respect to whether
to approve or reject the merger or whether to select the cash or PSI common
stock option in the merger; or (iii) express any opinion as to the business
decision to effect the merger, alternatives to the merger, or tax factors
resulting from the merger or the PSMI Merger or relating to PSI's continued
qualification as a REIT. Stanger's opinion is based on business, economic, real
estate and securities markets, and other conditions as of the date of its
analysis. See "The Merger - Fairness Opinions from Stanger."
9
<PAGE>
COMPARISON OF PSP20 COMMON STOCK WITH PSI COMMON STOCK
The information below summarizes certain principal differences between the
PSP20 Common Stock and the PSI common stock and the effect of the merger on
PSP20 shareholders who receive PSI common stock in the merger (set forth in
italics below each caption). For an expanded discussion of these and other
comparisons and effects, see "The Merger - Comparison of PSP20 Common Stock with
PSI Common Stock."
<TABLE>
<CAPTION>
PSP20 PSI
INVESTMENT OBJECTIVES AND POLICIES
<S> <C>
To provide (i) quarterly cash distributions To maximize funds from operations ("FFO") allocable to holders of
from operations and (ii) long-term capital gains PSI common stock and to increase shareholder value through
from through appreciation in the value of internal growth and acquisitions. FFO is a supplemental
properties. performance measure for equity REITs used by industry analysts.
FFO does not take into consideration principal payments on debt,
capital improvements, distributions and other obligations of PSI.
Accordingly, FFO is not a substitute for PSI's net cash provided
by operating activities or net income as a measure of PSI's
liquidity or operating performance. An increase in PSI's FFO
will not necessarily correspond with an increase in distributions
to holders of PSI common stock. See "- Liquidity, Marketability
and Distributions."
</TABLE>
PSP20 shareholders who receive PSI common stock in the merger will be
changing their investment from "finite-life" to "infinite life," and they will
be able to realize the value of their investment only by selling the PSI common
stock. The interest of PSI shareholders can be diluted through the issuance of
additional securities, including securities that would have priority over PSI
common stock as to cash flow, distributions and liquidation proceeds. PSI has
an effective registration statement for preferred stock, common stock, equity
stock and warrants and intends to issue additional securities under this
registration statement. There is no assurance that any such securities will be
issued. The preferred stock and the equity stock are issuable from time to
time in one or more series and would, if issued, have rights, including
dividend rights, conversion rights, voting rights, redemption price and
liquidation rights, as may be determined by PSI's Board of Directors. See
"Risk Factors - Uncertainty Regarding Market Price of PSI Common Stock" and "-
Financing Risks - Dilution and Subordination."
PSI has no plans with respect to a sale or financing of any of PSP20's
properties. PSI intends to continue to acquire properties from other parties,
including other affiliated entities.
<TABLE>
<CAPTION>
BORROWING POLICIES
<S> <C>
Not permitted to incur borrowings in Permitted to borrow in furtherance of its investment
acquisition of properties. objectives, subject to certain limitations.
</TABLE>
PSI, unlike PSP20, incurs debt in the acquisition of properties and
reinvests proceeds from borrowings. The incurrence of debt increases the risk
of loss of investment.
<TABLE>
<CAPTION>
TRANSACTIONS WITH AFFILIATES
<S> <C>
Shareholder approval required for a variety Restricted from acquiring properties from its affiliates or from
of business transactions with affiliates. See selling properties to them unless the transaction is approved by
"Amendment to Bylaws of PSP20." a majority of PSI's independent directors and is fair to PSI
based on an independent appraisal.
</TABLE>
It is easier for PSI to enter into transactions with its affiliates than in
the case of PSP20 because shareholder approval is not required.
10
<PAGE>
<TABLE>
<CAPTION>
PSP20 PSI
PROPERTIES (As of December 31, 1997)
<S> <C>
Seven wholly-owned mini-warehouses in Direct and indirect equity interests in 1,136 properties in
five states. 38 states.
</TABLE>
Because PSI owns substantially more property interests in more states than
PSP20, PSI's results of operations are less affected by the operations of a
single property than are those of PSP20, and it would be more difficult to
liquidate PSI than PSP20 within a reasonable period of time.
<TABLE>
<CAPTION>
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<S> <C>
The PSP20 Common Stock is traded on the AMEX. PSI common stock is traded on the NYSE. During the 12 months
During the 12 months ended December 31, 1997, ended December 31, 1997, the average daily trading volume of PSI
the average daily trading volume of PSP20 Common common stock was 98,000 shares. PSI has issued, and may in the
Stock was 800 shares. PSP20 may not issue future issue, securities that have priority over PSI common stock
securities having priority over the PSP20 Common as to cash flow, distributions and liquidation proceeds.
Stock.
</TABLE>
Distributions may be declared by the Board of Directors of PSI and PSP20 out
of any funds legally available for that purpose. PSI and PSP20 are required to
distribute at least 95% of their ordinary REIT taxable income in order to
maintain their qualification as REITs. PSI distributes less than its cash
available for distribution (recently distributing amounts approximately equal
to its taxable income), permitting it to retain funds for additional investment
and debt reduction.
A PSP20 shareholder who receives PSI common stock in the merger should have
an investment for which the market is broader and more active than the market
for PSP20 Common Stock. Distributions on PSI common stock are subject,
however, to priority of preferred stock.
<TABLE>
<CAPTION>
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
<S> <C>
PSP20 shareholders must approve all additional Subject to the rules of the NYSE and applicable provisions of
issuances of capital stock. California law, PSI has issued and intends to continue to issue
authorized capital stock without shareholder approval.
</TABLE>
Given the ownership level of PSI common stock by the Hughes family and PSI's
flexibility to issue capital stock, including senior securities with special
voting rights and priority over PSI common stock, PSI should be in a better
position to deter attempts to obtain control in transactions not approved by its
Board of Directors than PSP20. As a result, PSI shareholders could be less
likely to benefit from a takeover not approved by PSI's Board of Directors than
would PSP20 shareholders in a similar circumstance.
11
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial data in this section should be read in conjunction with the
financial statements included in the documents incorporated herein by reference.
PSI
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $114,680 $147,196 $ 212,550 $ 338,951 $ 470,844
Depreciation and amortization 24,998 28,274 40,760 64,967 91,356
Interest expense 6,079 6,893 8,508 8,482 6,792
Minority interest in income 7,291 9,481 7,137 9,363 11,684
Net income $ 28,036 $ 42,118 $ 70,386 $ 153,549 $ 178,649
BALANCE SHEET DATA (AT END OF PERIOD):
Total cash and cash equivalents $ 10,532 $ 20,151 $ 80,436 $ 26,856 $ 41,455
Total assets 666,133 820,309 1,937,461 2,572,152 3,311,645
Total debt 84,076 77,235 158,052 108,443 103,558
Minority interest 193,712 141,227 112,373 116,805 228,479
Shareholders' equity $376,066 $587,786 $1,634,503 $2,305,437 2,848,960
PER SHARE OF COMMON STOCK:
Net income-basic (1) $ .98 $ 1.05 $ .96 $ 1.10 $ .92
Net income-diluted (1) .98 1.05 .95 1.10 .91
Distributions (2) .84 .85 .88 .88 .88
Book value (at end of period)(3) $ 11.93 $ 12.66 $ 13.99 $ 15.43 17.19
Weighted average-diluted shares of
common stock (in thousands) 17,558 24,077 41,171 77,358 98,961
</TABLE>
12
<PAGE>
PSP20
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 2,459 $ 2,799 $ 2,956 $ 3,226 $ 3,466
Depreciation 480 483 471 469 475
Interest expense 2
Net income 806 1,074 1,085 1,439 1,509
BALANCE SHEET DATA (AT END
OF PERIOD):
Total cash and cash equivalents $ 1,968 $ 1,347 $ 538 $ 881 $ 1,252
Total assets 17,763 16,819 15,739 15,726 15,752
Shareholders' equity 16,984 16,085 14,697 14,548 14,595
PER SHARE OF COMMON STOCK:
Net income(4):
Basic $ .71 $ 1.00 $ 1.06 $ 1.49 $ 1.59
Diluted .59 .81 .85 1.18 1.25
Distributions(5)(6):
Series A $ .87 $ 1.03 $ 1.40 $ 1.59 $ 1.52
Series B .87 1.03 1.40 1.59 1.52
Book value (at end of period)(7) 12.51 12.43 12.06 12.03 12.07
Weighted average shares of Common
Stock (in thousands):
Basic 1,019 982 898 867 861
Diluted 1,368 1,330 1,246 1,216 1,209
</TABLE>
PSP20 - PRO FORMA
<TABLE>
<S> <C>
PER SHARE OF PSP20 COMMON STOCK (8):
Net income-diluted $ .63
Distributions paid on common stock .61
Book value (at December 31, 1997) $11.96
</TABLE>
- ---------------
(1) Net income per common share is computed in accordance with Statement of
Financial Accounting Standard No. 128 (SFAS 128) - "Earnings per Share" and
is presented on the diluted basis using the weighted average shares of PSI
common stock outstanding-diluted. The inclusion of the PSI class B common
stock in the determination of earnings per common share has been determined
to be anti-dilutive (after giving effect to the pro forma additional income
required to satisfy certain contingencies required for the PSI class B
common stock to convert into PSI common stock) and, accordingly, the
conversion of the PSI class B common stock into PSI common stock has not
been assumed.
(2) For federal income tax purposes all distributions on the PSI common stock
are from ordinary income. All distributions for generally accepted
accounting principles ("GAAP") were from investment income.
(3) Book value per share computed based on the number of shares of PSI common
stock and PSI class B common stock outstanding.
13
<PAGE>
(4) Net income per share is computed in accordance with SFAS 128 and is
presented on a basic and diluted basis. Basic earnings per share represents
the shareholders' rights to distribution out of the respective period's net
income, which is calculated by dividing net income after reduction for any
distributions made to the holders of the PSP20 Common Stock Series B
(holders of the PSP20 Common Stock Series C are not entitled to cash
distributions) by the weighted average number of shares of PSP20 Common
Stock Series A. (See note 5 below.) Diluted earnings per share assumes
conversion of the PSP20 Common Stock Series B and C into PSP20 Common Stock
Series A.
(5) In connection with the reorganizations of the PSP20 Partnership, PSP20
issued PSP20 Common Stock Series A, B and C. The capital structure of PSP20
was designed to reflect the economic rights of the limited partners and
general partners in the PSP20 Partnership and the capital shares were
distributed to the limited and general partners in respect of their
interests in the PSP20 Partnership.
PSP20 Common Stock Series A shares are entitled to 100% of cash
distributions from operations from PSP20 until (a) the sum of (1) all
cumulative dividends and other distributions from all sources to the
holders of PSP20 Common Stock Series A shares and (2) the cumulative PSP20
Partnership distributions from all sources with respect to all units equal
(b) the product of $20 multiplied by the number of the then-outstanding
"Common Stock Series A shares," at which time PSP20 Common Stock Series B
and Common Stock Series C shares will automatically convert to PSP20 Common
Stock Series A shares ("Conversion").
As of December 31, 1997, Conversion will occur when $10,046,000, in
additional distributions are made to holders of PSP20 Common Stock Series A
(assuming no further repurchases of PSP20 Common Stock Series A).
(6) For federal income tax purposes, distributions on the PSP20 Common Stock
for 1993, 1994, 1995, 1996 and 1997 were from ordinary income. For GAAP
income purposes, distributions exceeded net income in 1993, 1994, 1995 and
1996 by $157,000, $19,000, $287,000 and $80,000, respectively.
Distributions for each year included distributions declared during the
fourth quarter and paid in January. The difference between the components
of distributions for GAAP purposes and tax purposes results primarily from
the methods used to compute depreciation expense.
(7) Book value per share computed based on the numbers of shares of PSP20
Common Stock Series A, B and C outstanding at the end of the period.
(8) Presents pro forma amounts of PSI per equivalent share of PSP20 Common
Stock. Net income, cash distributions and book value data are calculated by
multiplying PSI's historical results (before impact of the merger, which is
not expected to have a material impact on PSI's per share amounts) by an
assumed exchange ratio of .696 (PSP20's merger value of $22.57 divided by
an assumed issue price of PSI stock of $32 7/16).
RELATIONSHIPS
The following charts show the relationships among Hughes, PSI and PSP20
both before and after the merger (assuming maximum cash elections). PSP20's
properties are managed by PSI, its largest shareholder, under the supervision of
its Board of Directors. PSI is controlled by Hughes, the chairman of the board
and chief executive officer of PSI and PSP20.
14
<PAGE>
BEFORE THE MERGER
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships among PSP20, PSI and certain
affiliates before the Merger: Hughes owns 33.8% of PSI and Public Shareholders
own 66.2% of PSI; PSI (which is the Property Manager of PSP20) owns 29.8% of
PSP20 and Public Shareholders own 70.2% of PSP20.
AFTER THE MERGER
(Assuming Maximum Cash Elections)
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships between PSI and certain
affiliates after the Merger: Hughes owns 33.6% of PSI and Public Shareholders
own 66.4% of PSI.
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER
------------------------------------------------------------------------
RELATIONSHIPS.
--------------
(THE PERCENTAGES OF OWNERSHIP OF PSI REFLECT ONLY PSI COMMON STOCK; THE
ECONOMIC INTEREST OF HUGHES IN PSI IS SUBSTANTIALLY LESS THAN THE PERCENTAGES
SHOWN BECAUSE OF THE SUBSTANTIAL AMOUNT OF PREFERRED STOCK THAT PSI HAS
OUTSTANDING.) AT APRIL 1, 1998, HUGHES AND MEMBERS OF HIS FAMILY OWNED 33.8% OF
PSI COMMON STOCK (37.7% UPON CONVERSION OF PSI CLASS B COMMON STOCK).
PERCENTAGE OWNERSHIP OF PSP20 BY PSI IS THE TOTAL COMBINED OUTSTANDING SHARES OF
THE PSP20 COMMON STOCK AND THE PSP20 COMMON STOCK SERIES B AND C OWNED BY PSI
AND HUGHES.
15
<PAGE>
RISK FACTORS
The merger involves the following risk factors and detriments which should
be considered by PSP20 shareholders, including the following:
NO ARM'S LENGTH NEGOTIATION OR INDEPENDENT REPRESENTATIVES
The merger has not been negotiated at arm's length, and PSI and its related
parties have significant relationships with PSP20. No independent persons were
hired to negotiate the terms of the merger on behalf of PSP20. If such persons
had been hired, the terms of the merger might have been more favorable to the
PSP20 shareholders. In addition, no third party proposals for PSP20 or its
properties were solicited. Such proposals could have generated higher prices.
CHANGE FROM FINITE LIFE TO INFINITE LIFE
PSP20 is a REIT organized to hold interests in properties for a fixed
period. PSP20's bylaws require that PSP20 shareholders be presented with a
liquidation proposal in 1999, although PSP20 could continue in existence for a
longer period. In contrast, PSI, which is engaged in all aspects of the mini-
warehouse industry, including property development and management, intends to
operate for an indefinite period. As a consequence of this difference,
following the merger, PSP20 shareholders receiving PSI common stock will be able
to liquidate their investment only by selling their shares on the NYSE or in
private transactions. The market value of PSI common stock may or may not
reflect the full fair market value of PSP20's assets.
LOWER LEVEL OF DISTRIBUTIONS AFTER THE MERGER
The level of distributions to PSP20 shareholders who receive PSI common
stock in the merger is expected to be lower after the merger. Based on a market
price of PSI common stock of $32 7/16 and the current regular quarterly
distribution rate for PSI ($.22 per share) and PSP20 ($.28 per share), PSP20
shareholders would receive approximately $.13 (46%) less in regular quarterly
distributions per share of PSP20 Common Stock after the merger from PSI than
before the merger from PSP20 and approximately $.01 less per share in regular
quarterly distributions for each $2 1/4 (7%) increase in the market price of PSI
common stock above $32 7/16.
POTENTIAL LOSS OF FUTURE APPRECIATION
PSP20's properties may increase in value and might be able to be sold for
higher prices at a later date.
LIMITATION ON DISSENTERS' RIGHTS OF APPRAISAL
Under California law, PSP20 shareholders will be entitled to dissenters'
rights in connection with the merger only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PSP20 Common Stock. See
"Dissenting Shareholders Rights of Appraisal."
CONFLICTS OF INTEREST
RELATIONSHIPS AMONG PARTIES. Because of the relationships among PSI, PSP20
and Hughes, there are significant conflicts of interest in connection with the
merger. PSI and Hughes have a significant ownership interest in PSP20, owning
29.8% of the total combined PSP20 Common Stock and Common Stock Series B and C.
See "Summary - Relationships."
STRUCTURING OF MERGER BY INSIDERS. The merger has been initiated and
structured by individuals who are executive officers of PSI and PSP20, and the
merger has not been negotiated at arm's length. No independent persons were
hired to negotiate the terms of the merger on behalf of PSP20. If such persons
had been hired, the terms of the merger might have been more favorable to the
PSP20 shareholders.
16
<PAGE>
BENEFITS TO INSIDERS. The merger involves certain benefits to PSI,
including the following:
. Liquidation Proposal. If approved by the PSP20 shareholders, the merger
would obviate the obligation to present the PSP20 shareholders with a
liquidation proposal in 1999.
. Acquisition of Mini-Warehouses. The merger will enable PSI, which is
seeking to increase its ownership of mini-warehouses, to acquire an
additional seven mini-warehouses.
. Issuance of Capital Stock. The merger will enable PSI, which is also
seeking to expand its capital base, to issue approximately 588,500
shares of common stock (assuming no cash elections).
CONTROL AND INFLUENCE BY THE HUGHES FAMILY AND OWNERSHIP LIMITATIONS
Public PSI shareholders are substantially limited in their ability to
control PSI. The Hughes family owns 33.8% of the outstanding shares of PSI
common stock (37.7% upon conversion of the PSI class B common stock).
Consequently, the Hughes family controls matters submitted to a vote of PSI
shareholders, including the election of directors, amendment of PSI's Articles
of Incorporation, dissolution and the approval of other extraordinary
transactions, such as a takeover attempt. Also, there are restrictions in the
PSI Articles of Incorporation and Bylaws on beneficial ownership of PSI
securities. Unless such limitations are waived by PSI's board of directors, no
PSI shareholder may own more than (A) 2.0% of the outstanding shares of all
common stock of PSI or (B) 9.9% of the outstanding shares of each class or
series of preferred or equity stock of PSI. The PSI Articles of Incorporation
and Bylaws provide, however, that no person shall be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of stock to the extent that such shares of stock were beneficially owned
by such person at the time of the PSMI Merger, which includes the PSI common
stock owned by the Hughes family at the time of the PSMI Merger. The principal
purpose of the foregoing limitations is to assist in preventing, to the extent
possible, a concentration of ownership that might jeopardize the ability of PSI
to qualify as a REIT and to obtain the favorable tax benefits afforded a
qualified REIT. See "- Tax Risks - Increased Risk of Violation of Ownership
Requirements." An incidental consequence of such provisions is to make a change
of control significantly more difficult (if not impossible) even if it would be
favorable to the interests of the public PSI shareholders. Such provisions will
prevent future takeover attempts which the PSI Board of Directors has not
approved even if a majority of the public PSI shareholders deem it to be in
their best interests or in which the public PSI shareholders may receive a
premium for their shares over the then market value. See "Description of PSI
Capital Stock - Ownership Limitations."
UNCERTAINTY REGARDING MARKET PRICE OF PSI COMMON STOCK
The number of shares of PSI common stock that would be received by PSP20
shareholders is based on the average market price of PSI common stock for the 20
consecutive trading days ending on the fifth trading day prior to the PSP20
shareholders' meeting. Since the market price of PSI common stock fluctuates,
the market value of PSI common stock that holders of PSP20 Common Stock may
receive in the merger may decrease following establishment of the number of
shares. In addition, because of increased selling activity following issuance
of shares in the merger and other factors, such as changes in interest rates and
market conditions, the market value of PSI common stock that PSP20 shareholders
may receive in the merger may decrease following the merger.
TAX TO PSP20 SHAREHOLDERS WHO RECEIVE CASH IN THE MERGER
Any PSP20 shareholder who receives only cash in connection with the merger
in exchange for his or her PSP20 Common Stock will recognize taxable gain to the
extent that the amount of cash received exceeds the adjusted basis of such PSP20
shareholder in his or her PSP20 Common Stock. A PSP20 shareholder receiving a
combination of cash and PSI common stock in the merger in exchange for his or
her PSP20 Common Stock will recognize taxable gain equal to the lesser of the
amount of the cash received or the difference between his or her adjusted basis
in his or her PSP20 Common Stock and the sum of (1) the fair market value of the
PSI common stock received and (2) the amount of cash received, but only to the
extent of the cash received.
The required REIT distributions will be taxable to PSP20 shareholders as
ordinary income.
17
<PAGE>
TAX RISKS
INCREASED RISK OF VIOLATION OF GROSS INCOME REQUIREMENTS. As a result of
the PSMI Merger, PSI performs property management services for properties in
which it has no or only a partial interest. Some or all of the gross income
received from these services will not be treated as income qualifying for
certain REIT gross income tests applicable to PSI ("Nonqualifying Income"). If
PSI's Nonqualifying Income were to exceed 5% of its total gross income in any
year, PSI's REIT status may terminate for that year and future years unless PSI
meets certain "reasonable cause" standards. Even if PSI meets such standards,
however, it would be subject to a 100% excise tax on any excess Nonqualifying
Income. PSI's Nonqualifying Income as a percentage of its total gross income
was approximately 3% in 1996 and is estimated to be approximately 3% in 1997.
The merger is not expected to increase PSI's Nonqualifying Income.
INCREASED RISK OF VIOLATION OF OWNERSHIP REQUIREMENTS. For PSI to qualify
as a REIT under the Code, no more than 50% in value of its outstanding stock may
be owned, directly or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year. Following the PSMI
Merger, the value of the outstanding capital stock of PSI held by the Hughes
family was estimated at approximately 45% and such percentage has been reduced
to approximately 30% as of December 31, 1997. In order to assist PSI in meeting
these ownership requirements, the PSI Articles of Incorporation and Bylaws
contain the ownership limitations described under "Description of PSI Capital
Stock - Ownership Limitations." However, even with these ownership limitations,
there still could be a violation of the ownership restrictions if four
individuals unrelated to the Hughes family were to own the maximum amount of
capital stock permitted under the PSI Articles of Incorporation and Bylaws.
Therefore, to further assist PSI in meeting the ownership restrictions, the
Hughes family entered into an agreement with PSI restricting the Hughes family's
acquisition of additional shares of capital stock of PSI and providing that if,
at any time, for any reason, more than 50% in value of its outstanding capital
stock otherwise would be considered owned by five or fewer individuals, a number
of shares of PSI common stock owned by Hughes necessary to prevent such
violation will automatically and irrevocably be transferred to a designated
charitable beneficiary. The provisions in the PSI Articles of Incorporation and
Bylaws and the agreement with Hughes are modeled after certain arrangements that
the Internal Revenue Service (the "IRS") has ruled in private letter rulings
will preclude a REIT from being considered to violate the ownership restrictions
so long as such arrangements are enforceable as a matter of state law and the
REIT seeks to enforce them as and when necessary. There can be no assurance,
however, that the IRS might not seek to take a different position with respect
to PSI (a private letter ruling is legally binding only with respect to the
taxpayer to whom it was issued) or contend that PSI failed to enforce these
various arrangements and, hence, there can be no assurance that these
arrangements will necessarily preserve PSI's REIT status. No private letter
ruling has been sought by PSI from the IRS on the effect of these arrangements.
ELIMINATION OF ANY ACCUMULATED EARNINGS AND PROFITS. Any accumulated
earnings and profits of PSMI carried over to PSI in the PSMI Merger. To retain
its REIT status, PSI would have had to distribute any acquired earnings and
profits on or before December 31, 1995. As a condition to the PSMI Merger, PSI
obtained from PSMI a study of the earnings and profits that showed that PSMI had
no earnings and profits at the time of the PSMI Merger. The determination of
earnings and profits depends upon a number of factual matters related to the
activities and operation of PSMI and its predecessors in years prior to the PSMI
Merger. Accordingly, no assurances can be given that the IRS will not challenge
such conclusion. If the IRS were subsequently to determine that such earnings
and profits existed at the time of the PSMI Merger, PSI may lose its REIT
qualification for 1995 and, perhaps, for subsequent years unless certain relief
provisions apply. See "Federal Income Tax Considerations - Consequences of the
Merger on PSI's Qualification as a REIT - Elimination of any Accumulated
Earnings and Profits Attributable to Non-REIT Years."
REDUCED CASH FLOW TO SHAREHOLDERS IF PSI FAILS TO QUALIFY AS A REIT. For
any taxable year that PSI fails to qualify as a REIT and the relief provisions
do not apply, PSI would be taxed at the regular corporate rates on all of its
taxable income, whether or not it makes any distributions to its shareholders.
Those taxes would reduce the amount of cash available to PSI for distribution to
its shareholders or for reinvestment. As a result, failure of PSI to qualify
during any taxable year as a REIT could have a material adverse effect upon PSI
and its shareholders. Furthermore, unless certain relief provisions apply, PSI
would not be eligible to elect REIT status again until the fifth taxable year
that begins after the first year for which PSI fails to qualify.
18
<PAGE>
CORPORATE LEVEL TAX ON SALE OF CERTAIN BUILT-IN GAIN ASSETS. PSI will be
subject to a corporate level tax if it disposes of any of the assets acquired in
the PSMI Merger at any time during the 10-year period beginning at the time of
the PSMI Merger. This tax would be imposed at the top regular corporate rate
(currently 35%) in effect at the time of the disposition on the excess of (i)
the lesser of (a) the fair market value at the time of the PSMI Merger of the
assets disposed of and (b) the selling price of such assets over (ii) PSI's
adjusted basis at the time of the PSMI Merger in such assets. PSI currently does
not intend to dispose of any significant part of the assets acquired in the PSMI
Merger during this 10-year period, but there can be no assurance that one or
more such dispositions will not occur.
FINANCING RISKS
DILUTION AND SUBORDINATION. The interest of PSI shareholders in PSI,
including persons who receive shares in the merger, can be diluted through the
issuance of additional securities.
Since October 1992, PSI has issued shares of preferred stock and intends to
issue additional such shares. These issuances could involve certain risks to
holders of shares of PSI common stock, including shares of PSI common stock to
be issued in the merger. In the event of a liquidation of PSI, the holders of
the preferred stock will be entitled to receive, before any distribution of
assets to holders of PSI common stock, liquidating distributions (an aggregate
of approximately $922 million in respect of preferred stock outstanding at
December 31, 1997), plus any accrued and unpaid dividends. Holders of preferred
stock are entitled to receive, when declared by the PSI board of directors, cash
dividends (an aggregate of approximately $80.7 million per year in respect of
preferred stock outstanding at December 31, 1997), in preference to holders of
PSI common stock. As a REIT, PSI must distribute at least 95% of its REIT
taxable income to its shareholders (which include not only holders of PSI common
stock but also holders of preferred stock). Failure to pay full dividends on
the preferred stock could jeopardize PSI's qualification as a REIT. See
"Federal Income Tax Considerations."
Certain of these securities have been issued under a currently effective
registration statement of PSI for preferred stock, common stock, equity stock
and warrants. PSI intends to issue additional securities under this
registration statement. There is no assurance that any such securities will be
issued. If PSI issues additional preferred or equity stock, the interest of PSI
shareholders could be further subordinated, and if PSI issues additional common
stock, the interest of PSI shareholders could be diluted. See "Description of
PSI Capital Stock" for a discussion of the terms of the preferred stock, common
stock and equity stock.
RISK OF LEVERAGE. In making real estate investments, PSI, unlike PSP20,
has incurred, and may continue to incur, debt, subject to certain limitations.
The incurrence of debt increases the risk of loss of the investment. At
December 31, 1997, PSI's debt of $104 million was approximately 3% as a
percentage of its total capitalization.
MERGER CONSIDERATION BASED ON APPRAISALS INSTEAD OF ARM'S LENGTH NEGOTIATION
The consideration to be received by PSP20 shareholders is based on
independent third party appraised values of the PSP20's properties of
$22,200,000. However, appraisals are opinions as of the date specified and are
subject to certain assumptions and may not represent the true worth or
realizable value of these properties. There can be no assurance that if these
properties were sold, they would be sold at the appraised values; the sales
prices might be higher or lower.
OPERATING RISKS
VALUE OF INVESTMENT REDUCED BY GENERAL RISKS OF REAL ESTATE OWNERSHIP.
Like PSP20, PSI is subject to the risks generally incident to the ownership of
real estate-related assets, including lack of demand for rental spaces or units
in a locale, changes in general economic or local conditions, changes in supply
of or demand for similar or competing facilities in an area, the impact of
environmental protection laws, changes in interest rates and availability of
permanent mortgage funds which may render the sale or financing of a property
difficult or unattractive and changes in tax, real estate and zoning laws.
19
<PAGE>
SIGNIFICANT COMPETITION AMONG MINI-WAREHOUSES. Like PSP20, most of PSI's
properties are mini-warehouses. Competition in the market areas in which many
of their properties are located is significant and has affected the occupancy
levels, rental rates and operating expenses of certain of their properties.
Competition may be accelerated by any increase in availability of funds for
investment in real estate. Recent increases in development of mini-warehouses
are expected to further intensify competition among mini-warehouse operators in
certain market areas in which PSI operates.
RISK OF ENVIRONMENTAL LIABILITIES. Under various federal, state and local
laws, regulations and ordinances (collectively, "Environmental Laws"), an owner
or operator of real estate interests may be liable for the costs of cleaning up,
as well as certain damages resulting from, past or present spills, disposals or
other releases of hazardous or toxic substances or wastes on, in or from a
property. Certain Environmental Laws impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of hazardous or
toxic substances or wastes at or from a property. An owner or operator of real
estate or real estate interests also may be liable under certain Environmental
Laws that govern activities or operations at a property having adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous or toxic wastes. In some cases,
liability may not be limited to the value of the property. The presence of such
substances or wastes, or the failure to properly remediate any resulting
contamination, also may adversely affect the owner's or operator's ability to
sell, lease or operate its property or to borrow using its property as
collateral.
PSI has conducted preliminary environmental assessments of most of its
properties (and intends to conduct such assessments in connection with property
acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, such properties. Such assessments
generally consist of an investigation of environmental conditions at the subject
property (not including soil or groundwater sampling or analysis), as well as a
review of available information regarding the site and publicly available data
regarding conditions at other sites in the vicinity. In connection with these
recent property assessments, PSI's operations and recent property acquisitions,
PSI has become aware that prior operations or activities at certain facilities
or from nearby locations have or may have resulted in contamination to the soil
and/or groundwater at such facilities. In this regard, certain such facilities
are or may be the subject of federal or state environmental investigations or
remedial actions. PSI has obtained, with respect to recent acquisitions and
intends to obtain with respect to pending or future acquisitions, appropriate
purchase price adjustments or indemnifications that it believes are sufficient
to cover any such potential liabilities. Although there can be no assurance,
based on the recent preliminary environmental assessments, PSI believes it has
funds available to cover any liability (estimated at $4 million) from
environmental contamination or potential contamination and PSI is not aware of
any environmental contamination of its facilities material to its overall
business, financial condition or results of operation.
TENANT REINSURANCE. A corporation owned by the Hughes family continues to
reinsure policies insuring against losses to goods stored by tenants in the
mini-warehouses operated by PSI. PSI believes that the availability of
insurance reduces its potential liability to tenants for losses to their goods
from theft or destruction. This corporation will continue to receive the
premiums and bear the risks associated with the insurance. PSI has a right of
first refusal to acquire the stock or assets of this corporation if the Hughes
family or the corporation agree to sell them, but PSI has no interest in its
operations and no right to acquire the stock or assets of the corporation in the
absence of a decision to sell. If the reinsurance business were owned directly
by PSI, the insurance premiums would be Nonqualifying Income to PSI. PSI would
be precluded from exercising its right of first refusal with respect to the
stock of the reinsurance corporation if such exercise would cause PSI to violate
any of the requirements for qualification as a REIT under the Code.
CANADIAN OPERATIONS. The Hughes family continues to own and operate mini-
warehouses in Canada. PSI has a right of first refusal to acquire the stock or
assets of the corporation engaged in these operations if the Hughes family or
the corporation agree to sell them, but PSI has no interest in its operations
and no right to acquire the stock or assets in the absence of a decision to
sell.
MERCHANDISE AND PORTABLE SELF STORAGE COMPANIES. At almost all of PSI's
mini-warehouses, PS Orangeco, Inc. (the "Lock/Box Company") offers for sale to
the general public, including mini-warehouse tenants, a variety of items such as
locks and boxes to assist in the moving and storage of goods. Because the
revenues
20
<PAGE>
received from the sale of these items would be nonqualifying income to PSI, the
nonvoting preferred stock of the Lock/Box Company (representing 95% of the
equity) is owned by PSI. The voting common stock of the Lock/Box Company
(representing 5% of the equity) is owned by the Hughes family, which will be
able to control the operations of the Lock/Box Company by reason of their
ownership of its voting stock.
Public Storage Pickup & Delivery, Inc. ("PSPUD") was organized in 1996 to
operate a portable self-storage business. Because the revenues from this
business would be non-qualifying income to PSI, the capital stock of PSPUD is
owned by the Lock/Box Company. In order to continue to meet the requirements for
qualification as a REIT, the value of the nonvoting preferred stock of the
Lock/Box Company held by PSI (which includes the value of the Lock/Box Company's
interest in PSPUD) may not exceed 5% of the value of PSI's total assets. The
ability of PSPUD to operate profitably depends upon its success in the
relatively new field of portable self-storage, and there can be no assurance as
to its profitability. As a start-up enterprise, PSPUD incurred operating losses
of $31,700,000 in 1997.
LIABILITIES WITH RESPECT TO ACQUIRED GENERAL PARTNER INTERESTS. In
succeeding to substantially all of the properties and operations of PSMI in the
PSMI Merger, PSI became subject to the possibility of certain liabilities and
associated costs in its capacity as general partner of former PSMI limited
partnerships arising out of facts and circumstances in existence prior to such
merger, and PSI will also have general partner liability for post-merger
activities of these partnerships, as it does for other partnerships for which it
is a general partner. Subject to certain limitations, Hughes agreed to
indemnify PSI for pre-merger activities and shares of PSI class B common stock
received in the PSMI Merger were placed in escrow to support such
indemnification.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of PSI common stock in the public
market could adversely affect prevailing market prices. At March 30, 1998,
there were approximately 111.7 million shares of PSI common stock and seven
million shares of PSI class B common stock outstanding. Of these shares,
approximately 75.9 million shares of PSI common stock are tradeable without
restriction (except as to affiliates of PSI) or further registration under the
Securities Act. The remaining approximately 35.8 million shares of PSI common
stock and seven million shares of PSI class B common stock were issued in the
PSMI Merger without registration under the Securities Act in reliance on an
exemption from registration and are "restricted securities" within the meaning
of Rule 144 under the Securities Act. The beneficial owners of 15.5 million of
the restricted securities (including all of the PSI class B common stock) have
agreed not to offer, sell or otherwise dispose (except for gifts and pledges) of
any of their shares until November 13, 1998, in the case of the PSI common
stock, or until November 13, 2002, in the case of the PSI class B common stock.
Upon expiration of such periods, each will be entitled to sell his or her shares
in the public market subject to certain public information, volume and manner of
sale requirements in Rule 144. The remaining approximately 27.3 million
restricted shares will be available for sale in the public market pursuant to
Rule 144, subject to the foregoing requirements. Sales of substantial amounts
of such PSI common stock in the public market could adversely affect the market
price of the PSI common stock.
BENEFITS TO INSIDERS
THE MERGER INVOLVES CERTAIN BENEFITS TO PSI, INCLUDING THE FOLLOWING:
. Liquidation Proposal. If approved by the PSP20 shareholders, the merger
would obviate the obligation to present the PSP20 shareholders with a
liquidation proposal in 1999.
. Acquisition of Mini-Warehouses. The merger will enable PSI, which is
seeking to increase its ownership of mini-warehouses, to acquire an additional
seven mini-warehouses.
. Issuance of Capital Stock. The merger will enable PSI, which is also
seeking to expand its capital base, to issue approximately 588,500 shares of
common stock (assuming no cash elections).
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THE MERGER
GENERAL
The merger agreement provides for the following:
. PSP20 will be merged into PSI, which will be the surviving
corporation.
. Each outstanding share of PSP20 Common Stock will be converted into
the right to receive a value of $22.57 in cash, PSI common stock or a
combination of the two, as follows:
. If holders of 20% or less of the outstanding PSP20 Common Stock
elect to receive cash in the merger, shares held by PSP20 shareholders
electing cash will be converted into the right to receive $22.57 in cash
for each share of PSP20 Common Stock, subject to reduction as described
below. To be effective a cash election must be made by May ___, 1998, in
accordance with the accompanying cash election form.
. If holders of more than 20% of the outstanding PSP20 Common Stock
elect to receive cash in the merger, shares held by PSP20 shareholders
electing cash will be converted into the right to receive cash on a pro
rata basis, and the balance of these shares would be converted into PSI
common stock with a market value (as determined below) of $22.57 per share
of PSP20 Common Stock, subject to reduction as described below.
. If a PSP20 shareholder does not elect cash, all of his or her
PSP20 Common Stock will be converted into PSI common stock with a market
value (as determined below) of $22.57 per share of PSP20 Common Stock,
subject to reduction as described below.
. Shares held by PSP20 shareholders who have properly exercised
dissenters' rights under California law will be purchased by PSP20 on the
terms described under "Dissenting Shareholders' Rights of appraisal."
. For purposes of the merger, the market value of the PSI common stock
will be the average of the per share closing prices on the NYSE of the PSI
common stock during the 20 consecutive trading days ending on the fifth trading
day prior to the special meeting of the shareholders of PSP20.
. The consideration paid by PSI to PSP20 shareholders in the merger will
be reduced by the amount of cash distributions required to be paid to PSP20
shareholders by PSP20 prior to completion of the merger (estimated at $.93 per
share) in order to satisfy PSP20's REIT distribution requirements. The
consideration received by PSP20 shareholders in the merger, however, along with
any required REIT distributions, will not be less than $22.57 per share of PSP20
Common Stock. PSP20 shareholders would receive the required REIT distributions
upon any liquidation of PSP20, regardless of the merger.
. Additional cash distributions would be made to the PSP20 shareholders
to cause PSP20's estimated net asset value allocable to the PSP20 shareholders
as of the date of the merger to be substantially equivalent to $22.57 per share.
. The PSP20 Common Stock and PSP20 Common Stock Series B and C held by
PSI will be cancelled in the merger.
It is estimated that the aggregate consideration (cash and PSI common
stock) to be paid by PSI to purchase all of the PSP20 Common Stock and the PSP20
Common Stock Series B and C (other than stock held by PSI) in the merger and to
pay related costs and expenses would be $19,359,000 (assuming no required REIT
distributions) and that the total amount of cash that would be required by PSI
to purchase the PSP20 Common Stock from PSP20 shareholders making cash elections
and to pay the allocated portion of the costs and expenses of the merger would
be $4,155,000 (assuming maximum cash elections). See "- Determination of
Payments to be Received by PSP20 Shareholders in Connection with the Merger" and
"- Costs of the Merger." These amounts would be reduced to the extent PSP20
must pay required REIT distributions, and the total amount of cash would also be
reduced to the extent that cash elections are less than the maximum.
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PSP20 COMMON STOCK SERIES B AND C
The shares of PSP20 Common Stock Series B and C are owned by PSI and by
Hughes. Upon consummation of the merger, each share of PSP20 Common Stock Series
B and C (other than shares held by PSI which will be cancelled in the merger)
will be converted (or deemed to be converted) into the right to receive PSI
common stock (valued as in the case of the PSP20 Common Stock) in the amount of
$10.90. In addition, holders of PSP20 Common Stock Series B and C will receive
(i) any additional distributions equal to the amount by which the estimated net
asset value allocable to holders of PSP20 Common Stock Series B and C as of the
date of the merger exceeds $10.90 and (ii) any required REIT distributions
payable to the holders of the PSP20 Common Stock Series B. See "- Determination
of Payments to be Received by PSP20 Shareholders." The PSP20 Common Stock Series
B and C will be voted with the majority of shares of PSP20 Common Stock held by
unaffiliated owners.
BACKGROUND
GENERAL. THE MERGER HAS BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO
ARE EXECUTIVE OFFICERS OF PSI AND PSP20. THE SPECIAL COMMITTEE HAS REVIEWED AND
RECOMMENDED FOR APPROVAL THE TERMS OF THE MERGER, AND THE PSP20 BOARD OF
DIRECTORS, BASED ON RECOMMENDATIONS OF ITS SPECIAL COMMITTEE, WHICH THE PSP20
BOARD OF DIRECTORS HAS ADOPTED, AND ON THE OPINION OF A FINANCIAL ADVISOR IN
WHICH IT CONCURS, BELIEVES THAT THE MERGER IS FAIR TO THE PUBLIC PSP20
SHAREHOLDERS, AND RECOMMENDS THAT PSP20 SHAREHOLDERS VOTE FOR THE MERGER. THE
MERGER HAS NOT BEEN NEGOTIATED AT ARM'S LENGTH, AND ONE OF THE THREE MEMBERS OF
THE PSP20 BOARD OF DIRECTORS HAS SUBSTANTIAL CONFLICTS OF INTEREST.
PSP20 was organized to succeed to the business of the PSP20 Partnership in
a reorganization transaction completed in August 1991. The PSP20 Partnership
was formed primarily to develop mini-warehouses and raised approximately $21
million in a public offering completed in 1989. All of the proceeds from the
offering have been invested. PSMI was the sponsor of the PSP20 Partnership.
The PSP20 Partnership originally anticipated selling or financing its
properties from seven to 10 years after development, i.e., between 1998 and
2001. By 1990, significant changes had taken place in the financial and real
estate markets affecting the timing of any proposed sale or financing,
including: (i) the increased construction of mini-warehouses from 1984 to 1988,
which had increased competition, (ii) the general deterioration of the real
estate market (resulting from a variety of factors, including the 1986 changes
in tax laws), which had significantly affected property values and decreased
real estate sales activities, (iii) the reduced sources of real estate financing
(resulting from a variety of factors, including adverse developments in the
savings and loan industry) and (iv) the glut in the real estate market caused by
overbuilding and sales of properties acquired by financial institutions.
In view of the events affecting the timing of the sale or financing of the
properties of the PSP20 Partnership, PSMI concluded that the limited partners of
this partnership, as well as the limited partners of other partnerships
sponsored by PSMI, should be provided with a more efficient method of realizing
the value of their investment than the secondary market for limited partnership
interests and that some of the disadvantages of operating in partnership form
should be avoided. Accordingly, in 1990, PSMI commenced planning the
reorganization of the PSP20 Partnership and other public limited partnerships
sponsored by PSMI into individual corporations taxed as REITs, and, between
December 1990 and November 1991, PSMI completed such reorganization of the PSP20
Partnership and 16 other public partnerships.
The reorganizations were implemented primarily to provide liquidity to
investors, to avoid the effects of legislation designed to require limited
partnerships to withhold state income taxes from distributions and to simplify
partnership administration. The reorganizations were not designed to alter the
business of the partnerships, but merely the form in which the partnerships were
operated, and were not intended to have any material impact on the timing of the
sale or financing of the properties of the PSP20 Partnership.
In response to changes requested by the unaffiliated dealer manager of the
PSP20 Partnership's original offering of limited partnership interests, PSP20
added a provision to its bylaws to the effect that its shareholders be presented
with a proposal in 1999 to sell all or substantially all of PSP20's properties,
distribute the proceeds from such sale and liquidate PSP20. Later, in
settlement of litigation arising from PSP20's reorganization, its bylaw
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provision was amended to expand the terms of the proposal to include a possible
financing of PSP20's properties. IF APPROVED BY PSP20 SHAREHOLDERS, THE MERGER
WOULD OBVIATE PSP20'S OBLIGATION TO PRESENT A PROPOSAL TO ITS SHAREHOLDERS FOR
THE SALE OF ITS PROPERTIES. IF THE PSP20 SHAREHOLDERS DO NOT APPROVE THE MERGER
OF PSP20 OR IF THE MERGER IS NOT OTHERWISE COMPLETED, PSP20 WOULD CONTINUE TO BE
OBLIGATED TO PRESENT SUCH A PROPOSAL IN 1999.
The special committee and the PSP20 Board of Directors believe that the
proposed merger is consistent with PSP20's bylaw provision. In the merger,
PSP20 would be disposing of its properties to PSI for value, i.e., PSI common
stock and cash (if cash elections are made), and the corporate existence of
PSP20 would cease. Furthermore, the consideration to be received in the merger
is based on the appraised value of PSP20's assets, and PSP20 shareholders have
the right, with respect to up to 20% of the outstanding PSP20 Common Stock (less
any dissenting shares), to receive cash in the merger. The applicable bylaw
provision does not (i) define the terms "sale," "liquidation" or "financing,"
(ii) specify what types of transactions would satisfy the requirement imposed by
this bylaw provision or (iii) preclude sales of PSP20's properties to PSI.
PSI, which was organized in 1980, has from time to time taken actions to
increase its asset and capital base and increase diversification. Between
September 1994 and June 1997, PSI merged with 17 REITs, which like PSP20 had
been organized to succeed to the business of predecessor partnerships sponsored
by PSMI and in June 1996 PSI merged with another REIT sponsored by PSMI.
PSP20 BOARD ACTIONS. The PSP20 Board of Directors consists of B. Wayne
Hughes, the chief executive officer of PSI and PSP20, Vern O. Curtis and Jack D.
Steele.
At a meeting on February 27, 1997, which included individuals who are
officers of PSP20 and PSI, the PSP20 Board of Directors appointed the special
committee, consisting of Vern O. Curtis and Jack D. Steele, both independent
directors, to consider and make recommendations to the PSP20 Board of Directors
regarding proposed mergers of PSP20 (and four other similar REITs) into PSI.
Messrs. Curtis and Steele were the members of the special committee that
considered the mergers of 17 other REITs into PSI from September 1994 - June
1997.
On April 9, 1997, the special committee held a telephonic meeting, which
was attended by individuals who are officers of both PSP20 and PSI. The
officers reported that the liquidation value per share of PSP20 Common Stock
appeared to be lower than the trading price of the PSP20 Common Stock at that
time. The special committee concluded that PSP20 should not therefore pursue at
that time a merger of PSP20 into PSI based on PSP20's liquidation value per
share. At the same meeting the mergers of four other similar REITs into PSI
were approved; the per share liquidation values of those REITs were higher than
their trading prices.
At a regularly scheduled November 12, 1997 telephonic meeting of the PSP20
Board of Directors, which was attended by individuals who are officers of both
PSP20 and PSI, the officers reported that the liquidation value per share of
PSP20 Common Stock now appeared to be higher than the trading price of the PSP20
Common Stock. The PSP20 Board of Directors decided that a possible merger with
PSI should be pursued and reappointed the special committee. Following the
November 12 board meeting, the special committee held an organizational meeting
and approved TNG, on behalf of PSI and PSP20, to appraise PSP20's properties,
determined to engage Hogan & Hartson L.L.P. as special counsel to represent and
advise the special committee and determined to engage Stanger to render an
opinion as to the fairness, from a financial point of view, of the consideration
to be received by PSP20 shareholders in the merger. TNG, Hogan & Hartson L.L.P.
and Stanger had acted in similar capacities in connection with mergers of other
REITs into PSI.
On February 13, 1998, the special committee held a telephonic meeting,
which was attended by representatives of TNG, Stanger and Hogan & Hartson L.L.P.
Individuals who are officers of PSP20 and PSI attended a portion of the meeting.
First, the officers described the capital structure of PSP20 and the mechanics
of arriving at the value per share of PSP20 Common Stock, including the
allocation of value between the PSP20 Common Stock and the PSP20 Common Stock
Series B and C and the provision giving PSI the right to terminate the merger
agreement if the average price of PSI common stock during the measurement period
is below $28 per share. Next, the TNG representative described generally the
methodology used in appraising PSP20's properties, including a physical
inspection of all of its properties and an analysis of other recent
transactions, including
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acquisitions of assembled portfolios by PSI and others, operating information on
the properties and market conditions. The Stanger representatives presented
Stanger's analysis, which included the following items: (1) they briefly
reviewed Stanger's recent experience relating to mini-warehouses; (2) they noted
that Stanger had performed a similar analysis in connection with prior mergers
of REITs into PSI, including a review of the portfolio appraisal; (3) they noted
that Stanger reviewed the appraisal methodologies utilized by TNG; (4) they
noted that Stanger reviewed the effective capitalization rates of the portfolio
appraisal, which was approximately 9.04% based on net operating income generated
for the 12 months ended September 30, 1997 (adjusted for non-recurring expenses
and after certain property tax adjustments); (5) they noted that Stanger
reviewed the capitalization rates on PSI transactions during the prior 12
months, reviewed capitalization rates currently cited by industry sources for
mini-warehouse transactions, and concluded that the capitalization rates used in
TNG's appraisal were consistent with transactions in the market; (6) they noted
that Stanger reviewed liquidation analyses, including assumptions (liquidation
of PSP20's properties on a property-by-property basis) prepared by PSP20 based
on certain information provided by TNG and that the projected consideration per
share resulting from liquidation under that analysis was less than the
consideration offered in the merger; (7) they noted that Stanger reviewed going-
concern analyses, based on analyses of five-year and 10-year projections
provided by PSP20, under scenarios in which the PSP20 Common Stock would be
liquidated into the securities markets or PSP20's properties would be liquidated
after 10 years at their residual value (from TNG's appraisal), that Stanger
reviewed the FFO multiples used in the various scenarios regarding the sale of
the PSP20 Common Stock, and that the estimated value per share on a going-
concern basis was lower than the consideration offered in the merger; (8) they
noted that Stanger had reviewed the historical market prices of PSP20 Common
Stock and compared them with the consideration offered in the merger, and they
noted that the consideration offered in the merger, reduced by estimated
retained earnings between the date of the TNG appraisal and April 30, 1998,
represents an approximately 2.2% premium over the then current price of the
PSP20 Common Stock and a 2.2%, 3.5%, 7.2% and 3.6% premium over its average
closing price for the prior 20 days, 60 days, 180 days and 360 days,
respectively; and (9) they indicated that Stanger was prepared to render its
opinion that the consideration to be received in the merger is fair to the
public PSP20 shareholders, from a financial point of view. The special committee
and Stanger representatives discussed the reduction in distributions to PSP20
shareholders (and in FFO per share) who receive PSI common stock in the merger,
the respective market prices of the PSP20 Common Stock and PSI common stock and
the timing of the transaction. Following the discussion, the special committee
expressed the belief that the merger is fair to, and in the best interests of,
public PSP20 shareholders, and determined to recommend to the PSP20 Board of
Directors that the merger be approved and to recommend that PSP20 shareholders
vote for the merger. Based on the foregoing recommendations of its special
committee, which were adopted by the PSP20 Board of Directors, the PSP20 Board
of Directors expressed the belief that the merger is fair to, and in the best
interests of, public PSP20 shareholders, approved the merger, determined to
recommend that PSP20 shareholders vote for the merger and approved the filing
with the Commission of preliminary proxy materials. See "- Comparison of
Consideration to be Received in the Merger to Other Alternatives" and "Risk
Factors - Lower Level of Distributions to PSP20 Shareholders."
PUBLIC ANNOUNCEMENT OF MERGER AND COMMISSION FILINGS. On February 13,
1998, PSI and PSP20 signed the merger agreement and publicly announced the
general terms of the merger. On March 9, 1998, PSP20 filed preliminary proxy
materials with the Commission. On April ___, 1998, PSI filed a registration
statement, which was declared effective on April ___, 1998.
REASONS FOR THE MERGER
The reasons for the decision of the special committee and PSP20 Board of
Directors to recommend the merger include:
. PSP20's bylaws includes a provision that PSP20 shareholders be
presented with a proposal to sell or finance all of PSP20's properties,
distribute the proceeds from such sale and liquidate PSP20. The
proposed merger satisfies this obligation. See "- Background."
. The merger provides PSP20 shareholders with the choice of either (A)
converting their investment in PSP20 into an investment in PSI, which
generally owns the same type of properties, on a tax-free basis
(assuming the merger is a tax-free reorganization and that a PSP20
shareholder receives only PSI common stock in the merger) and which
has, and intends to continue, to acquire additional
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properties or (B) with respect to up to 20% of the outstanding PSP20
Common Stock (less any dissenting shares), receiving in cash the
amounts they would receive if PSP20's properties were sold at their
appraised values and PSP20 were liquidated (without any reduction for
real estate commissions and other sales expenses). See "-
Recommendation to PSP20 Shareholders and Fairness Analysis."
. The special committee and PSP20 Board of Directors believe that the
merger is more advantageous to PSP20 shareholders than any of the
alternatives. See "- Alternatives to merger" and "- Recommendation to
PSP20 shareholders and Fairness Analysis."
. PSI has agreed to merge with PSP20 at this time, subject to approval by
PSP20 shareholders and certain other conditions. See "- The Merger
Agreement - Conditions to Consummation of the Merger."
ALTERNATIVES TO THE MERGER
Prior to concluding that the merger should be proposed to PSP20
shareholders, the PSP20 Board of Directors and its special committee considered
several alternatives to the merger. The alternatives considered by the PSP20
Board of Directors and its special committee were liquidation, continuation of
operations and amendments to organizational documents. In order to determine
whether the merger or one of its alternatives would be more advantageous to
PSP20 shareholders, the PSP20 Board of Directors and its special committee
compared the potential benefits and detriments of the merger with the potential
benefits and detriments of the alternatives.
LIQUIDATION
BENEFITS OF LIQUIDATION An alternative to the merger would be to
liquidate PSP20's assets, distribute the net liquidation proceeds to the PSP20
shareholders and thereafter dissolve PSP20. Through such liquidation, PSP20
would provide for a final disposition of its shareholders' interests in PSP20.
PSP20 shareholders would receive cash liquidation proceeds (as they will as to a
portion of their investment if they make cash elections). Liquidating PSP20
would be consistent with its bylaws that provide that PSP20 shareholders be
presented with a proposal for the sale of its properties and liquidation in
1999. If PSP20 liquidated its assets through asset sales to unaffiliated third
parties, PSP20 shareholders would not need to rely upon a real estate portfolio
appraisal of the fair market value of PSP20's real estate assets. Such assets
would be valued through arm's length negotiations between PSP20 and prospective
purchasers.
DISADVANTAGES OF LIQUIDATION. Over the last several years, the
performance of PSP 20's properties has improved as described under "- Continued
Operation of PSP20 - Benefits of Continuation." The PSP20 Board of Directors and
its special committee believe that the improvement may continue, making
liquidation (other than through the merger) inadvisable at this time. The merger
provides PSP20 shareholders with the opportunity either to convert their
investment in PSP20 into an investment in PSI, which like PSP20 primarily owns
mini-warehouses, on a tax-free basis (to the extent that PSP20 shareholders
receive only PSI common stock) or to receive cash based on the appraised value
of PSP20's properties as to a portion of their investment. In addition, for many
PSP20 shareholders, the proceeds available for reinvestment after liquidation
would be reduced as a result of federal and state income taxes (as they would be
in the case of cash elections) and real estate commissions and other sales
expenses (estimated at $.80 per share of PSP20 Common Stock).
PSP20 shareholders should recognize that appraisals are opinion as of
the date specified and are subject to certain assumptions and may not represent
the true worth or realizable value of PSP20's properties. There can be no
assurance that if PSP20's properties were sold, they would be sold at the
appraised value; the sales price might be higher or lower than the appraised
value.
LIQUIDATION PROCEDURES. As with a merger, a liquidation of PSP20
would require approval by the holders of a majority of the outstanding PSP20
Common Stock. Upon the dissolution of PSP20, its properties would be sold and
any funds remaining after payment of debts, and liabilities would be distributed
to PSP20 shareholders in respect of their shares. PSI and its affiliates would
receive their share of the available funds in the liquidation.
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The process for liquidating PSP20's assets would in large measure be within the
control of the PSP20 Board of Directors. Liquidation may be accomplished through
a series of separate transactions with different purchasers or as a part of a
multi-property transaction.
The PSP20 Board of Directors may engage real estate brokers,
investment bankers, financial consultants and others to assist with the
disposition of PSP20's assets. These persons may assist with the identification
of prospective purchasers, arrangements for asset financing, and structure of
the transaction. The PSP20 Board of Directors, as fiduciaries to PSP20
shareholders, remain responsible for determining the terms and conditions of
such transactions. One of the more significant considerations for the PSP20
Board of Directors would be the decision whether to insist upon payment in full
upon sale of a property or to accept a portion of the sale price at closing and
the balance through installment payments. Acceptance of a sale proposal
providing for deferred payments would extend the life of PSP20 until its receipt
of those amounts and their distribution to its shareholders. Such arrangements
would also expose PSP20 to the risk that deferred payments might not be
collected in full and that PSP20 might be forced to foreclose on any collateral
given to secure payment of the deferred obligations. It is not possible to
predict the time period that would be required to liquidate PSP20 because it
would depend on market conditions at the time of liquidation.
CONTINUED OPERATION OF PSP20
BENEFITS OF CONTINUATION. Another alternative to the merger would be
to continue PSP20 in accordance with its existing business plans, with PSP20
remaining as a separate legal entity and with its own assets and liabilities.
Nothing requires the liquidation or merger of PSP20 at this time, since PSP20 is
operating profitably and does not need to liquidate or reorganize to satisfy
debt obligations or other current liabilities or to avert defaults, foreclosures
or other adverse business developments.
There has been improvement in the mini-warehouse markets. As the pace
of new mini-warehouse development has slowed from the peak levels of 1984-88,
there has been a corresponding improvement in the financial performance of
existing properties. This improvement is evidenced by the performance of
PSP20's mini-warehouses. For example, from 1995 to 1997, occupancy per square
foot remained consistent at an average of 92%. During this same period,
realized annual rents per square foot increased from an average of $7.82 to
$9.28. Despite recent increases in the development of new mini-warehouses, the
PSP20 Board of Directors believes that the financial performance from existing
facilities may continue to improve, although not necessarily at the rate of
improvement experienced in prior years. Should such improvements continue, the
value of PSP20's properties could be expected to increase. See "Description of
PSP20's Properties."
A number of advantages could be expected to arise from the continued
operation of PSP20. PSP20 shareholders would continue to receive regular
quarterly distributions of net cash flow arising from operations and the sale or
refinancing of PSP20's assets. Given the currently improving market conditions
for mini-warehouses, the PSP20 Board of Directors and its special committee
believe that the level of these distributions to PSP20 shareholders may
increase. Continuing PSP20 affords PSP20 shareholders with the opportunity to
participate in any future appreciation in PSP20's properties. In addition, the
decision to continue PSP20, if elected, would mean that there would be no change
in the nature of the investment of PSP20 shareholders. This option avoids
whatever disadvantages might be deemed inherent in the merger. See "Risk
Factors" for discussion of various risks associated with the merger.
DISADVANTAGES OF CONTINUATION. The primary disadvantage with
continuing PSP20 is the failure of that strategy to secure the benefits that the
PSP20 Board of Directors expects to result from the merger. These benefits are
highlighted under "- Potential Advantages of the Merger." The merger affords
PSP20 shareholders increased liquidity. In addition, because PSP20 is not
authorized to issue new securities or to reinvest sale or financing proceeds,
PSP20 is less able to take advantage of new real estate investment
opportunities. In contrast, PSI has a substantially larger, more diversified,
investment portfolio that reduces the risks associated with any particular
assets or group of assets and increases PSI's ability to access capital markets
for new capital investments.
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AMENDMENT OF BYLAWS
BENEFITS OF BYLAW AMENDMENT. Another alternative to the merger would
be an amendment to PSP20's bylaws to remove the restrictions on investment of
cash flow and on the issuance of securities. If approved, such action would
provide some of the advantages of the merger. PSP20 could take advantage of new
real estate opportunities through the reinvestment of cash flow and the
investment of proceeds from the issuance of securities.
DISADVANTAGES OF BYLAW AMENDMENT. The PSP20 Board of Directors and
its special committee believe that such an amendment has disadvantages. It is
believed that PSP20 shareholders could better take advantage through PSI than
through PSP20 of the current market for REIT securities for the following
reasons. First, PSI has a larger capital base. At December 31, 1997, PSP20 had
total shareholders' equity of $14,595,000, compared with PSI's total
shareholders' equity of $2,849,000,000 (including preferred stock) and
$1,927,000,000 (without preferred stock). Second, the market for PSI common
stock should be more liquid than the market for PSP20 Common Stock. PSP20 has
860,7334 shares of Common Stock (1,209,025 shares upon conversion of the PSP20
Common Stock Series B and C), traded on the AMEX, and, during the 12 months
ended December 31, 1997, the average daily trading volume of the PSP20 Common
Stock was 800 shares. In comparison, PSI has approximately 112 million shares of
PSI common stock traded on the NYSE (approximately 76 million of which are
freely tradeable) and, during the 12 months ended December 31, 1997, the average
daily trading volume of PSI common stock was 98,000 shares. Third, PSI has
broader geographic diversification than PSP20. PSP20 owns seven properties in
five states and PSI owns equity interests (directly, as well as through general
and limited partnership interests and stock interests) in 1,136 properties in 38
states. For additional information on the properties owned by PSP20 and PSI, See
"-Comparison of PSP20 Common Stock with PSI Common Stock," "Description of
PSP20's Properties" and "Description of PSI's Properties."
NO SOLICITATION OF OTHER PROPOSALS
Neither the PSP20 Board of Directors nor its special committee solicited
any other proposals for the acquisition of PSP20 or its properties. The PSP20
Board of Directors agreed to the merger agreement, which includes a provision
against soliciting other offers to buy, because they believe that the potential
advantages to PSP20 shareholders described under "- Potential Advantages of the
Merger" are more likely to be achieved through the merger than in a transaction
with another party. In particular, assuming the merger qualifies as a tax-free
reorganization, no taxable gain or loss will be recognized by PSP20 shareholders
who exchange their PSP20 Common Stock solely for PSI common stock. The required
REIT distributions generally will be taxable to PSP20 shareholders as ordinary
income to the extent of PSP20's earnings and profits. PSI and Hughes have
little tax basis in their common stock of PSP20. For PSP20 shareholders, the
proceeds available for reinvestment after liquidation would be reduced as a
result of real estate commissions and other sales expenses (estimated at $.80
per share of PSP20 Common Stock). However, other proposals could have been for
a higher price. Under California law, most acquisitions of PSP20 or its
properties would require approval by PSP20 shareholders. PSI and Hughes in the
aggregate own approximately 29.8% of the total combined outstanding shares of
PSP20 Common Stock and Common Stock Series B and C.
DETERMINATION OF PAYMENTS TO BE RECEIVED BY PSP20 SHAREHOLDERS IN CONNECTION
WITH THE MERGER
In connection with the merger, PSP20 shareholders will receive a value of
$22.57 (less the amount of any required REIT distributions) per share of PSP20
Common Stock in cash, PSI common stock, or a combination of the two, calculated
as follows:
1. The market value (not book value) of PSP20's real estate assets has
been determined by TNG, showing such value as of October 1, 1997. In valuing
PSP20's real estate assets, TNG considered the applicability of all three
commonly recognized approaches to valuation: the cost approach, the income
approach and the sales comparison approach. TNG did not consider the cost
approach to be applicable to PSP20's properties. TNG reconciled the values
indicated from the sales comparison and income approaches to arrive at a final
valuation conclusion. TNG gave primary emphasis to the income approach. The
resulting effective implied capitalization rate for PSP20's portfolio of real
estate assets based on property operations (before non-recurring charges and
after
28
<PAGE>
certain property tax adjustments) for the 12 months ended October 1, 1997
averaged 9.04%. TNG's valuation is as of October 1, 1997 in the context of the
information available on that date. See "- Real Estate Portfolio appraisal by
TNG."
2. PSP20's net asset value has been computed as (a) the market value of
PSP20's real estate assets as of October 1, 1997 ($22,200,000) plus (b) the
estimated book value of PSP20's non-real estate assets as of April 30, 1998 (a
total of $1,618,000) less (c) PSP20's estimated liabilities as of April 30, 1998
(a total of $510,000).
3. PSP20's net asset value per share of PSP20 Common Stock was calculated
at $22.57 by reducing PSP20's net asset value (as computed in 1 and 2 above,
$23,308,000) by the amount of PSP20's net asset value allocable to the PSP20
Common Stock Series B and C (estimated at $3,798,000, or $10.90 per share) and
the estimated required REIT distributions attributable to the PSP20 Common Stock
Series B ($84,000 or $.93 per share) and dividing the result by the number of
outstanding shares of PSP20 Common Stock.
4. Upon completion of the merger, each share of PSP20 Common Stock (other
than dissenting shares and shares of PSP20 Common Stock held by PSI) would be
converted into the right to receive $22.57 in cash (with respect to up to 20% of
the outstanding PSP20 Common Stock, less any dissenting shares), subject to
reduction as described below, or that number of shares of PSI common stock
determined by dividing $22.57, subject to reduction as described below, by the
average of the closing prices on the NYSE of PSI common stock during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
PSP20 shareholders. Additional distributions would be made to PSP20 shareholders
to cause PSP20's estimated net asset value allocable to the PSP20 shareholders
as of the date of the merger to be substantially equivalent to $22.57 per share.
The consideration paid by PSI to PSP20 shareholders in the merger will be
reduced by the amount of any required REIT distributions. However, the
consideration received by PSP20 shareholders in the merger along with the
required REIT distributions (which will be paid in cash) will not be less than
$22.57 per share of PSP20 Common Stock.
Hughes, who owns 5.8% of the total combined outstanding shares of PSP20
Common Stock and PSP20 Common Stock Series B and C, would receive approximately
24,000 shares of PSI common stock in the merger (assuming no required REIT
distributions and PSI common stock price of $32 7/16.
The following tables set forth the calculation of the payments to be paid
to PSP20 shareholders:
COMPUTATION OF PAYMENTS
<TABLE>
<CAPTION>
Net book Appraised Book value PSP20's PSP20's net PSP20's PSP20's net Payments
value of market of PSP20's net asset asset value net asset asset value received in
PSP20's real value of other net value(1) allocable value per share connection with
estate PSP20's assets(1) to PSP20 allocable of PSP20 Merger per
portfolio(1) real estate Common Stock to PSP20 Common original $1,000
portfolio(2) Series B Common Stock investment in
and C(3) Stock (1) the PSP20
Partnership(4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$13,947,000 $22,000,000 $1,108,000 $23,308,000 $3,882,000 $19,426,000 $22.57 $1,129
- ---------------
</TABLE>
(1) Estimated as of April 30, 1998. The net asset value per share of PSP20
Common Stock includes the required REIT distributions, estimated at $.93 per
share or $800,000 in the aggregate. PSP20 shareholders would receive the
required REIT distributions upon any liquidation of PSP20 regardless of the
merger.
(2) As of October 1, 1997.
(3) Includes $10.90 per share of PSP20 Common Stock Series B and C plus the
estimated required REIT distributions attributable to the PSP20 Common Stock
Series B of $.93 per share.
(4) Does not include quarterly cash distributions to PSP20 shareholders or to
limited partners of the PSP20 Partnership. PSP20 was organized in August
1991 to succeed to the business of the PSP20 Partnership, which completed
its offering of limited partnership interests in 1989. PSP20's capital
structure was designed to reflect the economic rights of the limited and
general partners in the PSP20 Partnership. The market price of PSI common
stock may fluctuate following establishment of the number of shares to be
issued to PSP20
29
<PAGE>
shareholders in the merger and prior to issuance and could decrease as a
result of increased selling activity following issuance of shares in the
merger and other factors.
POTENTIAL BENEFITS OF THE MERGER
The PSP20 Board of Directors believes that the merger should result in the
following benefits to PSP20 shareholders who receive PSI common stock:
ACQUISITION OF ADDITIONAL PROPERTIES. PSP20's primary business activity is
operating the properties originally acquired by its predecessor. PSP20 has not
raised additional capital, and its articles of incorporation and bylaws restrict
its ability to reinvest cash flow in new properties. PSI, on the other hand,
has expanded, and is expected to continue to expand, its asset and capital base.
PSI is also permitted to borrow money to fund new acquisitions. Accordingly,
PSP20 shareholders who receive PSI common stock in the merger will be investors
in an entity that has grown, and is expected to continue to grow, as new
investments are made.
INCREASED LIQUIDITY. PSP20 has 860,734 shares of PSP20 Common Stock traded
on the AMEX (1,209,025 shares upon conversion of the PSP20 Common Stock Series B
and C into PSP20 Common Stock) and, during the 12 months ended December 31,
1997, the average daily trading volume of PSP20 Common Stock was 800 shares. In
comparison, PSI has approximately 112 million shares of PSI common stock traded
on the NYSE (approximately 76 million of which are freely tradeable) and, during
the 12 months ended December 31, 1997, the average daily trading volume of PSI
common stock was 98,000 shares. Accordingly, the investment in PSI of PSP20
shareholders who receive PSI common stock in the merger should have greater
liquidity than the current investment of PSP20 shareholders in PSP20.
POSSIBLE TAX-FREE TREATMENT. The merger is intended to qualify as a tax-
free reorganization. Assuming such qualification, no taxable gain or loss will
be recognized in connection with the merger by PSP20 shareholders who exchange
their common stock solely for PSI common stock. However, the required REIT
distributions will be taxable to all PSP20 shareholders as ordinary income.
Hughes, who has little tax basis in his PSP20 Common Stock, intends to exchange
his PSP20 Common Stock solely for PSI common stock. See "Federal Income Tax
Considerations - The Merger."
DETRIMENTS OF THE MERGER
For a discussion of certain risks and detriments of the merger, see "Risk
Factors" beginning on page 16.
RECOMMENDATION TO PSP20 SHAREHOLDERS AND FAIRNESS ANALYSIS
CONCLUSIONS. Based upon an analysis of the merger, the special committee
and the PSP20 Board of Directors have concluded (i) that the terms of the merger
are fair to PSP20 shareholders, (ii) after comparing the potential benefits and
detriments of the merger with alternatives, that the merger is more advantageous
to PSP20 shareholders than such alternatives and (iii) that PSP20 shareholders
should vote for the merger.
Although the PSP20 Board of Directors and its special committee reasonably
believe the terms of the merger are fair to PSP20 shareholders and recommend
that PSP20 shareholders vote for the merger, an affiliate of PSI is a member of
the PSP20 Board of Directors, and PSI has other significant relationships with
PSP20 and conflicts of interest with respect to the merger. The merger has been
initiated and structured by individuals who are executive officers of PSP20 and
who are also affiliated with PSI. The special committee, comprised of
independent directors, has reviewed and approved the terms of the merger. See
"Summary - Relationships" and "Risk Factors - Conflicts of Interest."
MATERIAL FACTORS UNDERLYING CONCLUSIONS OF SPECIAL COMMITTEE AND PSP20
BOARD OF DIRECTORS. The following is a discussion of the material factors
underlying the conclusions of the special committee and the PSP20 Board of
Directors. The PSP20 Board of Directors and its special committee have not
quantified the relative importance of these factors.
30
<PAGE>
1. Bylaw Provision. PSP20's bylaws require a proposal for the sale of its
properties in 1999. As discussed under "- Background," the special committee
and PSP20 Board of Directors believe that the proposed merger satisfies these
requirements and that, as discussed in paragraph 2 below, the form and amount of
consideration offered to PSP20 shareholders constitute fair value in respect of
their shares of PSP20 Common Stock. The special committee and PSP20 Board of
Directors recognize that, if PSP20's properties were liquidated through sales to
third parties, the PSP20 shareholders would not need to rely upon a real estate
portfolio appraisal to estimate the fair market value of PSP20's real estate
assets. Such assets would be valued through arm's length negotiations between
PSP20 and the prospective purchasers.
2. Consideration Offered. The PSP20 Board of Directors and its special
committee believe that (i) the proposal that the consideration to be paid to
PSP20 shareholders in the merger be based on the value of PSP20's assets is
reasonable and consistent with its bylaws, (ii) PSP20's net asset value
represents a fair estimate of the value of its assets, net of liabilities, and
constitutes a reasonable basis for determining the consideration to be received
by PSP20 shareholders, and (iii) the consideration to be received by PSI and
Hughes in respect of their interest in PSP20 is fair because it reflects the
amount they would receive upon PSP20's liquidation. There was no negotiation
regarding the basis for determining the consideration to be paid to PSP20
shareholders in the merger or the consideration to be received by PSI and Hughes
in respect of their interest in PSP20. See "- Background."
3. Choice as to Form of Consideration. The merger provides PSP20
shareholders with the choice of either (A) converting their investment into an
investment in PSI, which generally owns the same type of properties as PSP20, on
a tax-free basis (assuming the merger is a tax-free reorganization, the PSP20
shareholders receive solely PSI common stock in the merger, and except that the
required REIT distributions will be taxable as ordinary income) and which has
acquired, and is expected to continue to acquire, additional properties or (B)
with respect to up to 20% of the outstanding PSP20 Common Stock (less any
dissenting shares), receiving in cash the amounts they would receive if its
properties were sold at their appraised values and PSP20 were liquidated
(without any reduction for real estate commissions and other sales expenses).
4. Independent Portfolio Appraisal and Fairness Opinion. The conclusions
of the special committee and PSP20 Board of Directors are based partially upon
the portfolio appraisal prepared by TNG and Stanger's fairness opinion. The
special committee and PSP20 Board of Directors attributed significant weight to
these items, which they believe support their position, and do not know of any
factors that are reasonably likely to detract from the conclusions in TNG's
portfolio appraisals and Stanger's fairness opinion. The special committee and
PSP20 Board of Directors believe that the engagement of TNG and Stanger to
provide the portfolio appraisals and the fairness opinion, assisted the special
committee and PSP20 Board of Directors in the fulfillment of their duties to
PSP20 shareholders, notwithstanding that these parties has received fees in
connection with their engagements and may receive fees in the future. See "-
Real Estate Portfolio appraisal by TNG" and "- Fairness Opinion from Stanger."
5. Voting Procedures and Dissenters' Rights. The special committee and
PSP20 Board of Directors believe that the voting process and the rights of
dissenting shareholders of PSP20 support their conclusions as to the merger.
The merger is required to be approved by a majority of the outstanding shares of
PSP20 Common Stock and PSP20 Common Stock Series B and C, all voting together as
a class, and the PSP20 Common Stock Series B and C will be voted with the
holders of a majority of the unaffiliated PSP20 Common Stock of PSP20. PSP20
shareholders will have the right to exercise dissenters' rights, although the
special committee and PSP20 Board of Directors recognize that these rights may
be exercised by PSP20 shareholders only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PSP20 Common Stock.
6. Comparison of Payments to be Received at the Time of the Merger to
Other Alternatives. The payments to be received at the time of the merger of
$22.57 per share of PSP20 Common Stock generally compares favorably with (A) the
trading price of the PSP20 Common Stock immediately prior to the first
announcement of the merger ($21 5/8) and during other periods, (B) a range of
estimated going-concern value per share of PSP20 Common Stock ($17.41 to
$20.79), (C) an estimated liquidation value per share of PSP20 Common Stock
($21.77) and (D) the book value per share of PSP20 Common Stock as of December
31, 1997 ($12.07). The PSP20 Board of Directors and its special committee
recognize that this comparison is subject to significant assumptions,
31
<PAGE>
qualifications and limitations. See "- Comparison of Consideration to be
Received in the Merger to Other Alternatives."
7. Lower Level of Distributions to PSP20 Shareholders After the Merger.
The level of distributions to PSP20 shareholders who receive PSI common stock in
the merger is expected to be lower after the merger. Based on a market price of
PSI common stock of $32 7/16 and the current regular quarterly distribution rate
for PSI ($.22 per share) and PSP20 ($.28 per share), PSP20 shareholders would
receive approximately $.13 (46%) less in regular quarterly distributions per
share of PSP20 Common Stock after the merger from PSI than before the merger
from PSP20 and approximately $.01 less per share in regular quarterly
distributions for each $2 1/4 (7%) increase in the market price of PSI common
stock above $32 7/16.
8. Conflicts of Interest. The merger has been initiated and structured by
individuals who are executive officers of PSP20 and who are also affiliated with
PSI. Independent representatives were not engaged to negotiate these
arrangements on behalf of the public PSP20 shareholders, and the terms of the
merger are not the result of arm's length negotiations. Hughes will receive PSI
common stock in respect of his ownership of capital stock of PSP20.
The special committee and PSP20 Board of Directors do not believe that the
absence of independent representatives to negotiate the merger undermines the
fairness of the merger because the merger has been reviewed and approved by the
special committee, comprised of independent directors. Based upon the use of an
independent appraisal firm, the Stanger fairness opinion and the participation
of the special committee, the PSP20 Board of Directors and its special committee
considered that the engagement of such independent representatives was not
necessary or cost effective.
COMPARISON OF CONSIDERATION TO BE RECEIVED IN THE MERGER TO OTHER ALTERNATIVES
GENERAL. To assist PSP20 shareholders in evaluating the merger, the PSP20
Board of Directors and its special committee compared the consideration to be
received in the merger, i.e., a value of $22.57 per share of PSP20 Common Stock
(less the amount of any required REIT distributions) to: (i) the trading price
of the PSP20 Common Stock on the AMEX; (ii) estimates of the value of PSP20 on a
liquidation basis assuming that its assets were sold at their appraised fair
market value and the net proceeds distributed to the PSP20 shareholders in
accordance with their share ownership in PSP20; and (iii) estimates of the value
of PSP20 on a going-concern basis assuming that it were to continue as a stand-
alone entity and its securities sold at the end of either a five-year or 10-year
holding period or its assets sold at the end of a 10-year holding period. Due to
the uncertainty in establishing these values, the PSP20 Board of Directors and
its special committee have established a range of estimated values for certain
of the alternatives, representing a high and low estimated value for the
potential consideration. Since the value of the consideration for alternatives
to the merger is dependent upon varying market conditions, no assurance can be
given that the range of estimated values indicated establishes the highest or
lowest possible values. However, the PSP20 Board of Directors and its special
committee believe that analyzing the alternatives in terms of ranges of
estimated value, based on currently available market data and, where
appropriate, reasonable assumptions made in good faith, establishes a reasonable
framework for comparing alternatives.
The results of these comparative analyses are summarized in the following
tables. PSP20 shareholders should bear in mind that the estimated values
assigned to the alternate forms of consideration are based on a variety of
assumptions that have been made by PSP20. These assumptions relate, among other
things, to: projections as to the future income, expenses, cash flow and other
significant financial matters of PSP20; the capitalization rates that will be
used by prospective buyers when PSP20's assets are liquidated; and, appropriate
discount rates to apply to expected cash flows in computing the present value of
the cash flows that may be received with respect to shares of PSP20 Common
Stock. In addition, these estimates are based upon certain information
available to PSP20 at the time the estimates were computed, and no assurance can
be given that the same conditions analyzed by them in arriving at the estimates
of value would exist at the time of the merger. The assumptions used have been
determined by the PSP20 Board of Directors and its special committee in good
faith, and, where appropriate, are based upon current and historical information
regarding PSP20 and current real estate markets, and have been highlighted below
to the extent critical to the conclusions of the PSP20 Board of Directors and
its special committee.
32
<PAGE>
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and PSP20 shareholders should carefully
consider the following discussions to understand the assumptions, qualifications
and limitations inherent in the presented valuations. The estimated values
presented in the following table are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
estimated values are based upon certain assumptions that relate, among other
things, to (i) the price of PSI common stock as of the date of the merger being
the same as during the 20 trading days ending on the fifth trading day prior to
the meeting of PSP20 shareholders, (ii) projections as to the future revenues,
expenses, cash flow and other significant financial matters of PSP20, (iii) the
capitalization rates that will be used by prospective buyers when PSP20's assets
are liquidated, (iv) selling costs, (v) appropriate discount rates to apply to
expected cash flows in computing the present value of the cash flows and (vi)
the manner of sale of PSP20's properties. Actual results may vary from those
set forth below based on numerous factors, including interest rate fluctuations,
tax law changes, supply and demand for mini-warehouses, the manner in which the
properties are sold and changes in availability of capital to finance
acquisitions of mini-warehouses.
PSP20 COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Payments in Merger Estimated Going Concern Estimated Liquidation Value
per Share of PSP20 Trading Prices of PSP20 Value per Share of PSP20 per Share of PSP20 Common
Common Stock Common Stock (2) Common Stock (3) Stock at Appraised Value (4)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$22.57(1) $19 5/8 $21 1/4 $17.41 $20.79 $21.77
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) Based on PSP20's net asset value consisting of the independently appraised
market value of PSP20's real estate portfolio as of October 1, 1997 and
estimated book value of its other net assets as of April 30, 1998 and
assuming no required REIT distributions. The market price of PSI common
stock may fluctuate following establishment of the number of shares to be
issued to PSP20 shareholders in the merger and prior to issuance and could
decrease as a result of increased selling activity following issuance of the
shares in the merger and other factors. See "- Determination of Payments to
be Received by PSP20 Shareholders in Connection with the Merger."
(2) High and low sales prices on the AMEX composite tape for the fourth quarter
of 1997, the last full calendar quarter prior to the announcement of the
merger. On February 12, 1998, the closing price of PSP20 Common Stock was
$21 5/8.
(3) High and low of three methods of estimating going-concern value. Based upon
a number of assumptions regarding the future net operating income and
distributions of PSP20 and the date of their liquidation. See "- Going-
Concern Value."
(4) Based upon TNG's real estate appraisal, less estimated expenses of
liquidation. See "- Liquidation Values."
TRADING PRICES OF PSP20 COMMON STOCK. The PSP20 Board of Directors and its
special committee also considered that the trading price for PSP20 Common Stock
averaged $21.63, $21.35, $20.61 and $21.32 for the 20-day, 60-day, 180-day and
360-day periods preceding the announcement of the proposed merger and that the
closing price for PSP20 Common Stock on the last trading day prior to the first
announcement of the proposed merger was $21 5/8. The PSP20 Board of Directors
also considered that the consideration offered in the merger adjusted for
interim earnings of approximately $.48 per share (which amount represents
increases in current net assets projected to be generated and retained between
the date of the appraisal and April 30, 1998) represents a premium of 2.2%,
3.5%, 7.2%, 3.6% and 2.2% over the 20-day, 60-day, 180-day and 360-day average
closing prices and the closing price on the last trading day prior to the
announcement of the proposed merger.
GOING-CONCERN VALUE. The PSP20 Board of Directors and its special
committee have estimated the going-concern value of PSP20 by analyzing projected
cash flows and distributions assuming that PSP20 was operated as an independent
stand-alone entity and its securities or assets sold at the end of the holding
period under three scenarios: Scenario #1 - a five-year holding period, with
shares of PSP20 liquidated in securities markets at an FFO multiple ranging from
8.5 to 10.5; Scenario #2 - a 10-year holding period, with shares of PSP20
liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5;
and Scenario #3 - a 10-year holding period with
33
<PAGE>
the property portfolios of PSP20 liquidated in private real estate markets at
the terminal value projected by the appraiser in the portfolio appraisals and
the net proceeds resulting from the liquidation of the properties and other
remaining assets of PSP20 paid out to the PSP20 shareholders in liquidation
distributions. Dividends and sale proceeds per share of PSP20 Common Stock were
discounted in the projections at rates ranging from 12.00% to 13.00%.
Scenario #3 of the going-concern analysis assumes PSP20's properties are
sold in a single transaction after a 10-year holding period. Should the assets
be liquidated over time, even at prices equal to those projected, distributions
to PSP20 shareholders out of PSP20's cash flow from operations might be reduced
because relatively fixed costs, such as general and administrative expenses, are
not proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales are assumed to occur concurrently.
The estimated value of PSP20 on a going-concern basis is not intended to
reflect the distributions payable to PSP20 shareholders if its assets were to be
sold at their current fair market value.
LIQUIDATION VALUES. Since one of the alternatives available to the PSP20
Board of Directors is to proceed with a liquidation of PSP20, and the
corresponding distribution of the net liquidation proceeds to the PSP20
shareholders, the PSP20 Board of Directors and its special committee have
estimated the liquidation value of PSP20 assuming that its real estate portfolio
were sold at its fair market value, based upon the TNG real estate portfolio
appraisal. This alternative assumes non-real estate assets are sold at their
market value with respect to marketable securities and book value for other
assets (such assets, excluding cash, representing less than 2% of the value of
PSP20), PSP20 incurs selling costs at the time of liquidation (state and local
transfer taxes, real estate commissions and legal and other closing costs) of
$968,000, and the remaining net liquidation proceeds are distributed among the
PSP20 shareholders under the terms of its articles of incorporation, according
priority to the holders of PSP20 Common Stock.
The liquidation analysis assumes that PSP20's properties are sold in a
single transaction at their appraised value. Should the assets be liquidated
over time, even at prices equal to those projected, distributions to PSP20
shareholders from cash flow from operations might be reduced because PSP20's
relatively fixed costs, such as general and administrative expenses, are not
proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales of the properties in PSP20's portfolio are
assumed to occur concurrently.
Applying these procedures, the PSP20 Board of Directors and its special
committee arrived at the liquidation value set forth in the table. The real
estate portfolio appraisal sets forth, subject to the specified assumptions,
limitations and qualifications, TNG's professional opinion as to the market
value of PSP20's real estate portfolio as of October 1, 1997. While the
portfolio appraisal is not necessarily indicative of the price at which the
assets would sell, market value generally seeks to estimate the price at which
real estate assets would sell if disposed of in an arm's length transaction
between a willing buyer and a willing seller, each having access to relevant
information regarding the historical revenues and expenses of the properties.
The real estate portfolio appraisal assumes that PSP20's properties are disposed
of in an orderly manner and are not sold in forced or distressed sales where
sellers might be expected to dispose of their interests at substantial discounts
to their actual fair market value. See "- Real Estate appraisal by TNG."
DISTRIBUTION COMPARISON. The PSP20 Board of Directors and its special
committee have considered the potential impact of the merger upon distributions
that would be made to PSP20 shareholders who exchange their PSP20 Common Stock
for PSI common stock. Based on a market price of PSI common stock of $32 7/16
and the current regular quarterly distribution rate for PSI ($.22 per share) and
PSP20 ($.28 per share), PSP20 shareholders would receive approximately $.13
(46%) less in regular quarterly distributions per share of PSP20 Common Stock
after the merger from PSI than before the merger from PSP20 and approximately
$.01 less per share in regular quarterly distributions for each $2 1/4 (7%)
increase in the market price of PSI common stock above $32 7/16. These estimates
are based upon the actual distributions made by PSI and PSP20 (not upon the
amounts that might have been distributed by them based upon their cash flow from
operations).
In evaluating this estimate, PSP20 shareholders should bear in mind that a
number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and
34
<PAGE>
interest payments on debt, if any, capital expenditure levels (in excess of
normal expenditures for ongoing maintenance and repairs), and the corporate
policy with respect to cash distributions. A comparison of the current
distribution levels of PSI with those of PSP20 does not show how the merger
might affect a PSP20 shareholder's distribution level over a number of years.
REAL ESTATE PORTFOLIO APPRAISAL BY TNG
TNG was engaged by PSI and PSP20 to appraise PSP20's real estate portfolios
and has delivered a written report of its analysis, based upon the review,
analysis, scope and limitations described therein, as to the fair market value
of PSP20's portfolio of properties as of October 1, 1997. PSI and PSP20
selected TNG to provide the appraisal because of its experience and reputation
in connection with appraising mini-warehouses and its appraisal of the
properties of other REITs in connection with their mergers with PSI. The
consideration to be paid by PSI to PSP20 shareholders in the merger is based on
the appraisal. The appraisal, which contains a description of the assumptions
and qualifications made, matters considered and limitations on the review and
analysis, is set forth as Appendix B and should be read in its entirety.
Certain of the material assumptions, qualifications and limitations to the
appraisal are described below.
EXPERIENCE OF TNG. TNG was formed by Lawrence R. Nicholson, MAI to succeed
to the business of Nicholson-Douglas Realty Consultants, which was founded by
Mr. Nicholson in 1993. Mr. Nicholson has specialized in the appraisal of mini-
warehouses and other commercial properties since 1980. TNG has conducted real
estate appraisals on a variety of property types and uses throughout the United
States for owners, banks and thrift organizations, insurance companies and other
financial institutions. During 1996, TNG appraised over 350 properties.
SUMMARY OF METHODOLOGY. At the request of PSI and PSP20, TNG evaluated
PSP20's real estate portfolio. In valuing the properties, TNG considered the
applicability of all three commonly recognized approaches to value: the cost
approach, the income approach and the sales comparison approach. The type and
age of a property, market conditions and the quantity and quality of data affect
the applicability of each approach in a specific appraisal situation. TNG did
not consider the cost approach to be applicable to PSP20's properties.
The income approach estimates a property's capacity to produce income
through an analysis of the rental market, operating expenses and net income.
Net income may then be processed into a value estimate through either (or a
combination) of two methods: direct capitalization or yield capitalization,
i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of substitution,
i.e., that an informed purchaser would pay no more for a property than the cost
of acquiring an existing property with the same utility. The sales comparison
approach establishes what typical investors in the marketplace are willing to
pay for comparable properties.
The cost approach is based on the estimated market value of the site as if
vacant plus the depreciated replacement cost of the existing improvements. The
cost approach was not considered appropriate in the case of PSP20 since (a)
today's investors do not rely upon the cost approach in making investment
decisions, and (b) the necessity of estimating total accrued depreciation in
buildings of the type and age of PSP20's properties diminishes the validity of
this approach.
While the appraisal was prepared for PSP20's entire portfolio, TNG analyzed
the individual properties by (a) reviewing each property's previous three years'
operating statements, (b) reviewing information submitted to TNG by on-site
managers which included competitive rental and occupancy surveys, subject
facility descriptions, area trends and other factors, which were verified by TNG
through physical inspections, telephone calls and other sources; and (c)
developing information from a variety of sources about market conditions for
each individual property that included population, employment and housing trends
within the market.
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To determine any significant differences in quality among the various
properties, TNG considered such variables as property income growth patterns and
potential, quality of location and construction, tenant appeal, property
appearance, security and potential competition.
TNG also interviewed management personnel responsible for PSP20's
properties to discuss competitive conditions, area economic trends affecting the
properties, historical operating revenues and expenses, lease terms and
occupancy rates in competitive facilities. These interviews included
ascertaining information on items of deferred maintenance, planned capital
improvements and other factors affecting the physical condition of the
properties. Representatives of TNG performed site inspections on all of PSP20's
properties between October 15, 1997 and October 21, 1997.
TNG then estimated the value of each property in the portfolio relying
heavily upon the income approach. Indicated values were developed using a yield
capitalization technique applying overall capitalization rates derived directly
from the marketplace. To define the occupancy and rental rates and expense
escalators to be used in developing cash flow projections, TNG reviewed the
acquisition criteria and projection parameters in use in the marketplace by
major mini-warehouse investors, owners and operators, appraisers and financing
sources. In addition, TNG reviewed other published information concerning
acquisition criteria in use by property investors through the second quarter of
1997. Further, TNG interviewed various sources in local markets to identify
sales of mini-warehouses and business parks within the past 24 months in order
to derive certain valuation indicators. Sources for data concerning such
transactions included local appraisers, property owners, real estate brokers,
and others. TNG also reviewed information compiled by management identifying
sales and acquisitions of mini-warehouses.
In applying a discounted cash flow analysis, projections of cash flow from
each property (assuming no indebtedness) were developed for a 10-year period
ending in the year 2007 with a terminal residual value computed at the end of
year 10. The first year's scheduled gross income was estimated taking into
consideration each property's current rent structure and the rental rates of
competitive facilities. Also included in the income estimate were trends in
ancillary income from late fees and rental concessions. TNG then made an
analysis of each subject's occupancy history, took into consideration the
occupancy level of competitive facilities and estimated a stabilized occupancy
level for each property in the portfolio.
Estimated expenses were based upon each property's actual operating
history. The projected expenses were tested for reasonableness based upon a
comparison of the operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
property. Consideration was given to and adjustment made to reflect capital
expenditures and replacement reserves. Income and expense growth rates were
based on projection parameters currently being used by property investors as
well as upon local, regional and historical trends.
TNG used a 3.5% growth rate for income and expenses. TNG then used
terminal capitalization rates of 10% to capitalize each property's 11th year net
income into a residual value at the end of a 10-year holding period, assuming
normal cost of disposing of the properties. The 10 yearly cash flows were then
discounted to present worth using discount rates of 12.50% based upon local
market and property conditions. In addition, TNG valued each property using the
direct capitalization method by applying capitalization rates between 9.4% and
9.8% to projected cash flows for the next 12 months.
The indicated value based upon the discounted cash flow approach is
$21,900,000 for PSP20's portfolio of properties. The indicated value based upon
the direct capitalization approach is $22,500,000.
In applying the sales comparison approach to PSP20's properties, TNG
analyzed over 200 mini-warehouse properties that were sold during 1996 and 1997.
Using a regression analysis, a statistically significant correlation was derived
between the comparable property's net income and its sales price per square
foot.
In addition, TNG reviewed capitalization rates and purchase prices paid in
recent and pending transactions of properties similar to PSP20's portfolio
involving both PSI and others and reconciled the purchase prices with the values
of PSP20's portfolio of properties.
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CONCLUSIONS AS TO VALUE. TNG reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. TNG gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the mini-
warehouse market.
Based on the valuation methodology described above, TNG assigned a market
value to PSP20's portfolio of real property assets as of October 1, 1997 of
$22,200,000. The resulting effective implied capitalization rate for the
portfolio based on reported property operations (before non-recurring expenses
and after certain property tax adjustments) during the 12 months ended September
30, 1997 averaged 9.04%.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISAL. The
appraisal reflects TNG's valuation of PSP20's real estate portfolio as of
October 1, 1997 in the context of the information available on such date.
Events occurring after October 1, 1997 and before the closing of the merger
could affect the properties or assumptions used in preparing the appraisal. TNG
has no obligation to update the appraisal on the basis of subsequent events;
however, TNG has informed PSI and PSP20 that, as of the date of this proxy
statement, TNG is not aware of any event or change in conditions since October
1, 1997 that may have caused a material change in the value of PSP20's
portfolios of real estate since that date.
The appraisal is subject to certain general and specific assumptions and
limiting conditions and is in conformity with the Departure Provision of Uniform
Standards of Professional appraisal Practice. Among other limitations, the
appraisal (i) did not consider the effect of easements, restrictions and other
similar items on the value of PSP20's properties, (ii) assumed that the
properties comply with local building codes and zoning ordinances, (iii) assumed
that there are no new or planned facilities except as noted in the appraisal and
(iv) did not involve the physical inspections of competing properties. See
Appendix B for a discussion of the specific assumptions, limitations and
qualifications of the appraisal.
COMPENSATION AND MATERIAL RELATIONSHIPS. TNG is being paid an aggregate
fee of $23,100 for preparation of the appraisal, which fee includes
reimbursement for all of TNG's related out-of-pocket expenses. TNG is also
entitled to indemnification against certain liabilities. The fee was negotiated
with TNG and payment is not dependent upon completion of the merger. As a
leading appraiser of mini-warehouses, TNG, and its predecessor, have prepared
appraisals for PSI and its affiliates, including appraisals of the properties of
prior REITs in connection with their mergers with PSI, and TNG is expected to
continue to prepare appraisals for PSI.
FAIRNESS OPINION FROM STANGER
Stanger was engaged by PSP20 through its special committee to deliver a
written summary of its determination as to the fairness of the consideration to
be received in the merger, from a financial point of view, to the public PSP20
shareholders. The full text of the opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations on the
review and opinion, is set forth in Appendix C to this proxy statement and
should be read in its entirety. Certain of the material assumptions,
qualifications and limitations to the fairness opinion are set forth below. The
summary set forth below does not purport to be a complete description of the
analyses used by Stanger in rendering the fairness opinion. Arriving at a
fairness opinion is a complex analytical process not necessarily susceptible to
partial analysis or amenable to summary description.
Except for certain assumptions, described more fully below, which PSP20
advised Stanger that it would be reasonable to make, PSP20 imposed no conditions
or limitations on the scope of Stanger's investigation or with respect to the
methods and procedures to be followed in rendering the fairness opinion. PSP20
has agreed to indemnify Stanger against certain liabilities arising out of its
engagement to prepare and deliver the fairness opinion.
EXPERIENCE OF STANGER. Stanger, founded in 1978, has provided information,
research, investment banking and consulting services to clients throughout the
United States, including major NYSE firms and insurance companies and over 70
companies engaged in the management and operation of partnerships and REITs.
The investment banking activities of Stanger include financial advisory
services, asset and securities valuations, industry
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and company research and analysis, litigation support and expert witness
services, and due diligence investigations in connection with both publicly
registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, reorganizations and for estate, tax, corporate and other purposes.
In particular, Stanger's valuation practice principally involves partnerships,
partnership securities and the assets typically owned through partnerships
including, but not limited to, oil and gas reserves, real estate, cable
television systems and equipment leasing assets.
SUMMARY OF MATERIALS CONSIDERED. In the course of Stanger's analysis to
render its opinion regarding the merger, Stanger: (i) reviewed this proxy
statement; (ii) reviewed the annual reports on Form 10-K of PSI and PSP20 for
the three fiscal years ending December 31, 1995, 1996 and 1997; (iii) reviewed
the appraisal prepared by TNG and discussed with PSP20's management and TNG the
methodologies and procedures employed in preparing the appraisal; (iv) reviewed
information regarding purchases and sales of self-storage properties by PSI or
any affiliated entities over the past two years, and other information available
relating to acquisition criteria for self-storage properties; (v) reviewed
estimates prepared by PSP20, and based in part on the appraisal, of the current
net liquidation value per common share of PSP20's assets and projections of cash
flow from operations, dividend distributions and going-concern values for PSP20,
and the calculation of the allocation of such values between the holders of
PSP20 Common Stock and the holders of PSP20 Common Stock Series B and C; (vi)
discussed with certain members of management of PSI and PSP20 conditions in
self-storage property markets, conditions in the market for sales/acquisitions
of properties similar to those owned by PSP20, current and expected operations
and performance, and the financial condition and future prospects of PSI and
PSP20; (vii) reviewed historical market prices, trading volume and dividends for
PSI common stock and PSP20 Common Stock; and (viii) conducted other studies,
analyses, inquiries and investigations as Stanger deemed appropriate.
SUMMARY OF ANALYSIS. The following is a summary of certain financial and
comparative analyses reviewed by Stanger in connection with and in support of
its fairness opinion. The summary of the opinion and analysis of Stanger set
forth in this proxy statement is qualified in its entirety by reference to the
full text of such opinion.
Review of Appraisal. In preparing its opinion, Stanger relied upon the
appraisal of PSP20's portfolio of properties which was prepared as of October 1,
1997 by TNG, an independent appraiser. Stanger reviewed the appraisal rendered
by TNG, reviewed a sample of supporting documentation for the appraisal and
discussed with TNG its experience and qualifications and the appraisal
methodologies utilized.
Stanger observed that the appraisal was certified by a Member of the
appraisal Institute and was conducted utilizing the income approach to
valuation, applying the discounted cash flow method to establish a value for
each individual property, and the sales comparison approach.
Stanger observed that the effective capitalization rate utilized in the
appraisal was approximately 9.04%, based on net operating income (before non-
recurring expenses and after certain property tax adjustments) generated for the
12 months ended September 30, 1997. Lower capitalization rates generally reflect
higher sales prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared by
PSP20's management of the estimated value of PSP20 based upon liquidation of its
portfolio on a property-by-property basis utilizing estimates prepared by PSP20
and information provided by TNG.
The property-by-property liquidation analysis assumed each property could
be sold within an estimated marketing period of six months at the appraised
value as reported in the appraisal, to an independent third-party buyer. Costs
of such property sales by PSP20 to independent third-parties were estimated by
PSP20 to total approximately $968,000 and were comprised of estimates of $80,000
in state and local transfer taxes, $666,000 in commissions and $222,000 in legal
and other closing costs. Such amounts were based on prevailing transfer tax
rates in the locale of each property and on estimates of PSP20 based on
knowledge of real estate transactions. Stanger observed that the estimated net
proceeds from such liquidation, assuming no required REIT distributions
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(prior to the date of liquidation) and the associated dissolution of PSP20 and
distribution of all remaining assets was $21.77 per share of PSP20 Common Stock,
versus the consideration offered in the merger of $22.57 cash per share of PSP20
Common Stock, or the equivalent of $22.57 of PSI common stock per share of PSP20
Common Stock, based on the average closing price of PSI common stock on the NYSE
during the 20 consecutive trading days ending on the fifth trading day prior to
the meeting of PSP20 shareholders.
Stanger also reviewed information on recent multi-property purchases and
sales of self-storage properties transacted by PSI, PSMI or affiliates during
1993 through March 1997. Stanger observed that PSI, PSMI or affiliated entities
have completed 11 bulk purchases of property portfolios during the period
reviewed, excluding the properties associated with the mergers of 17 prior REITs
with PSI. These transactions involved affiliated and unaffiliated entities with
an interest in 106 properties with an aggregate acquisition cost of
approximately $250 million. Capitalization rates ranged from 9.1% to 10.7%,
averaging 9.7%, for bulk transactions during the entire period reviewed and
ranged from 9.1% to 9.8%, averaging 9.3%, for bulk transactions during the
preceding 15 months.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and
projections prepared by PSP20's management concerning estimated cash flows and
dividend distributions from PSP20's continued operation as an independent stand-
alone entity and estimated sales proceeds from the liquidation of PSP20's shares
or its portfolio of properties. The analyses incorporated estimates of revenues
and operating expenses for the properties, capital expenditures, entity-level
general and administrative costs, and cash flow distributions and proceeds from
sale of either PSP20's securities or its properties during projection periods of
up to 10 years. The analyses and projections assumed, among other things, that
(i) net operating income for PSP20 would grow at a compound annual rate of
approximately 3.6% over the 10-year projection period; (ii) general and
administrative expenses would increase at an average rate of 3.0% per annum over
the projection period; and (iii) in the scenario involving sale of the
properties in private real estate markets (as described below), such sales would
occur at the terminal value projected by the appraiser in the appraisal.
The projections evaluated PSP20's going-concern value under three
scenarios: Scenario #1 - a five-year holding period, with shares of PSP20 Common
Stock liquidated in securities markets at an FFO multiple ranging from 8.5 to
10.5; Scenario #2 - a 10-year holding period, with shares of PSP20 Common Stock
liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5;
and Scenario #3 - a 10-year holding period with PSP20's property portfolio
liquidated in private real estate markets at the terminal value projected in the
appraisal and the net proceeds resulting from the liquidation of the properties
and other remaining assets of PSP20 paid out to shareholders in liquidating
distributions. Dividends and sale proceeds per share of PSP20 Common Stock were
discounted in the projections at rates ranging from 12.0% to 13.0%.
Stanger observed that the FFO multiples utilized by management in the
projections were consistent with historical FFO multiples among publicly traded
REITs investing in self-storage facilities and with market capitalization and
leverage levels reasonably comparable to those of PSP20. This group of publicly
traded REITs are or were all affiliated with PSI. Stanger further observed that
the discount rates applied to dividends and sale proceeds were consistent with
the historic rates of return produced by equity REITs.
Stanger further observed that the estimated values per share of PSP20
Common Stock on a going-concern basis resulting from the above analysis were as
follows for each scenario: Scenario #1 - $17.41 to $20.29; Scenario #2 - $18.22
to $20.79; Scenario #3 - $19.58 to $20.76, compared with the consideration
offered in the merger of $22.57 per share of PSP20 Common Stock.
The estimated values assigned to the alternative forms of consideration are
based on a variety of assumptions that have been made by PSP20. While PSP20 has
advised Stanger that it believes that it has a reasonable basis for these
assumptions, these assumptions may not reflect PSP20's actual experience and
such differences could be material. See "- Comparison of Consideration to be
Received in the Merger to Other Alternatives."
Review of Market Value. Stanger reviewed historical market prices, trading
volume and dividend distributions for PSP20 Common Stock. In the course of this
review, Stanger compared the historical market prices
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of PSP20 Common Stock with amounts to be received at the time of the merger.
Stanger observed that the trading price for PSP20 Common Stock averaged $21.63,
$21.35, $20.61 and $21.32 for the respective 20-day, 60-day, 180-day, and 360-
day periods preceding the announcement of the proposed merger and that the
closing price for PSP20 Common Stock on the last trading day prior to the first
announcement of the proposed merger was $21 5/8. Stanger further observed that
the consideration offered in the merger, reduced by $578,000, or approximately
$.48 per share (which amount represents increases in current net assets
projected by management to be generated and retained between the date of the
appraisal and April 30, 1998) represents a premium of 2.2%, 3.5%, 7.2%, 3.6% and
2.2% over the 20-day, 60-day, 180-day, 360-day average closing prices and the
closing price on the last trading day prior to the announcement of the proposed
merger.
In addition, Stanger observed that the consideration per share of PSP20
Common Stock offered in the merger in the form of shares of PSI common stock
will reflect values established in public securities trading markets equivalent
to the cash offer per share of PSP20 Common Stock. Such value will be based on
the average closing prices on the NYSE of PSI common stock during the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
PSP20 shareholders.
Distribution/FFO Analysis. Stanger reviewed distributions per share and
FFO per share for PSP20 shareholders on an equivalent per share basis. Stanger
noted that based on a closing price of $32 7/16 for PSI common stock and the
resulting exchange ratio of PSP20 Common Stock for PSI common stock and based on
operating results for PSI, regular quarterly distributions per share would
decrease by approximately $.13 (46%) for PSP20 shareholders receiving PSI common
stock.
Stanger observed that, at the closing price of $32 7/16 for PSI common
stock and based on operating results for PSI, FFO per share on a quarterly
fully-diluted basis on an equivalent per share basis earned by PSP20
shareholders would decrease by $.07 (17%).
CONCLUSIONS. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and as of the date of the fairness opinion, the
consideration to be received in the merger is fair to the public PSP20
shareholders, from a financial point of view.
ASSUMPTIONS. In evaluating the merger, Stanger relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the proxy statement or that was furnished or
otherwise communicated to Stanger. Stanger did not perform an independent
appraisal of the assets and liabilities of PSI and PSP20 and relied upon and
assumed the accuracy of the appraisal. Stanger also relied on the assurances of
PSI and PSP20 that any projections, budgets, or value estimates contained in the
proxy statement or otherwise provided to Stanger, were reasonably prepared on
bases consistent with actual historical experience and reflect the best
currently available estimates and good faith judgments; that PSP20's net asset
value has been allocated between the holders of the PSP20 Common Stock and the
holders of the PSP20 Common Stock Series B and C in the same manner it would be
allocated upon PSP20's liquidation; that no material changes have occurred in
the appraised value of the portfolio or the information reviewed between the
date of the appraisal or the date of the other information provided and the date
of the opinion; and that PSI and PSP20 are not aware of any information or facts
that would cause the information supplied to Stanger to be incomplete or
misleading in any material respect.
In connection with preparing the fairness opinion, Stanger was not engaged
to, and consequently did not, prepare any written report or compendium of its
analysis for internal or external use beyond the analysis set forth in Appendix
C. Stanger does not intend to deliver any additional written summary of the
analysis.
COMPENSATION AND MATERIAL RELATIONSHIPS. For preparing the fairness
opinion and related services in connection with the merger, Stanger is being
paid a fee of $60,000. In addition, Stanger will be reimbursed for certain out-
of-pocket expenses, including legal fees, up to a maximum of $9,000 and will be
indemnified against certain liabilities, including certain liabilities under the
federal securities laws. The fee was negotiated with Stanger. Payment of the
fee to Stanger is not dependent upon completion of the merger. During the past
three years (1994 to present), Stanger has rendered consulting and related
services and provided products to PSI and to PSMI and its affiliates, including
fairness opinion to the public shareholders of 17 REITs in connection with their
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mergers with PSI, and may be engaged in the future. Stanger has received
compensation aggregating approximately $890,000 in connection with these
services and products since 1995 (exclusive of amounts received in connection
with the merger).
LIMITATIONS AND QUALIFICATIONS. Stanger was not requested to, and
therefore did not: (i) select the method of determining the consideration
offered in the merger; (ii) make any recommendation to the PSP20 shareholders
with respect to whether to approve or reject the merger or whether to select the
cash or PSP20 common stock option in the merger; or (iii) express any opinion as
to the business decision to effect the merger, alternatives to the merger or tax
factors resulting from the merger, the PSMI merger or relating to PSI's
continued qualification as a REIT. Stanger's opinion is based on business,
economic, real estate and securities markets, and other conditions as of the
date of its analysis. Events occurring after that date may materially affect the
assumptions used in preparing the opinion.
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of 17 other REITs with PSI, its
expertise in real estate transactions and the fee quoted by Stanger. No party
other than Stanger was contacted to render an opinion as to the fairness of the
merger to PSP20 shareholders, and PSP20 has neither requested nor received any
views, preliminary or otherwise, from any party other than Stanger regarding the
fairness of the merger to the PSP20 shareholders.
THE MERGER AGREEMENT
If the merger is approved by the PSP20 shareholders and the other
applicable conditions to the merger are satisfied or waived, the merger will be
consummated pursuant to the merger agreement which is set forth in Appendix A
to, and is incorporated by reference into, this proxy statement. As a result of
the merger, all of the assets now held by PSP20 will be held by PSI upon
completion of the merger. The merger agreement contains representations and
warranties of PSI and PSP20 and certain other provisions relating to the merger.
The representations and warranties are extinguished by, and do not survive, the
merger.
CONDITIONS TO CONSUMMATION OF THE MERGER. Consummation of the merger is
contingent upon standard conditions, including the following: (i) the
Registration Statement shall have been declared effective by the Commission and
PSI shall have received all other authorizations necessary to issue PSI common
stock in exchange for PSP20 Common Stock and to consummate the merger; (ii) the
merger agreement and the merger shall have been approved and adopted by the
requisite vote of the PSP20 shareholders; (iii) receipt by PSP20 of a legal
opinion of Hogan & Hartson L.L.P. that the merger will qualify as a
reorganization under Section 368(a) of the Code (which opinion has been received
and is described under "Federal Income Tax Considerations"); (iv) the shares of
PSI common stock issued to PSP20 shareholders shall be listed on the NYSE; (v)
the PSP20 Board of Directors shall have received a fairness opinion from Stanger
(which opinion has been received); (vi) the Board of Directors of PSI shall have
approved the merger (which approval has been obtained); (vii) in the case of
PSI, the average of the per share closing prices on the NYSE of the PSI common
stock during the 20 consecutive trading days ending on the fifth trading day
prior to the meeting of PSP20 shareholders is not less than $28; and (viii)
demands for payment by holders of dissenting shares are filed with respect to
less than 5% of the outstanding shares of PSP20 Common Stock. The obligation of
PSI to effect the merger is also subject to PSI, in its sole discretion, being
satisfied as to title to, and the results of an environmental audit of, each
property of PSP20. Any of these conditions (other than the conditions of
approval by the PSP20 shareholders) may be waived by the board of directors of
the corporation benefiting from such condition.
AMENDMENT OR TERMINATION. The merger agreement provides for amendment or
modification thereof with respect to the merger by written agreement authorized
by the boards of directors of PSI and PSP20, either before or after shareholder
approval, provided that any such amendment or modification made after
shareholder approval does not change any of the principal terms of the merger or
the merger agreement. The merger may be abandoned at any time before or after
shareholder approval by mutual written consent and may be abandoned by the
action of the board of directors of either party if, among other things, the
closing of the merger has not occurred on or before December 31, 1998.
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CONSUMMATION. It is contemplated that the merger will be consummated by
filing the Agreements of Merger (attached as Exhibit A to the merger agreement)
with the California Secretary of State as soon as practicable after its approval
by the PSP20 shareholders and the satisfaction or waiver of various conditions
contained in the merger agreement. It is currently contemplated that the merger
will be consummated during the first quarter of 1998.
EXCHANGE OF CERTIFICATES. After the merger, holders of certificates that
evidenced outstanding shares of PSP20 Common Stock that were converted into
shares of PSI common stock, upon surrender of the certificates to the exchange
agent, BankBoston N.A., shall be entitled to receive certificates representing
the number of whole shares of PSI common stock into which the shares of PSP20
Common Stock shall have been converted and cash payment in lieu of fractional
share interests, if applicable. As soon as practicable after the merger, the
exchange agent will send a notice and a transmittal form to each holder of
record whose PSP20 Common Stock shall have been converted into shares of PSI
common stock, advising of the effectiveness of the merger and the procedure for
surrendering to the exchange agent certificates evidencing PSP20 Common Stock in
exchange for certificates evidencing PSI common stock. HOLDERS OF PSP20 COMMON
STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT
THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE MAILED AFTER
CONSUMMATION OF THE MERGER.
Until surrendered, each outstanding certificate which represents shares of
PSP20 Common Stock that were converted into shares of PSI common stock will be
deemed for all corporate purposes to evidence ownership of the number of whole
shares of PSI common stock into which the PSP20 Common Stock evidenced thereby
were converted. However, until the certificates formerly evidencing PSP20
Common Stock are surrendered, no dividend payable to holders of record of the
PSI common stock shall be paid to the holders of such certificates, but upon
surrender of the certificates by the holders they will be entitled to receive
the dividends (without interest) previously paid with respect to such PSI common
stock as of any record date on or subsequent to the effectiveness of the merger.
After the merger, there will be no further registration of transfers of PSP20
Common Stock on PSP20's records and, if certificates formerly evidencing such
shares are presented, they will be cancelled and exchanged for certificates
evidencing PSI common stock.
FRACTIONAL SHARES. No fractional shares of PSI common stock will be issued
in the merger. In lieu of any fractional share interests, each holder of PSP20
Common Stock who would otherwise be entitled to a fractional share of PSI common
stock will, upon surrender of the certificate representing PSI common stock,
receive a whole share of PSI common stock if such fractional share to which such
holder would otherwise have been entitled is .5 of a share or more, and such
fractional share shall be disregarded if it represents less than .5 of a share;
provided that such fractional share shall not be disregarded if it represents .5
of 1% or more of the total number of shares of PSI common stock such holder is
entitled to receive in the merger. In such event, the holder will be paid an
amount in cash (without interest), rounded to the nearest $.01, determined by
multiplying (i) the per share closing price on the NYSE of the PSI common stock
at the time of effectiveness of the merger by (ii) the fractional interest.
RESTRICTIONS ON OTHER ACQUISITIONS. PSP20 has agreed not to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making of any
proposal with respect to a merger, consolidation, share exchange or similar
transaction involving them, or any purchase of all or any significant portion of
its assets, or any equity interest in it, other than the transactions
contemplated by the merger agreement, or engage in any negotiations concerning,
or provide any confidential information or data to, or have discussions with,
any person relating to such a proposal, provided that the PSP20 Board of
Directors may furnish or cause to be furnished information and may participate
in such discussions and negotiations through its representatives with persons
who have sought the same if the failure to provide such information or
participation in the negotiations and discussions might cause the members of the
PSP20 Board of Director to breach their fiduciary duty to PSP20 shareholders
under applicable law as advised by counsel. PSP20 has agreed to notify PSI
immediately if inquiries or proposals are received by, any such information is
requested from, or negotiations or discussions are sought to be initiated or
continued with them, and to keep PSI informed of the status and terms of any
such proposals and any such negotiations or discussions.
42
<PAGE>
DISTRIBUTIONS. Pending the merger, PSP20 is precluded from declaring or
paying any dividend on its capital stock or making any other distribution to its
shareholders other than (i) regular dividends at a quarterly rate not in excess
of $.28 per share; (ii) distributions to PSP20 shareholders immediately prior to
the effectiveness of the merger equal to the amount by which PSP20's estimated
net asset value allocable to its shareholders as of the date of the merger
exceeds $22.57 per share in the case of the PSP20 Common Stock and $10.90 per
share in the case of the PSP20 Common Stock Series B and C; and (iii) required
REIT distributions. See "- Determination of Payments to be Received by PSP20
shareholders in Connection with the Merger."
CASH ELECTION PROCEDURE
Each holder of record of PSP20 Common Stock may make a cash election to
have its shares of PSP20 Common Stock converted into the right to receive cash
in the merger. If the aggregate number of shares of PSP20 Common Stock as to
which cash elections are made, together with dissenting shares (see "dissenting
shareholders' Rights of appraisal"), is 20% or less than the number of shares of
PSP20 Common Stock outstanding as of the record date for the meeting of PSP20
shareholders, all such shares as to which cash elections are made shall be
converted into the right to receive cash in the merger. If the aggregate number
of such shares (together with any dissenting shares) is more than 20%, such
shares would be converted into the right to receive cash in the merger on a pro
rata basis, and the balance of such shares would be converted into PSI common
stock, unless PSI, in its sole discretion, elects to allow a greater percentage
of shares to be converted into the right to receive $22.57 in cash.
All cash elections are to be made on a cash election form. A cash election
form is being sent to PSP20 shareholders of record on April 6, 1998. To be
effective, a cash election form must be properly completed and signed and must
be received by the depositary, American Stock Transfer & Trust Company,
accompanied by all stock certificates representing shares of PSP20 Common Stock
held by the person submitting such cash election form to which the cash election
form relates (or by a guarantee of delivery of such certificates in the form and
on the terms set forth in the cash election form (a "Guaranteed Delivery")) no
later than 5:00 p.m. New York City time on May ___, 1998. Holders of record of
shares of PSP20 Common Stock who hold such shares as nominees, trustees or in
other representative capacities may submit multiple cash election forms,
provided that such representative certifies that each such cash election form
covers all the shares of PSP20 Common Stock held by such representative for a
particular beneficial owner. Any cash election form may be revoked by written
notice received by the depositary prior to 5:00 p.m., New York City time, on May
___, 1998. In addition, all cash election forms will automatically be revoked
if the depositary is notified in writing that the merger has been abandoned. If
a cash election form is properly revoked, the certificate or certificates (or
any guarantee of delivery) in respect of the PSP20 Common Stock to which the
cash election form relates will be promptly returned by the depositary. The
depositary may determine whether or not elections to receive cash have been
properly made or revoked, and any such determination shall be conclusive and
binding.
HOLDERS OF SHARES OF PSP20 COMMON STOCK WHO WISH TO SUBMIT CASH ELECTION
FORMS SHOULD DELIVER THEIR STOCK CERTIFICATES WITH SUCH CASH ELECTION FORMS OR
PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY.
A HOLDER OF PSP20 COMMON STOCK MAY NOT MAKE A CASH ELECTION AS TO LESS THAN
ALL OF THE SHARES OF PSP20 COMMON STOCK OWNED BY SUCH SHAREHOLDER. ANY HOLDER
OF PSP20 COMMON STOCK WHO DOES NOT SUBMIT A PROPERLY COMPLETED AND SIGNED CASH
ELECTION FORM ACCOMPANIED BY THE APPLICABLE STOCK CERTIFICATES (OR PROVIDE FOR,
AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY) WHICH IS RECEIVED BY
THE DEPOSITARY PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON MAY ___, 1998 WILL
RECEIVE PSI COMMON STOCK IN THE MERGER. IF PSI OR THE DEPOSITARY DETERMINES
THAT ANY PURPORTED CASH ELECTION WAS NOT PROPERLY MADE, SUCH PURPORTED CASH
ELECTION WILL BE DEEMED TO BE OF NO FORCE AND EFFECT AND THE HOLDER OF PSP20
COMMON STOCK MAKING SUCH PURPORTED CASH ELECTION WILL, FOR PURPOSES HEREOF,
RECEIVE PSI COMMON STOCK IN THE MERGER. NONE OF PSI, PSP20 OR THE DEPOSITARY
WILL BE UNDER ANY OBLIGATION TO NOTIFY ANY PERSON OF ANY DEFECT IN A CASH
ELECTION FORM.
The tax consequences of receiving cash and/or PSI common stock are
different. See "Federal Income Tax Considerations - The Merger."
43
<PAGE>
CONSEQUENCES TO PSP20 IF THE MERGER IS NOT COMPLETED
If the merger is not completed, PSP20 will remain as a separate legal
entity and will continue to operate its properties.
COSTS OF THE MERGER
It is estimated that the total consideration (cash and PSI common stock) to
be paid by PSI to purchase all of the PSP20 Common Stock and PSP20 Common Stock
Series B and C (other than shares held by PSI) in the merger and to pay related
costs and expenses would be $19,359,000 (less the amount of any required REIT
distributions) and that the total amount of funds that would be required by PSI
to purchase the PSP20 Common Stock from PSP20 shareholders making cash elections
and to pay the cost and expenses of the merger would be $4,155,000 (assuming
maximum cash elections and no required REIT distributions). These amounts will
be paid from PSI's working capital or with funds borrowed under credit
facilities with a group of banks for which Wells Fargo Bank, National
Association acts as agent. These credit facilities aggregate $150,000,000 and
bear interest at LIBOR plus .40% to 1.25%. PSI intends to repay amounts
borrowed under these facilities from the public or private placement of
securities or from PSI's undistributed cash flow.
If the merger is completed, all costs incurred by PSI and PSP20 in
connection with the merger will be paid by PSI. If the merger is not completed,
all costs incurred in connection with the merger will be paid by the party
incurring such costs, except that PSI will pay one-half of the cost of any
expenses incurred in connection with the printing of this proxy statement and
related registration statement, the appraisal, environmental and structural
audits and preparation for real estate closings and filing fees and PSP20 will
pay the other one-half of such costs. PSP20's share of such costs would be paid
from its working capital.
The following is a statement of certain fees and expenses estimated to be
incurred in connection with the merger (exclusive of amounts paid as a result of
cash elections).
<TABLE>
<CAPTION>
Preclosing Transaction Costs
<S> <C>
Printing and mailing $ 60,000
Proxy solicitation 15,000
Legal 25,000
Real Estate Appraisal and Fairness Opinion 85,000
Registration, listing and filing fees 6,000
Accounting 20,000
Other 14,000
--------
Subtotal 225,000
--------
Closing Transaction Costs*
Transfer agent fees 25,000
Legal 10,000
Escrow and related 5,000
fees
Other 5,000
--------
Subtotal 45,000
--------
TOTAL $270,000
========
</TABLE>
_______________
* Would not be incurred if merger is not approved.
ACCOUNTING TREATMENT
The merger will be treated as a purchase. Accordingly, the assets and
liabilities of PSP20 will be accounted for at fair market value based upon an
independent appraisal.
44
<PAGE>
REGULATORY REQUIREMENTS
The merger is subject to compliance with federal and state securities law
requirements.
COMPARISON OF PSP20 COMMON STOCK WITH PSI COMMON STOCK
The information below compares certain attributes of the PSP20 Common Stock
with the PSI common stock. The effect of the merger on PSP20 shareholders who
receive PSI common stock in the merger is set forth in italics below each
caption.
<TABLE>
<CAPTION>
PSP20 PSI
Investment Objectives and Policies
<S> <C>
The principal investment objectives are to provide (i) The investment objectives of PSI are to maximize FFO
quarterly cash distributions from its operations and allocable to holders of PSI common stock and to increase
(ii) long-term capital gains through appreciation in shareholder value through internal growth and acquisitions.
the value of properties. FFO is a supplemental performance measure for equity REITs
used by industry analysts. FFO does not take into
Under its organizational documents, PSP20 is not consideration principal payments on debt, capital
permitted to raise new capital or to reinvest improvements, distributions and other obligations of PSI.
operating cash flow or sale or financing proceeds. Accordingly, FFO is not a substitute for PSI's net cash
PSP20 will terminate on December 31, 2038, unless provided by operating acativities or net income as a measure
earlier dissolved. The PSP20 Partnership anticipated of PSI's liquidity or operating performance. An increase
selling or financing its properties within seven to in PSI's FFO will not necessarily correspond with an
10 years after development (i.e., between 1998 and increase in distributions to holders of PSI common stock.
2001). See "- Liquidity, Marketability and Distributions."
PSI intends to continue its operations for an indefinite
period of time and is not precluded from raising new
capital, including senior securities that would have
priority over PSI common stock (including PSI common stock
issued in the merger) as to cash flow, distributions and
liquidation proceeds, or from reinvesting cash flow or sale
or financing proceeds in new properties, except to the
extent such reinvestment precludes PSI from satisfying the
REIT distribution requirements. Therefore, PSI
shareholders should expect to be able to liquidate their
investment only by selling their shares in the market, and
the market value of the PSI common stock may not
necessarily equal or exceed the market value of PSI's
assets or the net proceeds which might be available for
distribution upon liquidation if PSI were to liquidate.
PSI has grown, and intends to continue to grow, as new
investments are made.
</TABLE>
45
<PAGE>
PSP20 PSI
PSP20 shareholders who receive PSI common stock in the merger will be
changing their investment from "finite-life" to "infinite-life"; they will be
able to realize the value of their investment only by selling the PSI common
stock. The interest of PSI Shareholders can be diluted through the issuance of
additional securities, including securities that would have priority over PSI
common stock as to cash flow, distributions and liquidation proceeds. PSI has
an effective registration statement for preferred stock, common stock, equity
stock and warrants and intends to issue additional securities under this
registration statement. There is no assurance that any such securities will be
issued. See "Risk Factors - Uncertainty Regarding Market Price of PSP20 Common
Stock" and "- Financing Risks - Dilution and Subordination."
PSI has no plans with respect to a sale or financing of any of PSP20's
properties. PSI intends to continue to acquire properties from other parties.
BORROWING POLICIES
<TABLE>
<S> <C>
PSP20 is not permitted to borrow in connection with Subject to certain limitations in PSI's bylaws, PSI has
the acquisition of properties. It is fully invested broad powers to borrow in furtherance of its investment
and would distribute the proceeds from a financing of objectives. PSI has incurred in the past, and may incur in
properties. the future, both short-term and long-term debt to increase
its funds available for investment in real estate, capital
expenditures and distributions. As of December 31, 1997,
PSI's ratio of "Debt" (liabilities other than "accrued and
other liabilities" and "minority interest" that should, in
accordance with GAAP, be reflected on PSI's balance sheet)
to "Assets" (PSI's total assets that should, in accordance
with GAAP, be reflected on PSI's balance sheet) was
approximately 3%.
</TABLE>
PSI, unlike PSP20, incurs debt in the acquisition of properties and
reinvests proceeds from borrowings. The incurrence of debt increases the risk
of loss of investment.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<S> <C>
PSP20's bylaws restrict a variety of business PSI's bylaws restrict PSI from acquiring properties from
transactions with affiliates. The bylaws may be its affiliates or from selling properties to them unless
amended by a majority vote of PSP20 shareholders. the transaction (i) is approved by a majority of PSI's
See "Amendment to Bylaws of PSP20." independent directors and (ii) is fair to PSI based on an
independent appraisal.
</TABLE>
It is easier for PSI to enter into transactions with its affiliates than in
the case of PSP20 because shareholder approval is not required.
PROPERTIES (As of December 31, 1997)
<TABLE>
<S> <C>
PSP20 owns seven wholly owned properties in five PSI owns equity interests (directly, as well as through
states. As of December 31, 1997, the weighted general and limited partnership interests and capital stock
average occupancy level and realized annual rent per interests) in 1,136 properties in 38 states, including 533
square foot of PSP20's properties were 92% and $9.28. wholly owned properties. See "Description of PSI
See "Description of PSP20's Properties." Properties."
</TABLE>
Because PSI owns substantially more property interests in more states than
PSP20, PSI's results of operations are less affected by the profitability or
lack of profitability of a single property than are those of PSP20 and it would
be more difficult to liquidate PSI than PSP20 within a reasonable period of
time.
46
<PAGE>
PSP20 PSI
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
<TABLE>
<S> <C>
PSP20 Common Stock is traded on the AMEX. During the PSI common stock is traded on the NYSE. During the 12
12 months ended December 31, 1997, the average daily months ended December 31, 1997, the average daily trading
trading volume of PSP20 Common Stock was 800 shares. volume of PSI common stock was 98,000 shares. PSI has
PSP20 has not issued any securities that have issued, and may in the future issue, securities that have
priority over its PSP20 Common Stock. priority over PSI common stock as to cash flow,
distributions and liquidation proceeds.
</TABLE>
Distributions may be declared by the boards of directors of PSI and PSP20
out of any funds legally available for that purpose. As REITs, they are
required to distribute at least 95% of their ordinary REIT taxable income in
order to maintain their qualification as REITs, but, subject to certain
limitations and penalties, they can take into account subsequent year
distributions for purposes of satisfying this requirement. PSI distributes
less than its cash available for distribution (recently distributing amounts
approximately equal to its taxable income), permitting it to retain funds for
additional investment and debt reduction.
A PSP20 shareholder who receives PSI common stock in the merger should have
an investment for which the market is broader and more active than the market
for PSP20 Common Stock. Distributions of PSI common stock are subject,
however, to priority of preferred stock. See "Risk Factors - Consequences of
Loss of Qualification as a REIT," "Distributions and Price Range of PSI Common
Stock" and "Distributions and Price Range of PSP20 Common Stock" for
information on trading prices of the PSI and PSP20 Common Stock.
TAXATION
Each of PSI and PSP20 was organized to qualify for taxation as a REIT and
intends to continue to so qualify. REITs generally are permitted to deduct
distributions to their shareholders, which, to the extent of such deductions,
effectively eliminates the "double taxation" (at the corporate and shareholder
levels) that typically results when a corporation earns income and distributes
that income to shareholders in the form of dividends. Distributions received
by PSI and PSP20 shareholders generally constitute portfolio income, which
cannot offset "passive" loss from other investments.
VOTING RIGHTS
PSI and PSP20 hold annual meetings, with each such meeting on a date within
15 months of the prior annual meeting, at which the shareholders elect the
directors, with each shareholder entitled to cast as many votes as there are
directors to be elected, multiplied by the number of shares registered in his
or her name. Under California law, a majority vote of shareholders is required
for (i) the removal of directors, (ii) the dissolution of the company, (iii)
the amendment of certain provisions of the organizational documents and (iv)
the sale of all or substantially all of the company's assets.
MANAGEMENT AND DUTIES
<TABLE>
<S> <C>
PSP20 is managed by its Board of Directors and PSI is managed by its board of directors and executive
executive officers. Two of the directors are officers. A majority of the directors of PSI are
independent directors and the third director is independent directors.
Hughes.
</TABLE>
Under California law, directors are accountable to a corporation and its
shareholders as fiduciaries and are required to perform their duties in good
faith, in a manner believed to be in the best interests of a corporation and
its shareholders and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances. The liability of the directors of PSI and PSP20 is limited
pursuant to the provisions of California law and their organizational
documents, which limit a director's liability for monetary damages to the
respective corporation or its shareholders for breach of the director's duty of
care, where a director fails to exercise sufficient care in carrying out the
responsibilities of office. Those provisions would not protect a director who
knowingly did something wrong, or otherwise acted in bad faith, nor would they
foreclose any other remedy which might be available to the respective
corporation
47
<PAGE>
PSP20 PSI
or its shareholders, such as the availability of non-monetary
relief. In addition, the organizational documents provide PSI and PSP20 with
the authority to indemnify its "agents" under certain circumstances for
expenses or liability incurred as a result of litigation. Under California
law, "agents" are defined to include directors, officers and certain other
individuals acting on a corporation's behalf. PSI and PSP20 have taken
advantage of those provisions and have entered into agreements with the
respective corporation's directors and executive officers, indemnifying them to
the fullest extent permitted by California law. To the extent that the
foregoing provisions concerning indemnification apply to actions arising under
the Securities Act, PSI and PSP20 have been advised that, in the opinion of the
Commission, such provisions are contrary to public policy and therefore are not
enforceable.
RESTRICTIONS ON TRANSFER AND ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
For PSP20 to be taxed as a REIT, its common stock must For PSI to be taxed as a REIT, PSI common stock must be
be widely held. To aid PSP20 in meeting this widely held. To aid PSI in meeting this requirement, PSI's
requirement, its board of directors is given the articles of incorporation contain significant restrictions
power to restrict the transfer of shares of its on the ownership of PSI common stock. PSI is authorized to
common stock if the transfer could produce a issue 200,000,000 shares of PSI common stock, of which
violation of this requirement. PSP20 cannot issue approximately 112,000,000 shares are outstanding, 7,000,000
additional common and preferred stock without shares of Class B PSP20 Common Stock, all of which are
shareholder approval. outstanding, 50,000,000 shares of preferred stock, of which
approximately 13,000,000 shares are outstanding and
200,000,000 shares of equity stock, 225,000 of which are
outstanding. Subject to the rules of the NYSE and
applicable provisions of California law, PSI can issue
authorized capital stock without shareholder approval. See
"Description of PSI Capital Stock - Effects of Issuance of
Capital Stock," "- Ownership Limitations" and "Federal
Income Tax Considerations - General Tax Treatment of PSI."
</TABLE>
Given the ownership level of PSI common stock by the Hughes family and
PSI's greater flexibility to issue capital stock, including senior securities
with special voting rights and priority over common stock, PSI should be in a
better position to deter attempts to obtain control in transactions not
approved by its board of directors than PSP20, and shareholders of PSI could be
less likely to benefit from a takeover not approved by PSI's board of directors
than would shareholders of PSP20 in a similar circumstance.
LIMITED LIABILITY OF INVESTORS
Under California law, shareholders are not generally liable for corporate
debts or obligations. The PSI and PSP20 Common Stock are nonassessable.
REVIEW OF SHAREHOLDER LISTS
Under applicable law, a shareholder is entitled, upon written demand, to
inspect and copy the record of shareholders, at any time during usual business
hours, for a purpose reasonably related to his or her interest as a
shareholder.
48
<PAGE>
AMENDMENT TO BYLAWS OF PSP20
A provision of the bylaws of PSP20 prohibits the sale of property to
affiliates. Because this would arguably apply to the merger, PSP20 is proposing
an amendment to its bylaws that expressly authorizes a merger with PSI provided
any such merger is approved by the majority of outstanding shares of PSP20
Common Stock. The proposed amendment has been approved by the PSP20 Board of
Directors who recommends that PSP20 shareholders vote FOR the proposal.
Appendix E contains a complete text of the proposed amendment.
49
<PAGE>
APPROVAL OF THE MERGER AND BYLAW AMENDMENT
GENERAL
This proxy statement and the enclosed proxy are first being mailed on or
about April ___, 1998 to the PSP20 shareholders in connection with the
solicitation by the PSP20 board of directors for use at the special meeting of
shareholders (and at any adjournment) to consider and vote upon the merger and
the bylaw amendment.
If a proxy in the accompanying form is properly executed and returned
before the voting, the shares represented thereby will be voted in the manner
specified on the proxy. If no specification is made with respect to the merger
or bylaw amendment, unspecified shares held by PSP20 shareholders will be voted
in favor of the merger and the bylaw amendment. A proxy is revocable by
delivering a subsequently signed and dated proxy or other written notice to
PSP20's secretary at any time before its exercise. A proxy may also be revoked
if the person executing the proxy is present at the meeting and chooses to vote
in person.
Holders of record at the close of business on April 6, 1998 of the PSP20
Common Stock will be entitled to receive notice of and to vote at the meeting.
On such date, there were outstanding 860,734 shares of PSP20 Common Stock and
348,291 shares of PSP20 Common Stock Series B and C, and each share is entitled
to one vote on the merger and the bylaw amendment. Presence, in person or by
proxy, of a majority of the shares of PSP20 Common Stock and of PSP20 Common
Stock Series B and C, counted together as a single class, constitutes a quorum.
As of the record date, PSI and Hughes beneficially owned 11,909 shares of PSP20
Common Stock and 348,291 shares of PSP20 Common Stock Series B and C
(approximately 29.8% of the total combined outstanding shares of PSP20 Common
Stock and PSP20 Common Stock Series B and C) and the directors and executive
officers of PSP20, excluding Hughes, beneficially owned an additional 600 shares
of PSP20 Common Stock (approximately 0.05% of the total combined outstanding
shares of PSP20 Common Stock and PSP20 Common Stock Series B and C).
The affirmative vote of a majority of the shares of PSP20 Common Stock and
of PSP20 Common Stock Series B and C outstanding and entitled to vote on the
record date, counted together as a single class, is required under California
law to approve the merger and the bylaw amendment. Accordingly, for these
purposes, an abstention or a broker non-vote will have the same effect as a vote
against the merger and the bylaw amendment. The shares of PSP20 Common Stock
Series B and C will be voted with the majority of shares of PSP20 Common Stock
held by unaffiliated owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PSP20. Information regarding beneficial ownership of shares of PSP20 Common
Stock and PSP20 Common Stock Series B and C by Mr. Hughes (a beneficial owner of
more than 5% of the outstanding shares of PSP20 Common Stock and PSP20 Common
Stock Series B and C) is set forth in the second table below. The following
table sets forth information as of the dates indicated with respect to the other
persons known to PSP20 to be the beneficial owner of more than 5% of the
outstanding shares of PSP20 Common Stock and PSP20 Common Stock Series B and C:
50
<PAGE>
<TABLE>
<CAPTION>
Shares of PSP20 Common Stock and
PSP20 Common Stock Series B and C
Beneficially Owned(1)
----------------------------------
Number
Name and Address of Shares(2)(3) Percent
---------------- --------------- -------
<S> <C> <C>
PSI A: 11,909(4) A: 1.4%
701 Western Avenue, Suite 200 B: 90,859(4) B: 100.0%
Glendale, California 91201-2397 C: 257,432(4) C: 100.0%
------- -----
360,200(4)(5) 29.8%
Loeb Arbitrage Fund A: 44,300(6) A: 5.1%
Loeb Partners Corporation
61 Broadway
New York, New York 10006
</TABLE>
_______________
(Footnotes are set forth following the next table).
The following table sets forth information as of April 1, 1998 concerning
the beneficial ownership of PSP20 Common Stock and PSP20 Common Stock Series B
and C of each director of PSP20 (including Hughes, the chief executive officer)
and of all directors and executive officers of PSP20 as a group:
<TABLE>
<CAPTION>
Shares of PSP20 Common Stock and
PSP20 Common Stock Series B and C
Beneficially Owned(1)
----------------------------------
Number
Name of Shares(2)(3) Percent
---- --------------- -------
<S> <C> <C>
B. Wayne Hughes A: 609.0(7) A: (8)
B: 18,171.8(7) B: 20.0%
C: 51,486.4(7) C: 20.0%
-------- -----
70,267.2(5)(7) 5.8%
Vern O. Curtis A: 500.0 (8)
Jack D. Steele A 100.0(9) (8)
All Directors and Executive A: 1,209.0(7)(9) A: 0.1%
Officers as a Group (eight persons) B: 18,171.8(7) B: 20.0%
C: 51,486.4(7) C: 20.1%
-------- -----
70,867.2(5)(7)(9) 5.9%
</TABLE>
_______________
(1) Except as otherwise indicated and subject to applicable community property
and similar statutes, the persons listed as beneficial owners of the shares
have sole voting and investment power with respect to the shares.
(2) Capital letters "A", "B" and "C" denote share information with respect to
PSP20 Common Stock and PSP20 Common Stock Series B and C.
(3) PSP20's Articles of Incorporation provide that the PSP20 Common Stock Series
B and C will convert automatically into PSP20 Common Stock on a share-for-
share basis when (A) the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the PSP20 Common Stock
(including liquidating distributions, but not including payments made to
redeem such stock other than in liquidation) and (2) the cumulative PSP20
Partnership distributions from all sources with respect to all PSP20
Partnership units (including the General Partners' 1% interest) equals (B)
the product of $20 multiplied by the number of then outstanding "Original
Series A Shares." The term "Original Series A Shares" means the shares of
PSP20 Common Stock issued in the PSP20 Reorganization.
51
<PAGE>
(4) This information is as of April 1, 1998 and includes (i) 11,700 shares of
PSP20 Common Stock Series A, 72,687.2 shares of PSP20 Common Stock Series B
and 205,945.6 shares of PSP20 Common Stock Series C owned by PSI as to which
PSI has sole voting and dispositive power and (ii) 209 shares of PSP20
Common Stock Series A, 18,171.8 shares of PSP20 Common Stock Series B and
51,486.4 shares of PSP20 Common Stock Series C which PSI has an option to
acquire (together with other securities) from Hughes as trustee of the B.W.
Hughes Living Trust and as to which PSI has sole voting power (pursuant to
an irrevocable proxy) and no dispositive power.
(5) Includes PSP20 Common Stock and PSP20 Common Stock Series B and C.
(6) This information is based on a Schedule 13D dated August 13, 1997 filed by
Loeb Arbitrage Fund and Loeb Partners Corporation. As of August 13, 1997,
Loeb Arbitrage Fund beneficially owned 39,145 shares of PSP20 Common Stock
Series A and Loeb Partners Corporation beneficially owned 5,155 shares of
PSP20 Common Stock Series A. Loeb Arbitrage Fund has sole voting and sole
dispositive power with respect to 39,145 shares, and Loeb Partners
Corporation has sole voting and dispositive power with respect to 3,087
shares and shared voting and dispositive power with respect to 2,068 shares.
(7) Includes (i) 209 shares of PSP20 Common Stock Series A, 18,171.8 shares of
PSP20 Common Stock Series B and 51,486.4 shares of PSP20 Common Stock Series
C owned by Hughes as trustee of the B.W. Hughes Living Trust as to which
Hughes has sole dispositive power and no voting power; PSI has an option to
acquire these shares and an irrevocable proxy to vote these shares (see
footnote (4) above), and (ii) 400 shares of PSP20 Common Stock Series A
owned by Hughes' wife as trustee FBO Parker Hughes Trust dtd 3/7/91.
(8) Less than 0.1%.
(9) Shares held by a bank custodian of a simplified employee pension for the
benefit of Mr. Steele.
PSI. The following table sets forth information with respect to persons
known to PSI to be the beneficial owners of more than 5% of the outstanding
shares of PSI common stock:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned
-----------------------------
Number Percent
Name and Address of Shares of Class
- ---------------- --------- --------
<S> <C> <C>
B. Wayne Hughes, B. Wayne Hughes, Jr., Parker Hughes 38,046,163 33.8%
Trust No. 2, Tamara L. Hughes, PS Orangeco, Inc., a
California corporation ("PSOI")
701 Western Avenue,
Glendale, California 91201-2397,
PS Insurance Company, Ltd., a
Bermuda corporation ("PSIC")
41 Cedar Avenue
Hamilton, Bermuda (1)
FMR Corp. 8,361,203 7.4%
82 Devonshire Street
Boston, Massachusetts 02109 (2)
Cohen & Steers Capital Management, Inc. 7,294,800 6.5%
757 Third Avenue
New York, New York 10017 (3)
</TABLE>
________________
(1) This information is as of April 1, 1998. The reporting persons listed above
(the "Reporting Persons") have filed a joint Schedule 13D, amended as of
June 24, 1997. The number of shares of Common Stock beneficially owned by
the Reporting Persons at April 1, 1998 includes 6,522 shares which can be
acquired upon conversion of 3,875 shares of 8.25% Convertible Preferred
Stock which are beneficially owned by the
52
<PAGE>
Report Persons. The common stock of PSOI (representing approximately 5% of
the equity) is owned one-third each by B. Wayne Hughes, Tamara L. Hughes (an
adult daughter of B. Wayne Hughes) and B. Wayne Hughes, Jr. (an adult son of
B. Wayne Hughes), and the non-voting preferred stock of PSOI (representing
approximately 95% of the equity) is owned by the Company. The stock of PSIC
is owned approximately 45% by B. Wayne Hughes, 47% by Tamara L. Hughes and
8% by B. Wayne Hughes, Jr. Tamara L. Hughes is the trustee of Parker Hughes
Trust No. 2. Each of the Reporting Persons disclaims the existence of a
group within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934. B. Wayne Hughes, Tamara L. Hughes and B. Wayne Hughes, Jr. share
voting and dispositive power with respect to the 30,777 shares owned by
PSOI, and B. Wayne Hughes and Tamara L. Hughes share voting and dispositive
power with respect to the 301,032 shares owned by PSIC. B. Wayne Hughes
disclaims beneficial ownership of the shares owned by B. Wayne Hughes, Jr.,
Parker Hughes Trust No. 2 and Tamara L. Hughes (Tamara L. Hughes
beneficially owns an aggregate of 16,733,399 shares (exclusive of the shares
owned by PSOI and PSIC) or approximately 14.9% of the shares of Common Stock
outstanding (or deemed to be outstanding) as of April 1, 1998). Each of the
other Reporting Persons disclaims beneficial ownership of the shares owned
by any other Reporting Person.
The above table does not include 7,000,000 shares of the Company's Class B
Common Stock which are owned by B. Wayne Hughes, Jr. and Tamara L. Hughes.
The Class B Common Stock is convertible into Common Stock on a share-for-
share basis upon satisfaction of certain conditions, but in no event earlier
than January 1, 2003.
(2) This information is as of December 31, 1997 and is based on a Schedule 13G
(Amendment No. 3) filed by FMR Corp. (except that the percent shown in the
table is based on the shares of Common Stock outstanding at April 1, 1998).
As of December 31, 1997, FMR Corp. beneficially owned 8,361,203 shares of
Common Stock. This number includes 7,739,000 shares beneficially owned by
Fidelity Management & Research Company, as a result of its serving as
investment adviser to several investment companies registered under Section
8 of the Investment Company Act of 1940, and 622,203 shares beneficially
owned by Fidelity Management Trust Company, as a result of its serving as
investment manager of various institutional accounts. FMR Corp. has sole
voting power with respect to 541,803 shares and sole dispositive power with
respect to 8,361,203 shares.
(3) This information is as of December 31, 1997 and is based on a Schedule 13G
(Amendment No. 1) filed by Cohen & Steers Capital Management, Inc. (except
that the percent shown in the table is based on the shares of Common Stock
outstanding at April 1, 1998). As of December 31, 1997, Cohen & Steers
Capital Management, Inc. beneficially owned 7,294,800 shares of Common
Stock. Cohen & Steers Capital Management, Inc. has sole voting power with
respect to 6,375,000 shares and sole dispositive power with respect to
7,294,800 shares.
The following table sets forth information as of April 1, 1998 concerning
the beneficial ownership of PSI common stock of each director of PSI, the chief
executive officer of PSI, the four most highly compensated persons who were
executive officers of PSI on December 31, 1997, and all directors and executive
officers of PSI as a group:
53
<PAGE>
<TABLE>
<CAPTION>
Shares of PSI Common Stock:
Beneficially Owned(1)
Shares Subject to Options(2)
Shares Issuable Upon Conversion
of Convertible Preferred Stock(3)
--------------------------------------
Name Positions Number of Shares Percent
---- --------- ---------------- -------
<S> <C> <C> <C>
B. Wayne Hughes Chairman of the Board and
Chief Executive Officer 20,304,661(1)(4) 18.0%
Harvey Lenkin President and Director 596,085(1)(5) 0.5%
88,333(2) *
4,040(3) *
------------ -----
688,458 0.6%
B. Wayne Hughes, Jr. Vice President and Director 1,006,631(1)(6) 0.9%
1,472(3) *
------------ -----
1,008,103 0.9%
Robert J. Abernethy Director 65,185(1) *
14,999(2) *
------------ -----
80,184 *
Dann V. Angeloff Director 81,500(1)(7) *
4,999(2) *
------------ -----
86,499 *
William C. Baker Director 30,000(1) *
4,999(2) *
------------ -----
34,999 *
Thomas J. Barrack, Jr. Director 2,619,893(1)(8) 2.3%
Uri P. Harkham Director 479,023(1)(9) 0.4%
3,999(2) *
------------ -----
483,022 0.4%
David Goldberg Senior Vice President 87,865(1)(10) *
and General Counsel 114,167(2) 0.1%
1,682(3) *
------------ -----
203,714 0.2%
Marvin M. Lotz Senior Vice President 70,939(1)(11) *
127,500(2) 0.1%
------------ -----
198,439 0.2%
A. Timothy Scott Senior Vice President 16,666(2) *
and Tax Counsel 3,367(3) *
------------ -----
20,033 *
All Directors and Executive Officers 25,490,431(1)(4)(5)(6)(7)
as a Group (16 persons) (8)(9)(10)(11)(12) 22.6%
512,626(2) 0.5%
22,850(3) *
------------ -----
26,025,907 23.0%
</TABLE>
_______________
* Less than 0.1%
(1) Shares of Common Stock beneficially owned as of April 1, 1998. Except as
otherwise indicated and subject to applicable community property and similar
statutes, the persons listed as beneficial owners of the shares have sole
voting and investment power with respect to such shares.
54
<PAGE>
(2) Represents vested portion as of April 1, 1998, and portion of which will be
vested within 60 days of April 1, 1998, of shares of Common Stock subject to
options granted to the named individuals or the group pursuant to the
Company's stock option and incentive plans.
(3) Represents shares of Common Stock which can be acquired upon conversion of
the shares of 8.25% Convertible Preferred Stock which are beneficially owned
as of April 1, 1998 by the named individuals or the group.
(4) Includes 19,921,249 shares held of record by the B. W. Hughes Living Trust
as to which Mr. Hughes has voting and investment power, 1,428 and 1,423
shares, held by custodians of IRAs for Mr. Hughes and Mrs. Kathleen Hughes
as to which each has investment power, 5,389 shares held by Mrs. Hughes as
to which she has investment power and 43,363 shares held by Mrs. Hughes as
custodian FBO Parker Hughes Trust dated 3/7/91. Also includes 30,777 shares
held of record by PSOI as to which Mr. Hughes, Tamara L. Hughes and B. Wayne
Hughes, Jr. share voting and dispositive power and 301,032 shares held of
record by PSIC as to which Mr. Hughes and Tamara L. Hughes share voting and
dispositive power.
(5) Includes 1,249 and 734 shares, held by custodians of IRAs for Mr. Lenkin and
Mrs. Lenkin as to which each has investment power, 300 shares held by Mrs.
Lenkin, 574 and 150 shares, held by Mrs. Lenkin as custodian for two sons
and 100 shares held by a custodian of an IRA for a son. Also includes
540,000 shares held of record by the Public Storage, Inc. Profit Sharing
Plan and Trust (the "PSI Plan") as to which Mr. Lenkin, as a member of the
PSI Plan's Advisory Committee, shares the power to direct voting and
disposition and as to which Mr. Lenkin expressly disclaims beneficial
ownership.
(6) Includes 1,231 and 214 shares, held by custodians of IRAs for Mr. Hughes,
Jr. and Mrs. Hughes, Jr. as to which each has investment power, 344 shares
held by Mrs. Hughes, Jr., 5,967 and 2,960 shares, held by Mr. Hughes, Jr. as
custodian for a daughter and a son, 5,018 shares held by Mrs. Hughes, Jr. as
custodian for a daughter and 1,348 shares held by Mr. Hughes, Jr. and Tamara
L. Hughes - Separate Property. Excludes 30,777 shares held of record by PSOI
as to which Mr. Hughes, Jr. shares voting and dispositive power; such shares
are included under Mr. Hughes above (see footnote 4).
(7) Includes 6,000 shares held by a custodian of an IRA for Mr. Angeloff, 3,000
shares held by Mr. Angeloff as trustee of Angeloff's Children Trust and
70,500 shares held by Mr. Angeloff as trustee of Angeloff Family Trust.
(8) Shares held of record by Colony PSA, LLC, a limited liability company of
which Mr. Barrack is a controlling member.
(9) Includes 65,057 shares held by Mr. Harkham as trustee of Harkham Industries
Profit Sharing Plan, 338,868 shares held by Harkham Industries, Inc. (dba
Jonathan Martin, Inc.), a corporation wholly owned by Mr. Harkham, 59,532
shares held by Mr. Harkham as trustee of Uri Harkham Trust, 1,440 shares
held by a custodian of an IRA for Mr. Harkham as to which he has investment
power, 3,102, 3,177, 2,750, 1,950 and 2,050 shares, held by Mr. Harkham as
custodian for five of his children and 97 shares held by a custodian of an
IRA for a son.
(10) Includes 6,358 shares held by a custodian of an IRA for Mr. Goldberg and
3,419 shares held by David Goldberg Profit Sharing Plan. Excludes 540,000
shares held of record by the PSI Plan as to which Mr. Goldberg, as a member
of the PSI Plan's Advisory Committee, shares the power to direct voting and
disposition; such shares are included under Mr. Lenkin above (see footnote
5).
(11) Includes 12,326 and 1,126 shares held by custodians of IRAs for Mr. Lotz.
(12) Includes shares held of record or beneficially by members of the immediate
family of executive officers of the Company and shares held by custodians
of IRAs for the benefit of executive officers of the Company.
55
<PAGE>
The following tables set forth information as of April 1, 1998 concerning
the remaining security ownership of each director of PSI, the chief executive
officer of PSI, the four most highly compensated persons who were executive
officers of PSI on December 31, 1997, and all directors and executive officers
of PSI as a group:
<TABLE>
<CAPTION>
Shares of 9.20%
Shares of 8.25% Shares of 10% Cumulative Cumulative Preferred
Convertible Preferred Stock Preferred Stock, Series A Stock, Series B
Beneficially Owned (1) Beneficially Owned (1) Beneficially Owned (1)
--------------------------- ------------------------- ----------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin 2,400 (1)(2) 0.1% 1,000 (1) * 1,600 (1) *
B. Wayne Hughes, Jr. 875 (1)(3) * - - 400 (1)(6) *
Robert J. Abernethy - - - - 225 *
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg 1,000 (1)(4) * - - - -
Marvin M. Lotz - - - - - -
A. Timothy Scott 2,000 (1) * - - - -
All Directors and 13,575 (1)(2) 0.6% 6,160 (1)(5) 0.3% 6,225 (1)(5) 0.3%
Executive Officers as a (3)(4)(5)
Group (16 persons)
<CAPTION>
Shares of Adjustable Rate Shares of 9.50% Shares of 10%
Cumulative Preferred Cumulative Preferred Cumulative Preferred
Stock, Series C Stock, Series D Stock, Series E
Beneficially Owned (1) Beneficially Owned(1) Beneficially Owned (1)
------------------------ ----------------------- ----------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - 893 (1) *
B. Wayne Hughes, Jr. - - - - - -
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg 600 (1)(7) * - - - -
Marvin M. Lotz - - - - - -
A. Timothy Scott - - - - - -
All Directors and 600 (1)(7) * 7,300 (1)(5) 0.6% 15,193 (1)(5) 0.7%
Executive Officers as a
Group (16 persons)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Depositary Shares, Depositary Shares,
Each Representing 1/1,000 Each Representing
of a Share of 8-7/8% 1/1,000 of a Share of
Shares of 9.75% Cumulative Cumulative Preferred 8.45% Cumulative
Preferred Stock, Series F Stock, Series G Preferred Stock, Series H
Beneficially Owned (1) Beneficially Owned (1) Beneficially Owned(1)
-------------------------- ---------------------- -------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
-------------------------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
B. Wayne Hughes, Jr. - - - - - -
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
David Goldberg - - - - - -
Marvin M. Lotz - - - - - -
A. Timothy Scott - - - - - -
All Directors and 9,550 (1)(5) 0.4% 8,000 (1)(5) 0.1% 8,000 (1)(5) 0.1%
Executive Officers as a
Group (16 persons)
<CAPTION>
Class B Common Stock
Beneficially Owned(1)
---------------------
Number
of Shares Percent
---------------------
<S> <C> <C>
B. Wayne Hughes - -
Harvey Lenkin - -
B. Wayne Hughes, Jr. 3,204,758 (1) 45.8%
Robert J. Abernethy - -
Dann V. Angeloff - -
William C. Baker - -
Thomas J. Barrack, Jr. - -
Uri P. Harkham - -
David Goldberg - -
Marvin M. Lotz - -
A. Timothy Scott - -
All Directors and 3,204,758 (1) 45.8%
Executive Officers as a
Group (16 persons)
</TABLE>
_________________
* Less than 0.1%
(1) Shares of 8.25% Convertible Preferred Stock, 10% Cumulative Preferred
Stock, Series A, 9.20% Cumulative Preferred Stock, Series B, Adjustable
Rate Cumulative Preferred Stock, Series C, 9.50% Cumulative Preferred
Stock, Series D, 10% Cumulative Preferred Stock, Series E, 9.75% Cumulative
Preferred Stock, Series F, Depositary Shares, each representing 1/1,000 of
a Share of 8-7/8% Cumulative Preferred Stock, Series G, Depositary Shares,
each representing 1/1,000 of Share of 8.45% Cumulative Preferred Stock,
Series H, or Class B Common Stock, as applicable, beneficially owned as of
April 1, 1998. Except as otherwise indicated and subject to applicable
community property and similar statutes, the persons listed as beneficial
owners of the shares have sole voting and investment power with respect to
such shares.
(2) Includes 100 shares held by Mrs. Lenkin and 300 shares held by Mrs. Lenkin
as custodian for a son.
(3) Includes 350 shares held by Mr. Hughes, Jr. as custodian for a daughter and
525 shares held by Mrs. Hughes, Jr. as custodian for a daughter.
(4) Includes 500 shares held by a custodian of an IRA for Mr. Goldberg and 500
shares held by David Goldberg Profit Sharing Plan.
(5) Includes shares held of record or beneficially by members of the immediate
family of executive officers of the Company and shares held by custodians
of IRAs for the benefit of executive officers of the Company.
(6) Shares held by Mr. Hughes, Jr. and Tamara L. Hughes - Separate Property.
(7) Includes 500 shares held by a custodian of an IRA for Mr. Goldberg and 100
shares held by David Goldberg Profit Sharing Plan.
57
<PAGE>
As of April 1, 1998, the directors and executive officers of PSI did not
own any shares of PSI's Depositary Shares, each representing 1/1,000 of a Share
of 8-5/8% Cumulative Preferred Stock, Series I, Depositary Shares, each
representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J or
Equity Stock, Series A.
SOLICITATION OF PROXIES
PSP20 will pay the cost of soliciting proxies. In addition to solicitation
by mail, certain directors, officers and regular employees of PSP20 and its
affiliates may solicit the return of proxies by telephone, telegraph, personal
interview or otherwise. PSP20 may also reimburse brokerage firms and other
persons representing the beneficial owners of PSP20 Common Stock for reasonable
expenses in forwarding proxy solicitation materials to such beneficial owners.
Shareholder Communications Corporation may be retained to assist PSP20 in
solicitation of proxies at an estimated cost of $15,000.
58
<PAGE>
DESCRIPTION OF PSP20'S PROPERTIES
PSP20 holds fee ownership of seven 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 property and the size of the storage space
which ranges generally from 25 to 400 square feet.
Users of space in mini-warehouses include both individuals and large and
small businesses. Individuals usually employ this space for storage of, among
other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
The following table sets forth information as of December 31, 1997 about
PSP20's properties. Pursuant to the merger, these properties would be acquired
by PSI.
<TABLE>
<CAPTION>
Size of Parcel Number of Net Rentable Completion
Location (Acres) Spaces Square Feet Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA
Los Angeles, Airdrome St. 1.20 670 56,000 September 1989
Santa Rosa, Hopper Ave. 2.31 575 55,000 November 1989
ILLINOIS
Aurora, Farnsworth Ave. 5.45 530 60,000 July 1989
Chicago, So. Chicago Ave. 1.38 580 52,000 December 1991
MINNESOTA
Golden Valley, Winnetka Ave. 2.03 474 44,000 December 1989
MISSOURI
St. Louis, Benham Rd. 3.95 568 63,000 November 1990
OHIO
Cleveland, 117th St. 4.11 631 70,000 April 1989
</TABLE>
As of the date of this proxy statement, each of PSP20's properties is
generating sufficient revenues to cover its operating expenses. None of PSP20's
properties is subject to any material mortgage, lien, or any encumbrance other
than liens for taxes and assessments not yet due or payable, utility easements
or other immaterial liens or encumbrances. Each of PSP20's properties will
continue to be used for its current purpose. At present, PSP20 has no plans for
any material renovation or improvement of its properties. However, PSP20
budgets for regular maintenance, repair and upgrade to its properties. PSP20
believes each of its properties is adequately covered by insurance.
Competition exists in all of the market areas in which PSP20's properties
are located, and the barriers to entry are relatively low for competitors with
the necessary capital. However, PSP20 believes that the current overall demand
for mini-warehouse space is strong, and as reflected in the table below the
overall performance of PSP20's properties has generally improved. PSP20's
properties are, and will continue after the merger to be, operated as part of
the "Public Storage" system by PSI, the largest operator of mini-warehouses in
the United States.
59
<PAGE>
Set forth below is a schedule showing the overall occupancy rate and
realized rent for PSP20's properties for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average occupancy level 92% 94% 92%
Realized rent per occupied
square foot (1) $7.82 $8.45 $9.28
</TABLE>
_______________
(1) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. Management believes this is a more relevant
measure than the posted rental rates, since posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
Additional information is set forth below with respect to the Santa
Rosa/Hopper Avenue, Los Angeles/Airdrome Street, Aurora/Farnsworth Avenue, St.
Louis/Benham, Cleveland/117th Street and Chicago/South Chicago Avenue properties
because each has a book value of at least 10% of PSP20's total assets or has
accounted for at least 10% of its gross revenues.
SANTA ROSA/HOPPER AVENUE. This mini-warehouse is located in Santa Rosa,
California, approximately 50 miles north of San Francisco in Sonoma County. No
tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 99% $8.67
December 31, 1996 97 8.01
December 31, 1995 96 7.26
December 31, 1994 92 7.02
December 31, 1993 92 6.53
</TABLE>
LOS ANGELES/AIRDROME STREET. This mini-warehouse is located in Los
Angeles, California, approximately seven miles west of downtown Los Angeles. No
tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 87% $13.73
December 31, 1996 88 13.17
December 31, 1995 88 12.55
December 31, 1994 88 12.19
December 31, 1993 79 11.80
</TABLE>
60
<PAGE>
AURORA/FARNSWORTH STREET. This mini-warehouse is located approximately 32
miles southwest of downtown Chicago, Illinois. No tenant occupies 10% or more
of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 88% $8.65
December 31, 1996 94 7.67
December 31, 1995 95 7.08
December 31, 1994 95 6.29
December 31, 1993 93 5.73
</TABLE>
ST. LOUIS/BENHAM. This mini-warehouse is located approximately 11 miles
northwest of downtown St. Louis, Missouri. No tenant occupies 10% or more of
the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 90% $7.16
December 31, 1996 96 6.48
December 31, 1995 96 5.96
December 31, 1994 86 5.66
December 31, 1993 76 5.19
</TABLE>
CLEVELAND/117TH STREET. This mini-warehouse is located five miles from
downtown Cleveland, Ohio at the intersection of 117th Street and Western Avenue.
No tenant occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 94% $7.60
December 31, 1996 95 6.71
December 31, 1995 95 6.14
December 31, 1994 94 5.86
December 31, 1993 94 5.31
</TABLE>
61
<PAGE>
CHICAGO/SOUTH CHICAGO AVENUE. This mini-warehouse is located approximately
ten miles southeast of downtown Chicago on South Chicago Avenue. No tenant
occupies 10% or more of the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
<TABLE>
<CAPTION>
Annual
Realized
Occupancy Rent Per
Date Rate Square Foot
----------------- --------- -----------
<S> <C> <C>
December 31, 1997 93% $11.27
December 31, 1996 94 9.95
December 31, 1995 89 9.30
December 31, 1994 88 8.88
December 31, 1993 79 8.94
</TABLE>
62
<PAGE>
DESCRIPTION OF PSI'S PROPERTIES
At December 31, 1997, PSI had equity interests (through direct ownership,
as well as general and limited partnership interests and stock ownership
interests) in 1,136 facilities (533 of which were wholly-owned) located in 38
states. These facilities consist of 1,073 mini-warehouses and 63 business
parks. None of PSI's current investments involves 10% or more of PSI's total
assets or gross revenues.
For a general description of mini-warehouses, see "Description of PSP20's
Properties."
The following table reflects the geographic diversification of PSI's mini-
warehouses ("Mini") and business parks ("BP"):
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
-------------------- ------------------------
Mini(1) BP Mini(1) BP
------- ---- ------- -----
<S> <C> <C> <C> <C>
California:
Northern 129 8 7,172 891
Southern 149 23 9,443 3,083
Texas 122 8 8,029 843
Florida 98 - 5,705 -
Illinois 65 - 4,074 -
Colorado 37 - 2,329 -
Washington 36 1 2,226 28
Georgia 36 - 1,957 -
Virginia 33 8 2,040 712
New Jersey 35 - 2,018 -
Maryland 32 3 1,802 419
New York 29 - 1,692 -
Ohio 27 - 1,650 -
Oregon 25 2 1,171 102
Nevada 22 - 1,409 -
Pennsylvania 18 - 1,224 -
Missouri 18 - 954 -
Other states (22 states) 162 10 9,129 800
----- -- ------ -----
Totals 1,073 63 64,024 6,878
====== == ====== =====
</TABLE>
(1) Includes properties that combine mini-warehouse and business park
space.
As of the date of this proxy statement, each of PSI's properties is
generating sufficient revenues to cover its operating expenses. Only 29 of
PSI's properties are subject to any material mortgage, lien, or any encumbrance
other than liens for taxes and assessments not yet due or payable, utility
easements or other immaterial liens or encumbrances. These 29 properties are
encumbered by mortgages in the aggregate amount of $43,308,000, bearing interest
at rates ranging from 7.07% to 11.0% per year and maturing between July 1998 and
September 2020. Each of PSI's properties will continue to be used for its
current purpose. At present, PSI has no plans for any material renovation or
improvement of its properties except as noted in the property table above.
However, PSI budgets for regular maintenance, repair and upgrade to its
properties. PSI believes each of its properties is adequately covered by
insurance.
Competition exists in substantially all of the market areas in which PSI's
mini-warehouses and commercial properties are located, and the barriers to entry
are relatively low for competitors with the necessary capital. However, PSI
believes that the current overall demand for mini-warehouse and commercial space
is strong, and as reflected in the table below the overall performance of PSI's
mini-warehouses and commercial properties has generally improved. More than 10%
of PSI's net rentable square feet of space are located in each of the Southern
California, Northern California and Texas market areas. The economy of each of
those markets has been
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strengthening. PSI's mini-warehouses are operated as part of the "Public
Storage" system. PSI is the largest operator of mini-warehouses in the United
States.
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the 951 mini-warehouses in which PSI had an interest, direct
or indirect in each of 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Weighted average occupancy level (1) 90.1% 91.2% 91.8%
Realized rent per occupied
square foot (1)(2) $8.40 $8.76 $9.24
</TABLE>
- ---------------
(1) Properties owned throughout the periods.
(2) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. PSI believes this is a more relevant measure than
the posted rental rates, since posted rates can be discounted through the
use of promotions. Includes administrative and late fees.
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DISTRIBUTIONS AND PRICE RANGE OF PSI COMMON STOCK
The PSI common stock has been listed on the NYSE since October 19, 1984.
The following table sets forth the distributions paid per share on the PSI
common stock in the periods indicated below and the reported high and low sales
prices on the NYSE composite tape for the applicable periods.
<TABLE>
<CAPTION>
DISTRIBUTIONS
Calendar Periods HIGH LOW PAID (1)
---------------- ---- --- ------
<S> <C> <C> <C>
1996:
First quarter $21 7/8 $ 18 7/8 $.22
Second quarter 21 1/2 19 3/8 .22
Third quarter 22 5/8 19 7/8 .22
Fourth quarter 31 3/8 22 1/4 .22
1997:
First quarter 30 7/8 26 1/2 .22
Second quarter 29 1/4 25 7/8 .22
Third quarter 30 7/8 27 .22
Fourth quarter 30 5/8 26 1/8 .22
1998:
First quarter 33 5/8 28 11/16 .22
Second quarter (through
April ___, 1998) --
</TABLE>
_______________
(1) For GAAP purposes, all distributions were from investment income.
As of March 2, 1998, there were approximately 23,716 record holders of PSI
common stock. On February 12, 1998, the last full trading day prior to the
first public announcement of the proposed merger, the closing price of the PSI
common stock was $32 7/16. On April ___, 1998, the last full trading day prior
to the date of this proxy statement, the closing price was $_____.
Holders of PSI common stock are entitled to receive distributions when, as
and if declared by the board of directors out of any funds legally available for
that purpose. PSI, as a REIT, is required to distribute annually at least 95%
of its "REIT taxable income," which, as defined by the relevant tax statutes and
regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PSI can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
See "Federal Income Tax Considerations - General Tax Treatment of PSI."
PSI's revolving credit facility with a commercial bank restricts PSI's
ability to pay distributions in excess of "Funds from Operations" for the prior
four fiscal quarters less scheduled principal payments and less capital
expenditures. Funds from Operations is defined in the loan agreement generally
as net income before gain on sale of real estate, extraordinary loss on early
retirement of debt and deductions for depreciation, amortization and non-cash
charges. Also, unless full dividends on PSI's preferred stock have been paid
for all past dividend periods, no dividends may be paid on PSI common stock,
except in certain instances.
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DISTRIBUTIONS AND PRICE RANGE OF PSP20 COMMON STOCK
The PSP20 Common Stock has been listed on the AMEX since September 1991.
The following table sets forth the distributions paid per share on PSP20 Common
Stock with respect to the periods indicated below and the reported high and low
sales prices on the AMEX composite tape for the applicable periods.
<TABLE>
<CAPTION>
DISTRIBUTIONS
Calendar Periods HIGH LOW PAID (1)
---------------- ---- --- ------
<S> <C> <C> <C>
1996:
First quarter $17 3/8 $16 1/4 $.28
Second quarter 17 3/8 16 3/8 .28
Third quarter 19 1/2 16 3/8 .28
Fourth quarter 22 1/4 19 1/8 .75 (2)
1997:
First quarter 22 7/8 20 1/2 .28
Second quarter 22 3/4 21 7/8 .28
Third quarter 22 19 3/8 .28
Fourth quarter 21 1/4 19 5/8 .68 (2)
1998:
First quarter 22 1/4 20 3/4 --
Second quarter (through
April ___, 1998) --
</TABLE>
_______________
(1) Distributions paid per share of PSP20 Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For GAAP purposes, all distributions were from investment income.
(2) Includes special distributions of $.47 in the fourth quarter of 1996 and
$.40 in the fourth quarter of 1997.
As of March 27, 1998, there were approximately 638 record holders of
PSP20's Common Stock. On February 12, 1998, the last full trading day prior to
the first public announcement of the proposed merger, the closing price of PSP20
Common Stock was $21 5/8. On April ___, 1998, the last full trading day prior to
the date of this proxy statement, the closing price was $_____.
Holders of PSP20 Common Stock are entitled to receive distributions when,
as and if declared by its board of directors out of any funds legally available
for that purpose. PSP20, as a REIT, is required to distribute annually at least
95% of its "REIT taxable income," which, as defined by the relevant tax statutes
and regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PSP20 can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
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<PAGE>
DESCRIPTION OF PSI CAPITAL STOCK
PSI is authorized to issue 200,000,000 shares of PSI common stock, par
value $.10 per share, 7,000,000 shares of PSI class B common stock, par value
$.10 per share, 50,000,000 shares of preferred stock, par value $.01 per share
and 200,000,000 shares of equity stock, par value $.01 per share. At March 24,
1998, PSI had outstanding 111,728,424 shares of PSI common stock (exclusive of
shares issuable upon conversion of PSI's convertible capital stock and shares
subject to options), 7,000,000 shares of Class B Common Stock, 13,236,980 shares
of preferred stock and 225,000 shares of equity stock.
COMMON STOCK
The following description of PSI common stock sets forth certain general
terms and provisions of PSI common stock. The statements below describing PSI
common stock are in all respects subject to and qualified in their entirety by
reference to the applicable provisions of the PSI's articles of incorporation
and bylaws.
PSI shareholders will be entitled to receive dividends when, as and if
declared by PSI's Board of Directors, out of funds legally available therefor.
Payment and declaration of dividends on PSI common stock and purchases of shares
thereof by PSI will be subject to certain restrictions if PSI fails to pay
dividends on outstanding preferred stock. See "- Preferred Stock." Upon any
liquidation, dissolution or winding up of PSI, holders of PSI common stock will
be entitled to share equally and ratably in any assets available for
distribution to them, after payment or provision for payment of the debts and
other liabilities of PSI and the preferential amounts owing with respect to any
outstanding preferred stock. Holders of PSI common stock have no preemptive
rights, which means they have no right to acquire any additional shares of PSI
common stock that may be issued by PSI at a subsequent date.
Each outstanding share of PSI common stock entitles the holder to one vote
on all matters presented to PSI shareholders for a vote, with the exception that
PSI shareholders have cumulative voting rights with respect to the election of
the Board of Directors, in accordance with California law. Cumulative voting
entitles each PSI shareholder to cast as many votes as there are directors to be
elected multiplied by the number of shares registered in his or her name. A PSI
shareholder may cumulate the votes for directors by casting all of the votes for
one candidate or by distributing the votes among as many candidates as the PSI
shareholder chooses. PSI shareholders have no preemptive or other rights to
subscribe for or purchase additional shares of PSI common stock. All
outstanding shares of PSI common stock are fully paid and nonassessable.
OWNERSHIP LIMITATIONS
For PSI to qualify as a REIT under the Code, no more than 50% in value of
its outstanding shares of capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. In order to maintain its qualification as a REIT, PSI's articles
of incorporation and bylaws provide certain restrictions on the shares of
capital stock that any PSI shareholder may own.
PSI's articles of incorporation and bylaws provide that, subject to certain
exceptions, no holder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than (A) 2.0% of the outstanding shares of all
common stock of PSI, or (B) 9.9% of the outstanding shares of each class or
series of shares of preferred stock or equity stock of PSI. The articles of
incorporation and bylaws provide, however, that no person shall be deemed to
exceed the ownership limit solely by reason of the beneficial ownership of
shares of any class of stock to the extent that such shares of stock were
beneficially owned by such person (including the Hughes family) at the time of
the PSMI Merger. This ownership limitation is necessary in order to assist in
preserving PSI's REIT status in view of the Hughes family's substantial
ownership interest in PSI. See "Federal Income Tax Considerations - Tax
Treatment of PSI."
PSI's Board of Directors, in its sole and absolute discretion, may grant an
exception to the ownership limits to any person so requesting, so long as (A)
the Board of Directors has determined that, after giving effect to (x) an
acquisition by such person of beneficial ownership (within the meaning of the
Code) of the maximum amount of capital stock of PSI permitted as a result of the
exception to be granted and (y) assuming that the four other persons who would
be treated as "individuals" for the purposes of Section 542(a)(2) of the Code
and who would beneficially
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own the largest amounts of stock of PSI (determined by value) beneficially own
the maximum amount of capital stock of PSI permitted under the ownership limits
(or any waivers of the ownership limits granted with respect to such persons),
PSI would not be "closely held" within the meaning of Section 856(h) of the Code
and would not otherwise fail to qualify as a REIT, and (B) such person provides
to PSI's Board of Directors such representations and undertakings as the Board
of Directors may require. Notwithstanding any of the foregoing ownership limits,
no holder may own or acquire, either directly, indirectly or constructively
under the applicable attribution rules of the Code, any shares of any class of
PSI's capital stock if such ownership or acquisition (i) would cause more than
50% in value of PSI's outstanding capital stock to be owned, either directly or
constructively, under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds), (ii) would
result in PSI's stock being beneficially owned by less than 100 persons
(determined without reference to any rules of attribution), or (iii) would
otherwise result in PSI's failing to qualify as a REIT.
PSI's articles of incorporation and bylaws provide that, if any holder of
PSI's capital stock purports to transfer shares to a person or there is a change
in the capital structure of PSI and either the transfer or the change in capital
structure would result in PSI failing to qualify as a REIT, or such transfer or
the change in capital structure would cause the transferee to hold shares in
excess of the applicable ownership limit, then the stock being transferred (or
in the case of an event other than a transfer, the stock beneficially owned)
which would cause one or more of the restrictions on ownership or transfer to be
violated shall be automatically transferred to a trust for the benefit of a
designated charitable beneficiary. The purported transferee of such shares
shall have no right to receive dividends or other distributions with respect to
such shares and shall have no right to vote such shares. Any dividends or other
distributions paid to such purported transferee prior to the discovery by PSI
that the shares have been transferred to a trust shall be paid to the trustee of
the trust for the benefit of the charitable beneficiary upon demand. The
trustee of the trust will have all rights to dividends with respect to shares of
stock held in trust, which rights will be exercised for the exclusive benefit of
the charitable beneficiary. Any dividends or distributions paid over to the
trustee will be held in trust for the charitable beneficiary. The trustee shall
designate a transferee of such stock so long as such shares of stock would not
violate the restrictions on ownership or transfer in the PSI articles of
incorporation or bylaws in the hands of such designated transferee. Upon the
sale of such shares, the purported transferee shall receive the lesser of (A)(i)
the price per share such purported transferee paid for the stock in the
purported transfer that resulted in the transfer of the shares to the trust, or
(ii) if the transfer or other event that resulted in the transfer of the shares
of the trust was not a transaction in which the purported transferee gave full
value for such shares, a price per share equal to the market price on the date
of the purported transfer or other event that resulted in the transfer of the
shares to the trust and (B) the price per share received by the trustee from the
sale or other disposition of the shares held in the trust.
CLASS B COMMON STOCK
The PSI class B common stock (i) does not participate in distributions
until the later to occur of Funds from Operations ("FFO") per Common Share (as
defined below by PSI) aggregating $1.80 during any period of four consecutive
calendar quarters, or January 1, 2000; thereafter, the PSI class B common stock
will participate in distributions (other than liquidating distributions), at the
rate of 97% of the per share distributions on the PSI common stock, provided
that cumulative distributions of at least $.22 per quarter per share have been
paid on the PSI common stock, (ii) does not participate in liquidating
distributions, (iii) is not entitled to vote (except as expressly required by
California law) and (iv) will automatically convert into PSI common stock, on a
share for share basis, upon the later to occur of FFO per Common Share
aggregating $3.00 during any period of four consecutive calendar quarters or
January 1, 2003.
For these purposes:
(1) FFO means net income (loss) (computed in accordance with GAAP) before
(i) gain (loss) on early extinguishment of debt, (ii) minority interest in
income and (iii) gain (loss) on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization (including PSI's pro-rata share of
depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the PSMI Merger, including property
management agreements and goodwill), and (ii) less FFO attributable to minority
interest. FFO is a supplemental performance measure for equity REITs as defined
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT").
The NAREIT definition does not specifically address the treatment of minority
interest in the
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<PAGE>
determination of FFO or the treatment of the amortization of property management
agreements and goodwill. In the case of PSI, FFO represents amounts attributable
to its shareholders after deducting amounts attributable to the minority
interests and before deductions for the amortization of property management
agreements and goodwill. FFO does not take into consideration scheduled
principal payments on debt, capital improvements, distributions and other
obligations of PSI. Accordingly, FFO is not a substitute for PSI's cash flow or
net income as a measure of its liquidity or operating performance or ability to
pay distributions.
(2) FFO per Common Share means FFO less preferred stock dividends (other
than dividends on convertible preferred stock) divided by the outstanding
weighted average shares of PSI common stock assuming conversion of all
outstanding convertible securities and the PSI class B common stock.
PREFERRED STOCK
PSI is authorized to issue 50,000,000 shares of preferred stock, $.01 par
value per share. PSI's articles of incorporation provide that the preferred
stock may be issued from time to time in one or more series and give the Board
of Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, if any, redemption provisions and liquidation
preferences of each series of preferred stock.
At March 24, 1998, PSI had 11 series of preferred stock outstanding: 10
series of senior preferred stock and a series of convertible preferred stock.
In all respects, each of the series of senior preferred stock ranks on a parity
with each other and is senior to the series of convertible preferred stock.
Each of the series of senior preferred stock (i) has a stated value of $25.00
per share, (ii) in preference to the holders of shares of the common stock and
any other capital stock ranking junior to the senior preferred stock as to
payment of dividends (including the series of convertible preferred stock),
provides for cumulative quarterly dividends calculated as a percentage of the
stated value (ranging from 8% to 10% per year in the case of the nine series of
fixed rate senior preferred stock and a rate adjustable quarterly ranging from
6.75% to 10.75% per year in the case of a series of adjustable rate senior
preferred stock) and (iii) is subject to redemption, in whole or in part, at the
option of PSI at a cash redemption price of $25.00 per share, plus accrued and
unpaid dividends (on and after June 30, 1999 in the case of the adjustable rate
senior preferred stock and on or after various dates between December 31, 2000
and April 30, 2005 in the case of the series of fixed rate senior preferred
stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of PSI, the holders of each of the series of senior preferred stock
will be entitled to receive out of PSI's assets available for distribution to
stockholders, before any distribution of assets is made to holders of PSI common
stock or any other shares of capital stock ranking as to such distributions
junior to the senior preferred stock (including both series of convertible
preferred stock), liquidating distributions in the amount or equivalent amount
of $25.00 per share, plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, the holders of the senior preferred stock are not entitled to
vote. The consent of holders of at least 66 2/3% of the outstanding shares
of the senior preferred stock (and any other series of preferred stock ranking
on a parity therewith), voting as a single class, is required to authorize
another class of shares senior to such preferred stock.
In all respects, the series of convertible preferred stock ranks senior to
the PSI common stock. The convertible preferred stock (i) has a stated value of
$25.00 per share, (ii) in preference to the holders of shares of the PSI common
stock and any other capital stock ranking junior to the convertible preferred
stock as to payment of dividends, provides for cumulative quarterly dividends at
an annual rate of 8.25% of the stated value thereof, (iii) is convertible at the
option of the holder at any time into PSI common stock at a conversion price of
1.6835 shares of PSI common stock for each share of convertible preferred stock
(subject to adjustment in certain circumstances) and (iv) after July 1, 1998,
under certain circumstances, is redeemable for PSI common stock at the option of
PSI, in whole or in part, at a redemption price of 1.6835 shares of PSI common
stock for each share of convertible preferred stock (subject to adjustment in
certain circumstances).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of PSI, the holders of the convertible preferred stock will be
entitled to receive out of PSI's assets available for distribution to
stockholders, before any distribution of assets is made to holders of PSI common
stock or any other shares of capital stock
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ranking as to such distributions junior to the convertible preferred stock,
liquidating distributions in the amount of $25.00 per share, plus all accrued
and unpaid dividends.
EQUITY STOCK
PSI is authorized to issue 200,000,000 shares of equity stock, $.01 par
value per share. At March 24, 1998, PSI had 225,000 outstanding shares of equity
stock which rank on a parity with the PSI common stock. PSI's articles of
incorporation provide that the equity stock may be issued from time to time in
one or more series and give the Board of Directors broad authority to fix the
dividend and distribution rights, conversion and voting rights, redemption
provisions and liquidation rights of each series of equity stock. Holders of
equity stock have no preemptive rights. The shares of equity stock will be, when
issued, fully paid and nonassessable.
EFFECTS OF ISSUANCE OF CAPITAL STOCK
The issuance of PSI common stock and the issuance of preferred stock or
equity stock with special voting rights could be used to deter attempts by a
single shareholder or group of shareholders to obtain control of PSI in
transactions not approved by PSI's Board of Directors. PSI has no intention to
issue PSI common stock or the preferred stock or equity stock for such purposes.
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DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Chapter 13 of the California General Corporation Law, a holder
of PSP20 Common Stock may, in some instances, be entitled to require PSP20 to
purchase his or her shares of PSP20 Common Stock for cash at their fair market
value as of the day before the first announcement of the terms of the merger,
excluding any appreciation or depreciation in consequence of the merger. The
general terms of the merger were first announced on February 13, 1998. The
following is a brief summary of the procedures to be followed by a PSP20
shareholder in order to perfect his or her right, if any, to payments under
Chapter 13 and is qualified in its entirety by reference to the text of Chapter
13 attached to this proxy statement as Appendix D, to which reference is hereby
made for a definitive statement of the rights of dissenting shareholders and the
procedures to be followed.
Shares of PSP20 Common Stock will qualify as dissenting shares only if
demands for payment are filed with respect to 5% or more of the outstanding
shares of PSP20 Common Stock. This 5% requirement is applicable because PSP20
Common Stock is listed on the AMEX, a national securities exchange certified by
the California Commissioner of Corporations, as provided in Section 1300(b)(1)
of Chapter 13.
A dissenting shareholder who wishes to require PSP20 to purchase his or her
respective shares of PSP20 Common Stock must:
(1) vote against the merger any or all of the shares of Common Stock
entitled to be voted (shares of PSP20 Common Stock not voted are not
considered to be voted against the merger and will not be counted toward
the 5% minimum for dissenters' rights to exist); provided that if a PSP20
shareholder votes part of the shares entitled to be voted in favor of the
merger, and fails to specify the number of shares voted, it is conclusively
presumed under California law that such shareholder's approving vote is
with respect to all shares entitled to be voted;
(2) make written demand upon PSP20 or its transfer agent at the
addresses listed below, which is received not later than the date of the
meeting of PSP20 shareholders, setting forth the number of shares of PSP20
Common Stock demanded to be purchased by PSP20 and a statement as to
claimed fair market value of such shares at February 12, 1998; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval of the merger by PSP20 shareholders described below is
mailed to such shareholders, to PSP20 or its transfer agent at the
addresses listed below, the certificates representing any shares in regard
to which demand for purchase is being made, or to be exchanged for
certificates of appropriate denominations so endorsed, with a statement
that the shares are dissenting shares.
The statement of fair market value in clause (2) above will constitute an
offer by the dissenting shareholder to sell his or her shares at a price equal
to such fair market value. Neither a vote against approval of the merger nor
the giving of a proxy directing a negative vote will be sufficient to constitute
the demand described in clause (2) above. A proxy which fails to include
instructions with respect to approval of the merger will be voted in favor of
the merger. Accordingly, shares covered by such a proxy will not be dissenting
shares. In addition, a vote in favor of the merger, or a failure to vote at
all, will nullify any previously filed written demand for payment.
If the holders of 5% or more of the outstanding shares of PSP20 Common
Stock have made demands for payment on or prior to the date of the meeting of
PSP20 shareholders to approve the merger, and have voted against the merger at
the meeting, within 10 days after the date of the approval of the merger, PSP20
will mail to each dissenting shareholder who holds PSP20 Common Stock a notice
of such approval together with a statement of the price determined by PSP20 to
represent the fair market value of dissenting shares, a copy of certain sections
of Chapter 13, and a brief description of the procedure to be followed if the
shareholder desires to exercise dissenters' rights. The statement of price will
constitute an offer by PSP20 to purchase at the price stated therein any
dissenting shares.
If PSP20 and the dissenting shareholder agree that any shares of PSP20
Common Stock are dissenting shares and agree upon the price of the shares, the
dissenting shareholder will be entitled to the agreed price plus interest
thereon at the legal rate on judgments from the date of such agreement. Subject
to the provisions of
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California law, payment of the fair market value of the dissenting shares will
be made within 30 days after such agreement or within 30 days after any
statutory or contractual conditions to the merger are satisfied, whichever is
later. If PSP20 denies that the shares are dissenting shares or if PSP20 and the
dissenting shareholder fail to agree upon the fair market value of the shares,
then the dissenting shareholder, within six months after the date on which
notice of approval of the merger by PSP20 shareholders is mailed to such
shareholder, and not thereafter, may file a complaint in the Superior Court of
Los Angeles County, California, requiring the court to determine whether the
shares are dissenting shares, or the fair market value of the dissenting shares,
or both, or may intervene in any pending action for the appraisal of any shares
of PSP20 Common Stock. The court will direct payment of the appraised value of
the shares, together with interest thereon at the legal rate on judgments from
the date on which the judgment was entered, by PSP20 to the PSP20 shareholder
upon the surrender of the certificates representing such shares to PSP20. The
costs of the proceeding shall be apportioned as the court considers equitable,
but if the appraisal exceeds the price offered by PSP20, it shall pay the costs,
and if the appraisal is more than 125% of the price offered by it, it may be
required to pay attorneys' and other fees and interest at the legal rate on
judgments from the date the shareholder complied with Sections 1300-1302 of
Chapter 13.
A dissenting shareholder may not withdraw demand for purchase of dissenting
shares without PSP20's consent. Written demands for payment and submissions for
endorsement with respect to PSP20 Common Stock must be addressed to Public
Storage Properties XX, Inc., 701 Western Avenue, Suite 200, Glendale, California
91201-2397, attention: Investor Services Department or to PSP20's transfer
agent, American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005.
Any reference to "dissenting shareholder" in this section "dissenting
shareholders' Rights of Appraisal" means the recordholder of dissenting shares
of PSP20 and includes a transferee of record.
A shareholder receiving cash upon the exercise of rights of appraisal may
recognize gain or loss for income tax purposes. See "Federal Income Tax
Considerations."
PSP20 shareholders are entitled, upon written demand, to inspect and copy
the record of PSP20 shareholders, at any time during usual business hours to
communicate with other PSP20 shareholders with respect to the merger.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax considerations
of the merger and the subsequent ownership and disposition of shares of PSI
common stock that are reasonably expected to be material to PSP20 shareholders.
The following discussion is for general information only, is not exhaustive of
all possible tax considerations, and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax consequences. In addition, this
discussion is intended to address only those federal income tax considerations
that are applicable to all PSI and PSP20 shareholders and to PSI and PSP20. It
does not discuss all aspects of federal income taxation that might be relevant
to a specific shareholder in light of its particular investment or tax
circumstances. This discussion does not purport to deal with aspects of
taxation that may be relevant to shareholders subject to special treatment under
the federal income tax laws, including, without limitation, insurance companies,
financial institutions or broker-dealers, tax-exempt organizations (except to
the extent discussed under the subheading "- Taxation of Tax-Exempt Shareholders
of PSI") or foreign corporations and persons who are not citizens or residents
of the United States (except to the extent discussed under the subheading "-
Taxation of Non-U.S. Shareholders of PSI").
This discussion is based on the Code (including the provisions of the
Taxpayer Relief Act of 1997 (the "1997 Act"), several of which are described
herein), applicable Treasury Regulations, judicial decisions, and IRS rulings,
and certain representations made by PSP20 and PSI, all as of the date hereof.
There can be no assurance that the legal authorities on which this discussion is
based will not change, perhaps retroactively, that the factual assumptions
underlying this discussion will be accurate, or that there will not be a change
in the future in the circumstances of PSI and PSP20 that would affect this
discussion. PSI and PSP20 do not plan to obtain any rulings from the Internal
Revenue Service ("IRS") concerning tax issues with respect to the merger or the
qualification of PSI or PSP20 as a REIT. Thus, no assurance can be provided
that the statements set forth herein (which do not bind the IRS or the courts)
will not be challenged by the IRS or will be sustained if so challenged.
BECAUSE THIS DISCUSSION DOES NOT DEAL WITH ALL ASPECTS OF FEDERAL TAXATION,
AND THE TAX CONSEQUENCES WILL NOT BE THE SAME FOR ALL PSP20 SHAREHOLDERS, PSP20
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO
THEIR OWN TAX SITUATIONS, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
AND FOREIGN TAX LAWS.
THE MERGER
The merger is intended to be a "reorganization" for federal income tax
purposes, and accordingly no gain or loss will be recognized by PSP20 or PSI in
connection with the merger; and no gain or loss will be recognized by PSP20
shareholders who receive solely PSI common stock in exchange for their PSP20
Common Stock in the merger (but all PSP20 shareholders will recognize ordinary
income in the amount of any required distributions made to them). No rulings
have been or will be requested from the IRS regarding the merger or any other
aspect of the matters discussed in this proxy statement. Hogan & Hartson
L.L.P., counsel to PSP20, has rendered an opinion that the merger will
constitute a reorganization under Section 368(a) of the Code, based on certain
factual assumptions and representations made by PSI and PSP20. Of particular
importance are certain assumptions and representations relating to the
"continuity of interest" requirement discussed below.
Continuity of Interest Requirement. To qualify as a reorganization, among
other requirements, the merger must satisfy a "continuity of interest" test,
under which the historic PSP20 shareholders (shareholders who purchase shares in
anticipation of the merger may not be included for this purpose), must continue
to retain a meaningful ownership interest in PSI after the merger. Pursuant to
recently issued Treasury Regulations, this test will be satisfied if a
substantial part of the value of the PSP20 shareholders' proprietary interest in
PSP20 is preserved in the merger. Generally, the proprietary interest in PSP20
will be preserved if (a) PSP20 shareholders receive PSI common stock in exchange
for at least 50% of their PSP20 Common Stock and (b) in connection with the
merger, neither PSI nor any person related to PSI (within the meaning of Treas.
Reg. (S) 1.368-1(e)(3)) redeems or acquires, with consideration other than PSI
stock, the PSI common stock issued to the former PSP20 shareholders in exchange
for their PSP20 Common Stock. PSI has represented that (i) no more than 20% of
the outstanding PSP20 Common Stock will be acquired in the merger for
consideration other than PSI common stock and (ii) PSI is not aware of any plan
or intention of PSI or of any person related to PSI (within the meaning of
Treas. Reg. 1.368-
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1(e)(3)) to redeem or acquire the PSI common stock given in exchange for PSP20
Common Stock in the merger that would cause the continuity of interest test not
to be satisfied. Therefore, the continuity of interest requirement will be
satisfied.
Reorganization Consequences to PSI and PSP20. If the merger qualifies as a
reorganization under Section 368(a) of the Code, PSI and PSP20 will not
recognize gain or loss as a result of the merger. PSI also will succeed to the
assets, liabilities, and tax attributes of PSP20. Accordingly, following the
merger, PSI will hold the properties of PSP20 with a carryover tax basis,
determined by reference to the relatively low, historic basis of those assets in
the hands of PSP20. The tax basis will not be increased by any cash expended by
PSI pursuant to the cash elections or to satisfy dissenters' rights, or by the
amount of any gain reportable by those PSP20 shareholders who may be taxable as
a result of the merger.
Exchange of PSP20 Common Stock Solely for PSI Common Stock. If the merger
qualifies as a reorganization under Section 368(a) of the Code, PSP20
shareholders who exchange their PSP20 Common Stock solely for PSI common stock
pursuant to the merger (i) will recognize no gain or loss (but see "- The Merger
- - Required REIT Distributions"), (ii) will have an aggregate tax basis in the
PSI common stock received equal to the aggregate tax basis of the shares of
PSP20 Common Stock surrendered (reduced by the amount of any tax basis allocable
to a fractional share interest for which cash is received) and (iii) provided
such PSP20 Common Stock is held as a capital asset at the effective time, will
include the holding period of the surrendered PSP20 Common Stock in the holding
period of the PSI common stock received.
PSP20 Shareholders Receiving Only Cash. A PSP20 shareholder who exchanges
PSP20 Common Stock only for cash (whether pursuant to and subject to the
conditions of the cash election, or as a result of the exercise of dissenters'
rights) will recognize taxable gain or loss with respect to such cash in an
amount equal to the difference between such PSP20 shareholder's adjusted basis
in his or her PSP20 Common Stock and the amount of cash received. Generally such
gain or loss will constitute capital gain or loss if the PSP20 Common Stock is
held as a capital asset.
PSP20 Shareholders Receiving Cash and PSI Common Stock. If the merger
qualifies as a reorganization, a PSP20 shareholder who, pursuant to the merger
and subject to the conditions of the cash election, exchanges PSP20 Common Stock
for a combination of PSI common stock and cash (i) will not recognize any loss
realized on such exchange and (ii) will recognize gain only to the extent of the
lesser of the amount of cash received or the excess of the fair market value of
the PSI common stock and cash received over such PSP20 shareholder's tax basis
in the PSP20 Common Stock surrendered. The recognized gain will be treated as
capital gain (provided the PSP20 Common Stock is held as a capital asset at the
effective time). The aggregate tax basis of the PSI common stock received will
be the same as the aggregate tax basis of the PSP20 Common Stock surrendered for
the PSI common stock, reduced by the amount of cash received and increased by
the amount of gain recognized, if any. Provided the PSP20 shareholder holds the
PSP20 Common Stock as a capital asset at the effective time of the merger, the
holding period of the PSI common stock will include the holding period of the
PSP20 Common Stock surrendered for the PSI common stock.
Required REIT Distributions. The required distributions would not be
treated as cash paid in exchange for the PSP20 Common Stock, but rather as a
dividend taxable to all recipients as ordinary income.
Cash Received in Lieu of Fractional Shares of PSI Common Stock. PSP20
shareholders that receive cash in lieu of a fractional share of PSI common stock
pursuant to the merger will recognize taxable gain or loss equal to the
difference between the tax basis allocable to such fractional share and the cash
received in exchange therefor, provided that the PSP20 Common Stock is held as a
capital asset at the effective time.
Failure to Qualify for Reorganization Treatment. In the event that the
merger does not qualify as a reorganization, the merger likely would be treated
as a taxable sale by PSP20 of its assets and a contemporaneous liquidation.
PSP20 would recognize gain or loss equal to the difference between PSP20's basis
in its various properties and assets and the sum of the fair market value of the
PSI common stock, cash (including cash attributable to fractional share
interests) issued in the merger and the outstanding debt of PSP20. In computing
its taxable income for the taxable year ending on the date of the merger, PSP20
would be entitled to a dividends paid deduction equal to the fair market value
of the PSI common stock and cash (including cash attributable to fractional
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share interests) deemed distributed to the PSP20 shareholders as a result of the
merger and the contemporaneous deemed liquidation of PSP20. To the extent that
any such gain were to exceed the fair market value of the PSI common stock and
cash (including cash attributable to fractional share interests) issued in the
merger, such gain would be taxable to PSP20, with the liability for the tax
attributable thereto transferring to PSI. The PSP20 shareholders would recognize
income or loss equal to the difference between the tax basis (with such basis
increased by the amount of the dividend deemed paid by PSP20 as described above)
of their PSP20 Common Stock and the sum of the fair market value of the PSI
common stock and the cash received in exchange for their PSP20 Common Stock, but
some of the income could be ordinary income. The PSP20 shareholders receiving
PSI common stock would have a tax basis in those shares equal to the fair market
value of the shares at the time of the merger, and their holding period in the
PSI common stock received would not include the period during which their shares
of PSP20 Common Stock were held. PSI would receive a basis in the properties
acquired from PSP20 equal to their fair market value.
OPINION OF COUNSEL
Hogan & Hartson L.L.P., counsel to PSP20, has rendered an opinion to PSP20
with respect to the merger to the effect that (i) for federal income tax
purposes, the merger will constitute a reorganization under Section 368(a) of
the Code, (ii) PSI continues to qualify as a REIT under Sections 856 through 860
of the Code following the PSMI Merger so long as (A) PSI continues to meet the
stock ownership and gross income requirements applicable to REITs and (B) either
(i) at the time of (and giving effect to) the PSMI Merger, PSMI was not
considered to have any current or accumulated earnings and profits for tax
purposes or (ii) PSI made distributions prior to the end of 1995 in an amount
sufficient to eliminate such earnings and profits, and (iii) the discussion
under the heading "Federal Income Tax Considerations," to the extent that it
describes matters of law or legal conclusions, is correct in all material
respects. Hogan & Hartson L.L.P. has not opined that PSI continues to meet the
stock ownership and gross income requirements applicable to REITs following the
PSMI Merger or that PSMI did not have current or accumulated earnings and
profits at the time of the PSMI Merger, due to the numerous factual
determinations and future events that bear on those conclusions. The opinion of
counsel is based upon certain extensive and detailed representations as to
factual and legal matters made by PSI and PSP20 that relate both to the
qualification of PSI as a REIT and to the qualification of the merger as a
reorganization. The opinion of counsel also makes certain customary assumptions
regarding the accuracy and completeness of documents reviewed by counsel and
representations relied upon by counsel and as to the consummation of the merger
in accordance with the terms of the merger agreement. The opinion of counsel
states that the conclusion set forth therein could be adversely affected if any
of these representations or assumptions is incorrect or incomplete at the time
that the merger is consummated. The opinion of counsel only represents
counsel's best judgment, based upon the underlying representations and
assumptions, regarding the application of relevant provisions of the Code and
interpretations thereof, as set forth in existing judicial decisions,
administrative regulations and published rulings and procedures of the Internal
Revenue Service. The opinion of counsel is not binding upon the Internal
Revenue Service or the courts, and there can be no assurance that the Internal
Revenue Service would not seek to assert a contrary position. Also, there
cannot be any assurance that future legislative, judicial or administrative
changes (which could be retroactive in effect) will not adversely affect the
conclusions reached in the opinion of counsel. Finally, the opinion of counsel
is expressly limited to the specific conclusions described in the first sentence
of this section and does not purport to address any other federal, state, local
or foreign tax consequences that may result from the merger or any other
transaction (including the tax consequences of the merger as applied to specific
PSP20 shareholders (or classes of PSP20 shareholders); the tax consequences of
the merger to PSI and PSP20 (including whether any entity will recognize any
gain in the merger and PSI's adjusted tax basis in the assets of PSP20 acquired
in the merger); the application of the "golden parachute" provisions, the
alternative minimum tax provisions, and any other provisions of the Code (other
than Section 368(a) of the Code) to the merger and/or participants therein; and
whether PSP20 shareholders who have provided or will provide services to PSI and
PSP20 will recognize compensation income, either as a result of the merger or
otherwise).
GENERAL TAX TREATMENT OF PSI
PSI elected to be taxed as a REIT beginning with its taxable year ending
December 31, 1981. That election will continue in effect until it is revoked or
terminated. PSI believes that it has qualified during each of the past five
fiscal years, and currently qualifies, as a REIT, and PSI expects to continue to
be taxed as a REIT for federal income tax purposes. While PSI intends to
operate so that it will continue to qualify as a REIT, given the
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highly complex nature of the rules governing REITs, the ongoing importance of
factual determinations, and the possibility of future changes in the
circumstances of PSI, no assurance can be given by PSI that PSI will so qualify
for any particular year.
So long as PSI qualifies for taxation as a REIT for federal income tax
purposes, PSI generally will be entitled to deduct dividend distributions to its
shareholders, thus substantially eliminating the corporate level of the "double
taxation" that typically results when a corporation earns taxable income and
distributes that income to shareholders in the form of taxable dividends.
However, PSI will be subject to federal income tax in certain circumstances as
described below under the subheading "- Applicable Federal Income Tax."
The following is a very brief overview of certain of the technical
requirements that PSI must meet on an ongoing basis in order to continue to
qualify as a REIT:
1. The capital stock must be widely-held and not more than 50% of the
value of the capital stock may be held by five or fewer individuals ("5/50
Test") (determined after giving effect to various ownership attribution rules).
Pursuant to the 1997 Act, for PSI's taxable years commencing on or after January
1, 1998, if PSI complies with regulatory rules pursuant to which it is required
to send annual letters to holders of common stock requesting information
regarding the actual ownership of the common stock, and PSI does not know, or
exercising reasonable diligence would not have known, whether it failed to meet
the 5/50 Test, PSI will be treated as having met the 5/50 Test. See "-
Consequences of the PSMI Merger on PSI's Qualification as a REIT - Violation of
Ownership Requirements."
2. PSI's gross income must meet three income tests:
(a) at least 75% of the gross income must be derived from specified
real estate sources;
(b) at least 95% of the gross income must be from the real estate
sources includable in the 75% income test, and/or from dividends,
interest, or gains from the sale or disposition of stock or securities
not held for sale in the ordinary course of business; and
(c) for its taxable years ending on or before December 31, 1997, less
than 30% of the gross income may be derived from the sale of real
estate assets held for less than four years, from the sale of certain
"dealer" property, or from the sale of stock or securities held for
less than one year (pursuant to the 1997 Act, PSI will not have to meet
the 30% test for its taxable years commencing on or after January 1,
1998).
Rents received by PSI will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
of sales. PSI anticipates that none of its gross annual income will be
attributable to rents that are based in whole or in part on the income of any
person (excluding rents based on a percentage of receipts or sales, which, as
described above, are permitted). Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if PSI, or an owner
of 10% or more of PSI, directly or constructively owns 10% or more of such
tenant (a "Related Party Tenant"). PSI does not anticipate that it will receive
income from Related Party Tenants. Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." PSI does not anticipate deriving rent attributable to personal
property leased in connection with real property that exceeds 15% of the total
rents. Finally, for rents received to qualify as "rents from real property,"
PSI generally must not operate or manage the property or furnish or render
services to tenants, other than through an "independent contractor" which is
adequately compensated and from whom PSI derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by PSI are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant." Any services with respect to certain Properties that PSI
believes may not be provided by PSI directly without jeopardizing the
qualification of rent as "rents from real property" will be performed by
"independent contractors."
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Pursuant to the 1997 Act, for PSI's taxable years commencing on or after
January 1, 1998, rents received generally will qualify as rents from real
property even if PSI were to provide services that are not Permissible Services
so long as the amount received for such services meets a de minimis standard.
The amount received for "impermissible services" with respect to a property will
be de minimis so long as such amount does not exceed one percent of all amounts
received, directly or indirectly, by PSI with respect to such property. In
computing any such amounts, the amount that PSI would be deemed to have received
for performing "impermissible services" will be the greater of the actual amount
so received or 150% of the direct cost to PSI of providing such "impermissible
services."
See "- Consequences of the PSMI Merger on PSI's Qualification as a REIT
Nonqualifying Income," and "- Consequences of the PSMI Merger on PSI's
Qualification as a REIT - Acquisition of Affiliated Partnership Interests" for a
discussion of specific aspects of the PSMI Merger that may impact upon PSI's
ability to satisfy the 95% gross income test following the PSMI Merger.
3. Generally, 75% by value of PSI's investments must be in real estate,
mortgages secured by real estate, cash, or government securities (including its
allocable share of real estate assets held by any partnerships in which PSI owns
an interest). Not more than 25% of PSI's total assets may be represented by
securities other than those in the 75% asset class. Of the investments included
in the 25% asset class, the value of any one issuer's securities owned by PSI
may not exceed 5% of the value of PSI's total assets, and PSI may not own more
than 10% of any one issuer's outstanding voting securities. The 5% test
generally must be met for any quarter in which PSI acquires securities of an
issuer. PSI believes that it satisfies these tests. In this regard, however,
the 10% voting stock prohibition precludes PSI from controlling the operations
of the Lock/Box Company (in which PSI owns 95% of the equity in the form of non-
voting stock and the Hughes family owns 5% of the equity but 100% of the voting
stock), PSPUD (a subsidiary of the Lock/Box Company) or PSCC (in which PSI owns
a less than 10% equity interest), and may preclude PSI from exercising its
rights of first refusal with respect to the corporations owning the Canadian
operations and the reinsurance business.
See "- Recent Administration Proposal" for a discussion of a proposal that,
if enacted, would limit PSI's ability to derive economic benefits from the
activities of the Lock/Box Company and PSPUD.
4. PSI must distribute to its shareholders in each taxable year an amount
at least equal to 95% of PSI's "REIT Taxable Income" (which is generally
equivalent to net taxable ordinary income). Under certain circumstances, PSI
can rectify a failure to meet the 95% distribution test by paying dividends
after the close of a particular taxable year.
In years prior to 1990, PSI made distributions in excess of its REIT
Taxable Income. During 1990, PSI reduced its distributions to the PSI
shareholders. As a result, distributions paid by PSI in 1990 were less than 95%
of PSI's REIT Taxable Income for 1990. PSI has satisfied the REIT distribution
requirements for 1990 through 1996 by attributing distributions in 1991 through
1997 to the respective prior year, and PSI expects to satisfy the distribution
requirement for 1997 by attributing distributions in 1998 to 1997. PSI may be
required, over each of the next several years, to make distributions after the
close of a taxable year and to attribute those distributions to the prior year.
PSI shareholders, however, will be treated for federal income tax purposes as
having received such distributions in the taxable years in which they were
actually made except for under certain circumstances as described below under
the heading "Taxation of U.S. Shareholders Holding PSI Common Stock -
Distributions by PSI." The extent to which PSI will be required to attribute
distributions to the prior year will depend on PSI's operating results and the
level of distributions as determined by PSI's Board of Directors. Reliance on
subsequent year distributions could cause PSI to be subject to certain penalty
taxes. In that regard, if PSI should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such calendar
year, (ii) 95% of its REIT capital gain net income for such calendar year, and
(iii) any undistributed taxable income from prior periods, PSI would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed during such calendar year (not taking into account
distributions made in subsequent years but attributed to such calendar year).
PSI intends to comply with this 85% distribution requirement in an effort to
minimize any excise tax. Any distributions required to be made by PSI in order
to eliminate any accumulated earnings and profits of PSMI would not be counted
in determining whether PSI satisfies the 95% distribution test and could
adversely impact upon PSI's ability to satisfy the 95% distribution test. See
"- Consequences of the
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PSMI Merger on PSI's Qualification as a REIT - Elimination of Any Accumulated
Earnings and Profits Attributable to Non-REIT Years."
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets 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 PSI's
Qualification as a REIT - Acquisition of Affiliated Partnership Interests in the
PSMI Merger."
Applicable Federal Income Tax. For years in which PSI qualifies as a REIT,
PSI generally will not be subject to federal corporate income tax on its net
income distributed currently to shareholders. However, PSI will be subject to
federal income tax in the following circumstances. First, PSI will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, PSI may
be subject to the "alternative minimum tax" on any items of tax preference.
Third, if PSI has (i) net income from the sale or other disposition of certain
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if PSI has net income from prohibited transactions (which are,
in general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if PSI
should fail to satisfy the 75% gross income test or the 95% gross income test
(discussed below), and nonetheless should maintain its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of either the amount by which
it fails the 75% gross income test or the amount by which it fails the 95% gross
income test. Sixth, if PSI should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, it would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
Seventh, if PSI acquires or has acquired any asset 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 the acquiror's hands is determined by reference
to the basis of the asset (or any other asset) in the hands of the C corporation
and the acquiror recognizes gain on the disposition of such asset during the 10
year period beginning on the date on which such asset was acquired by it, then
to the extent of such asset's "Built-In Gain" (i.e., the excess of (a) the fair
market value of such asset at the time of the acquisition by PSI over (b) the
adjusted basis in such asset, determined as of the time of such acquisition),
such gain will be subject to tax at the highest regular corporate rate
applicable, pursuant to anticipated Treasury Regulations that have not yet been
promulgated. This result with respect to the recognition of Built-In Gain
assumes that PSI will make an election pursuant to IRS Notice 88-19 with respect
to any such acquisition.
PSI made an election pursuant to IRS Notice 88-19, 1988-1 C.B. 486, with
respect to the PSMI Merger. Accordingly, PSI will be subject to a corporate
level tax with respect to the assets acquired in the PSMI Merger only if it
disposes of any of the assets acquired in the PSMI Merger at any time during the
10-year period beginning on the closing date of the PSMI Merger (the
"Restriction Period"). PSI currently does not intend to dispose any material
portion of the assets acquired in the PSMI Merger during the Restriction Period,
but there can be no assurance that one or more such dispositions will not occur.
Termination of REIT Election. For any taxable year that PSI fails to
qualify as a REIT, it would be taxed at the usual corporate rates on all of its
taxable income, whether or not it makes any distributions to its shareholders.
Those taxes would reduce the amount of cash available to PSI for distribution to
its shareholders. As a result, failure of PSI to qualify during any taxable
year as a REIT could have a material adverse effect upon PSI and its
shareholders, unless certain relief provisions are available.
PSI's election to be treated as a REIT will terminate automatically if PSI
fails to meet the qualification requirements described above. If a termination
(or a voluntary revocation) occurs, unless certain relief provisions apply, PSI
will not be eligible to elect REIT status again until the fifth taxable year
that begins after the first year for which PSI's election was terminated (or
revoked). If PSI loses its REIT status, but later qualifies and elects to be
taxed as a REIT again, PSI may face significant adverse tax consequences.
Immediately prior to the effectiveness of the election to return to REIT status,
PSI would be treated as if it disposed of all of its assets in a taxable
transaction, triggering taxable gain with respect to PSI's appreciated assets.
(PSI would, however, be permitted to elect an alternative treatment under which
the gains would be taken into account only as and when they actually are
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recognized upon sales of the appreciated property occurring within the 10-year
period after return to REIT status.) PSI would not receive the benefit of a
dividends paid deduction to reduce any such taxable gains. Thus, any such gains
on appreciated assets would be subject to double taxation, at the corporate as
well as the shareholder level.
CONSEQUENCES OF THE PSMI MERGER ON PSI'S QUALIFICATION AS A REIT
In light of the unique federal income tax requirements applicable to REITs,
the PSMI Merger could have adverse consequences on PSI's continued qualification
as a REIT, as discussed in greater detail below. Hogan & Hartson L.L.P. is of
the opinion that PSI continues to qualify as a REIT following the PSMI Merger so
long as (A) PSI has met at all times since the PSMI Merger and continues to meet
the stock ownership and gross income requirements applicable to REITs and (B)
either (i) at the time of (and giving effect to) such merger, PSMI was not
considered to have any current or accumulated earnings and profits for tax
purposes or (ii) PSI made distributions prior to the end of 1995 in an amount
sufficient to eliminate such earnings and profits. See "- Nonqualifying
Income," "- Violation of Ownership Requirements," and "- Elimination of Any
Accumulated Earnings and Profits Attributable to Non-REIT Years." Hogan &
Hartson L.L.P., however, has not opined that PSI continues to meet the stock
ownership and gross income requirements applicable to REITs following the PSMI
Merger or that PSMI did not have current or accumulated earnings and profits at
the time of the PSMI Merger, due to the numerous factual determinations and
future events that bear on those conclusions.
Nonqualifying Income. PSI must meet several annual gross income tests to
retain its REIT qualification. See "- General Tax Treatment of PSI." Under the
95% gross income test, PSI must derive at least 95% of its total gross income
from specified classes of income related to real property, dividends, interest
or gains from the sale or other disposition of stock or other securities that do
not constitute "dealer property." Income related to real property includes: (i)
proceeds from the rental of mini-warehouse facilities; (ii) interest on
obligations secured by mortgages on real property; and (iii) gains from the sale
or other disposition of real property (other than real property held by PSI as a
dealer).
After the PSMI Merger, PSI assumed and performs property management
activities for the various partnerships and REITs in which PSI has an interest
that own properties, as well as for various other entities that own mini-
warehouse properties and/or business parks. PSI will receive management fees
from such partnerships, REITs, and other owners in exchange for the performance
of such management activities. The gross income received by PSI from these
property management activities with respect to properties owned by other
entities (including the REITs in which PSI has an ownership interest) is treated
as income not qualifying under the 95% test ("Nonqualifying Income"). See "-
Acquisition of Affiliated Partnership Interests in the PSMI Merger."
In order to reduce the amount of Nonqualifying Income, in December 1995,
certain properties pre-paid to PSI approximately $4.5 million of management fees
that PSI otherwise would have been expected to receive for 1996 discounted to
compensate for early payment. Pre-payment of management fees reduced the
percentage of Nonqualifying Income received by PSI in taxable years subsequent
to such prepayment. Hogan & Hartson L.L.P. is of the opinion that it is more
likely than not that the IRS would respect the inclusion of the prepaid
management fees in the gross income of PSI when they are received. Hogan &
Hartson's opinion is based on numerous cases where courts have upheld the IRS's
position that fees should be included in income when they are received, rather
than when the services to which such fees relate are performed. There are,
however, several contrary authorities where courts, over the IRS's objections,
have held that prepaid amounts are not included in income in advance of
performance. Because of these contrary authorities, there can be no assurance
that the IRS might not assert that such management fees should be included in
the gross income of PSI as the related management services are provided, rather
than being included in the gross income when they are received. If the IRS were
to successfully challenge the treatment of such management fees and the
inclusion of such fees in PSI's gross income resulted in it failing the 95% test
for a taxable year ending after the PSMI Merger, PSI's REIT status may terminate
for such year and future years unless it meets the "good cause" exception
described below.
PSI and the various other owners of mini-warehouses and business parks for
which PSI performs management activities (the "Owners") have entered into an
agreement (the "Administrative and Cost-Sharing Agreement") with PSCC pursuant
to which PSCC provides the Owners and PSI certain administrative and cost-
sharing services in connection with the operation of the properties and the
performance of certain administrative functions. Such services include the
provisions of corporate office space and certain equipment, personnel required
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for the operation and maintenance of the properties, and corporate or
partnership administration. Each of the Owners and PSI pay the PSCC directly
for services rendered by PSCC in connection with the Administrative and Cost
Sharing Agreement. That payment is separate from and in addition to the
compensation paid to PSI under the management agreement for the management of
the properties owned by the Owners. PSI has received a private letter ruling
from the IRS to the effect that the reimbursements and other payments made to
PSCC by the Owners will not be treated as revenues of PSI for purposes of the
95% test.
If PSI fails to meet the 95% test during any taxable year, its REIT status
would terminate for that year and future years unless it qualifies for the "good
cause" exception. In order to qualify for the "good cause" exception, PSI would
have to satisfy each of the following: (i) it reported the source and nature of
each item of its gross income in its federal income tax return for such year;
(ii) the inclusion of any incorrect information in its return is not due to
fraud with intent to evade tax; and (iii) the failure to meet such test is due
to a reasonable cause and not to willful neglect. PSI intends to conduct its
operations and affairs so that it meets the 95% test for each taxable year. PSI
also intends to operate so that, in the event it were to fail to meet the 95%
test, it would satisfy the "reasonable cause" requirement of the "good cause"
exception because it exercised ordinary business care and prudence in attempting
to satisfy the 95% test (including by receiving opinions of counsel where
appropriate). There can be no assurance, however, that if PSI were unable to
satisfy the 95% test, the IRS would necessarily agree that PSI had operated in a
manner that qualifies for the "good cause" exception. Furthermore, even if
PSI's REIT status were not terminated because of the "good cause" exception, PSI
still would be subject to an excise tax on any excess nonqualifying income.
Generally, if PSI fails the 95% test but still retains its qualification as a
REIT under the "good cause" exception, it would be subject to a 100% excise tax
on the amount of the excess nonqualifying income multiplied by a fraction, the
numerator of which would be PSI's taxable income (computed without its
distribution deduction) and the denominator of which would be PSI's gross income
from all sources. This excise tax would have the general effect of causing PSI
to pay all net profits generated from this excess nonqualifying income to the
IRS.
Violation of Ownership Requirements. For PSI to qualify as a REIT under
the Code, no more than 50% in value of its outstanding stock may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. Following the PSMI Merger,
the value of the outstanding capital stock held by the Hughes family was
estimated to be approximately 45% and such percentage has been reduced to
approximately 30% as of December 31, 1997. In order to assist PSI in meeting
these ownership restrictions, the PSI articles of incorporation and bylaws
prohibit the actual or constructive ownership of more than 2.0% of the
outstanding shares of all common stock of PSI or more than 9.9% of the
outstanding shares of each class or series of shares of preferred stock of PSI.
(The PSI articles of incorporation and bylaws provide, however, that no person
is deemed to exceed this ownership limitation solely by reason of the beneficial
ownership of shares of any class of stock to the extent that such shares of
stock were beneficially owned by such person at the time of the PSMI Merger.)
However, even with these ownership limitations, there still could be a violation
of the ownership restrictions if four individuals unrelated to the Hughes family
were to own the maximum amount of capital stock permitted under the PSI articles
of incorporation. Therefore, to further assist PSI in meeting the ownership
restrictions, the Hughes family entered into an agreement with PSI for the
benefit of PSI and certain designated charitable beneficiaries restricting their
acquisition of additional shares of PSI's capital stock and providing that if,
at any time, for any reason, more than 50% in value of PSI's outstanding stock
otherwise would be considered owned by five or fewer individuals, then a number
of shares of PSI common stock owned by Wayne Hughes necessary to cure such
violation will automatically and irrevocably be transferred to a designated
charitable beneficiary. These provisions are modeled after certain arrangements
that the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as such arrangements
are enforceable as a matter of state law and the REIT seeks to enforce them as
and when necessary. There can be no assurance, however, that the IRS might not
seek to take a different position with respect to PSI (a private letter ruling
is legally binding only with respect to the taxpayer to whom it was issued) or
contend that PSI failed to enforce these various arrangements and, hence, there
can be no assurance that these arrangements will necessarily preserve PSI's REIT
status. No private letter ruling has been sought by PSI from the IRS on the
effect of these arrangements.
Elimination of Any Accumulated Earnings and Profits Attributable to Non-
REIT Years. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first taxable
year in which it has non-REIT earnings and profits to distribute any such
accumulated earnings and
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profits. In a corporate reorganization qualifying as a tax free statutory
merger, the acquired corporation's current and accumulated earnings and profits
are carried over to the surviving corporation. Under Treasury regulations, any
earnings and profits treated as having been acquired by a REIT through such a
merger will be treated as accumulated earnings and profits of a REIT
attributable to non-REIT years. Accordingly, any accumulated earnings and
profits of PSMI and its predecessors (including earnings and profits resulting
from transactions undertaken in contemplation of the PSMI Merger or from the
PSMI Merger itself) carried over to PSI in the PSMI Merger and PSI would have
been required to distribute any such accumulated earnings and profits prior to
the close of 1995 (the year in which the PSMI Merger occurred). Failure to do so
would result in disqualification of PSI as a REIT (unless the "deficiency
dividend" procedures described below apply and PSI complies with those
procedures).
The amount of any accumulated earnings and profits of PSMI acquired by PSI
was based on the consolidated earnings and profits of PSMI (including each of
its predecessors) through and including the date of the PSMI Merger
("Consolidated Accumulated Earnings"). As a condition to the PSMI Merger, PSI
received a study prepared by PSMI of the earnings and profits of PSMI and its
subsidiaries that showed, taking into account projected income of PSMI and its
affiliates to and including the time of the PSMI Merger and distributions to the
PSMI shareholders made at or prior to the time of the PSMI Merger, PSMI had no
Consolidated Accumulated Earnings at the time of the PSMI Merger. The
determination of the accumulated earnings and profits acquired by PSI in the
PSMI Merger ("Acquired Earnings") depends upon a number of factual matters
related to the activities and operations of PSMI and its predecessors during
their entire corporate existence and is subject to review and challenge by the
IRS. There can be no assurance that the IRS will not examine the tax returns of
PSMI and its predecessors for years prior to and including the PSMI Merger and
propose adjustments to increase their taxable income. Because the earnings and
profits study used to calculate the amount of Acquired Earnings is based on
these returns, such adjustments could increase the amount of the Acquired
Earnings. In this regard, the IRS can consider all taxable years of PSMI and
its predecessors as open for review for purposes of determining earnings and
profits.
Although not free from doubt, it appears that pursuant to Treasury
regulations PSI may be able to use certain "deficiency dividend" procedures to
distribute any Acquired Earnings that were subsequently determined to exist as a
result of an IRS audit. In order to use this "deficiency dividend" procedure,
PSI would have to make an additional dividend distribution to its shareholders
(in addition to distributions made for purposes of satisfying the normal REIT
distribution requirements), in the form of cash, notes, other property, or stock
in a taxable stock dividend, within 90 days of the IRS determination. In
addition, PSI would have to pay to the IRS an interest charge on 50% of the
Acquired Earnings that were not distributed prior to December 31, 1995, from the
date on which its 1995 tax return was due to the date the IRS determination was
made. The statute and Treasury regulations related to the application of the
"earnings and profits distribution" requirement to a REIT that acquires a "non-
REIT" in a reorganization and the availability of the "deficiency dividend"
procedure in those circumstances are not entirely clear, and there can be no
assurance that the IRS would not take the position either that the "deficiency
dividend" procedure is not available (in which case, PSI would cease to qualify
as a REIT effective for its taxable year in which the PSMI Merger occurs) or,
alternatively, that even if the procedure is available, PSI cannot qualify as a
REIT for the taxable year in which the merger occurs (but it could qualify as a
REIT for subsequent years).
Acquisition of Affiliated Partnership Interests. PSI has acquired
interests in various partnerships that own and operate properties in the PSMI
Merger and in other transactions. PSI, for purposes of satisfying its REIT
asset and income tests, will be treated as if it directly owns a proportionate
share of each of the assets of these partnerships. For these purposes, under
current Treasury regulations PSI's interest in each of the partnerships must be
determined in accordance with its "capital interest" in such partnership. The
character of the various assets in the hands of the partnership and the items of
gross income of the partnership will retain their same character in the hands of
PSI for these purposes. Accordingly, to the extent the partnership receives
real estate rentals and holds real property, a proportionate share of such
qualified income and assets will be treated as qualified rental income and real
estate assets of PSI for purposes of determining its REIT qualification. It is
expected that substantially all of the properties of the partnerships will
constitute real estate assets and generate qualified rental income for these
REIT qualification purposes.
The acquisition of these partnership interests creates several issues
regarding PSI's satisfaction of the 95% gross income test. First, PSI earns
property management fees from these partnerships. Existing Treasury regulations
do not address the treatment of management fees derived by a REIT from a
partnership in which the REIT holds a partnership interest, but the IRS has
issued a number of private letter rulings holding that the portion
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of the management fee that corresponds to the REIT interest in the partnership
in effect is disregarded in applying the 95% gross income test where the REIT
holds a "substantial" interest in the partnership. PSI disregards the portion of
management fees derived from partnerships in which it is a partner that
corresponds to its interest in these partnerships in determining the amount of
its Nonqualifying Income, and PSI's prepayment of management fees set forth
above was computed based upon this approach. There can be no assurance, however,
that the IRS would not take a contrary position with respect to PSI, either
rejecting the approach set forth in the private letter rulings mentioned above
or contending that PSI's situation is distinguishable from those addressed in
the private letter rulings (for example, because PSI does not have a
"substantial" interest in the partnerships).
Second, PSI acquired interests in certain of these partnerships that
entitles PSI to a percentage of profits (either from operations, or upon a sale,
or both) in excess of the percentage of total capital originally contributed to
the partnership with respect to such interest. Existing Treasury Regulations do
not specifically address this situation, and it is uncertain, based on existing
authority, how PSI's "capital interest" in these partnerships should be
determined. This determination is relevant because it affects both the
percentage of the gross rental income of the partnership that is considered
gross rental income (or qualifying income) to PSI and the percentage of the
management fees paid to PSI that are disregarded in determining PSI's
Nonqualifying Income. For example, if PSI takes the position that it has a 25%
"capital interest" in a partnership (because it would receive 25% of the
partnership's assets upon a sale and liquidation) but the IRS determines it only
has a 1% "capital interest" (because the original holder of PSI's interest only
contributed 1% of the total capital contributed to the partnership), PSI's share
of the qualifying income from the partnership would be reduced and the portion
of the management fee from the partnership that would be treated as
Nonqualifying Income would be increased, thereby adversely affecting PSI's
ability to satisfy the 95% gross income test. In determining its "capital
interest" in the various partnerships in which PSI acquired an interest in the
PSMI Merger, PSI determines the percentage of the partnership's assets that
would be distributed to it if those assets were sold and distributed among the
partners in accordance with the applicable provisions of the partnership
agreements. There can be no assurance, however, that the IRS will agree with
this methodology and not contend that another, perhaps less favorable, method
must be used for purposes of determining PSI "capital interests." If that were
to occur, it could adversely affect PSI's ability to satisfy the 95% gross
income test following the PSMI Merger.
TAXATION OF U.S. SHAREHOLDERS HOLDING PSI COMMON STOCK
Distributions by PSI. As used herein, the term "U.S. shareholder" means a
holder of shares of PSI common stock who (for United States federal income tax
purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (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. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to be
treated as United States persons, shall also be considered U.S. shareholders.
As long as PSI qualifies as a REIT, distributions made to PSI's taxable U.S.
shareholders (and not designated as capital gain dividends) will generally be
taxable to such shareholders as ordinary income to the extent of PSI's earnings
and profits. Such distributions will not be eligible for the dividends received
deductions in the case of shareholders that are corporations. Dividends
declared during the last quarter of a calendar year and actually paid during
January of the immediately following calendar year generally are treated as if
received by the shareholders on December 31 of the calendar year during which
they were declared.
Distributions designated by PSI as capital gain dividends generally will be
taxed as long-term capital gain to shareholders (to the extent that the
distributions do not exceed PSI's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held its stock.
Corporate shareholders however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income. As described below in "- Recent
Legislation," the 1997 Act changed significantly the taxation of capital gains
by taxpayers who are individuals, estates, or trusts. On November 10, 1997, the
IRS issued IRS Notice 97-64, which provides generally that PSI 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
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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 further provides 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 PSI. Instead, such losses would be
carried over by PSI for potential offset against future income (subject to
certain limitations). Distributions made by PSI and gain arising from the sale
or exchange by a shareholder of PSI common stock will not be treated as passive
activity income, and, as a result, shareholders generally will not be able to
apply any "passive losses" against such income or gain. In addition, taxable
distributions from PSI will be treated as investment income for purposes of the
investment interest limitations. Capital gain dividends and capital gains from
the disposition of shares (including distributions treated as such), however,
will be treated as investment income only if the U.S. shareholder so elects, in
which case such capital gains will be taxed at ordinary income rates. PSI will
notify shareholders after the close of its taxable year as to the portions of
the distributions attributable to that year that constitute ordinary income,
return of capital and capital gain.
PSI may designate (by written notice to shareholders) its retained net
capital gain (i.e., net capital gain that is not actually distributed as capital
gain dividends, as described above) as undistributed capital gains in respect of
shareholders' shares. Pursuant to such a designation by PSI with respect to
retained net capital gains, a U.S. shareholder would include its proportionate
share of such gain in income as capital gain, and would be treated as having
paid its proportionate share of the tax paid by the REIT with respect to the
gain. The U.S. shareholder's basis in its shares would be increased by its
share of such gain and decreased by its share of such tax. With respect to such
capital gain of a U.S. shareholder that is an individual or an estate or trust,
the IRS has authority to issue regulations that could apply the special tax rate
applicable generally to the portion of the long-term capital gains of an
individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property.
PSI may distribute cash in excess of its net taxable income. Upon
distribution of such cash by PSI to shareholders (other than as a capital gain
dividend), if all of PSI's current and accumulated earnings and profits have
been distributed, the excess cash will be deemed to be a non-taxable return of
capital to each shareholder to the extent of the adjusted tax basis of the
shareholder's capital stock. Distributions in excess of the adjusted tax basis
will be treated as gain from the sale or exchange of the capital stock. A
shareholder who has received a distribution in excess of current and accumulated
earnings and profits of PSI may, upon the sale of the capital stock, realize a
higher taxable gain or a smaller loss because the basis of PSI common stock as
reduced will be used for purposes of computing the amount of the gain or loss.
In any year in which PSI does not qualify as a REIT, distributions by PSI
to shareholders will be taxable in the same manner discussed above, except that
no distributions can be designated as capital gain dividends, distributions will
be eligible for the corporate dividends received deduction.
Sales of Common Stock. In general, a shareholder will realize gain or loss
on the disposition of shares of PSI common stock equal to the difference between
(i) the amount of cash and the fair market value of any property received on
such disposition and (ii) the shareholder's adjusted basis of such shares of PSI
common stock. With respect to dispositions occurring after July 28, 1997, in
the case of a shareholder who is an individual or an estate or trust, such gain
or loss will be mid-term capital gain or loss if such shares have been held for
more than one year but not more than 18 months and long-term capital gain or
loss if such shares have been held for more than 18 months. In the case of a
shareholder that is a corporation, such gain or loss will be long-term capital
gain or loss if such shares have been held for more than one year. Loss upon a
sale or exchange of shares of PSI common stock by a shareholder who has held
such shares of PSI common stock for six months or less (after applying certain
holding period rules) will be treated as either a long-term or mid-term capital
loss to the extent of distributions from PSI required to be treated by such
shareholder as long-term or mid-term capital gain.
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Ownership Records. To monitor PSI's compliance with the REIT share
ownership requirements, PSI is required to demand annual written statements from
the record holders of designated percentages of its capital stock disclosing the
actual owners of the capital stock and to maintain permanent records showing the
information it has received as to the actual ownership of such capital stock and
a list of those persons failing or refusing to comply with such demand.
BACKUP WITHHOLDING
If a shareholder is subject to "backup withholding," PSI will be required
to deduct and withhold from any dividends payable to the shareholder a tax of
31%. These rules may apply when a shareholder fails to supply a correct
taxpayer identification number, or when the IRS notifies PSI that the
shareholder is subject to the rules or has furnished an incorrect taxpayer
identification number.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
In general, a tax exempt entity that is a shareholder is not subject to tax
on distributions from PSI or gain realized on the sale of capital stock,
provided that the tax exempt entity has not financed the acquisition of its
capital stock with "acquisition indebtedness" within the meaning of the Code.
Special rules apply to organizations exempt under Code Sections 501(c)(7),
(c)(9), (c)(17) and (c)(20), and such prospective investors are urged to 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 preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of PSI common stock by
persons that are not U.S. shareholders ("Non-U.S. shareholders"). In general,
Non-U.S. shareholders may be subject to special tax withholding requirements on
distributions from PSI and with respect to their sale or other disposition of
PSI common stock, except to the extent reduced or eliminated by an income tax
treaty between the United States and the Non-U.S. shareholder's country. A Non-
U.S. shareholder who is a shareholder of record and is eligible for reduction or
elimination of withholding must file an appropriate form with PSI in order to
claim such treatment. Non-U.S. shareholders should consult their own tax
advisors concerning the federal income tax consequences to them of an
acquisition of shares of PSI common stock, including the federal income tax
treatment of dispositions of interests in, and the receipt of distributions
from, PSI.
RECENT LEGISLATION
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Under the 1997 Act, individuals, trusts and estates
that hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than one year
but not more than 18 months may be taxed at a maximum mid-term capital gain rate
of 28% 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 PSI to its shareholders that are designated
by PSI as "capital gain dividends," see "- Taxation of U.S. Shareholders Holding
PSI Common Stock - Distributions by PSI" above. Shareholders are urged to
consult with their tax advisors with respect to the new rules contained in the
1997 Act.
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REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that PSI will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which PSI can meet the REIT qualification
requirements. These provisions are effective for PSI's taxable years commencing
on or after January 1, 1998.
RECENT ADMINISTRATION PROPOSAL
The administration's budget proposal announced on February 2, 1998 includes
a proposal to amend the REIT asset tests with respect to non-qualified REIT
subsidiaries, such as the Lock/Box Company. The proposal would require a REIT
to own no more than 10% of the vote or value of the outstanding stock of any
non-qualified REIT subsidiary. Stock interests held by a REIT in existing non-
qualified REIT subsidiaries would be grandfathered, and therefore subject to the
existing 10% voting securities test (see "- General Tax Treatment of PSI"),
except that such grandfathered status would terminate if the non-qualified REIT
subsidiary engaged in a new trade or business or acquired substantial new assets
on or after the effective date of the proposal. As a result, if the legislation
were enacted and the Lock/Box Company were to commence new trade or business
activities or acquire substantial new assets after the effective date of the
proposal, the Lock/Box Company would lose its grandfathered status and PSI would
be subject to the new 10% of the vote or value limitation with respect to its
ownership interest in the Lock/Box Company (which PSI does not now satisfy).
Accordingly, the proposal, if enacted, could materially impede PSI's ability to
expand the business activities of the Lock/Box Company and to engage in other
activities through non-qualified REIT subsidiaries without jeopardizing PSI's
REIT status. This would limit PSI's ability to derive economic benefit from
engaging in activities which were related to PSI's businesses, but which were
not qualified REIT activities.
A second proposed provision would tax immediately the built-in gains of C
corporations merging into REITs in tax-free reorganizations. Under current law,
C corporations can defer a portion of this tax. Accordingly, if enacted as
currently drafted, this provision could impede PSI's ability to acquire
additional properties through mergers with C corporations.
STATE AND LOCAL TAXES
The tax treatment of PSI and PSP20 shareholders, in states having taxing
jurisdiction over them may differ from the federal income tax treatment.
Accordingly, no discussion of state taxation of PSI and PSP20 shareholders, is
provided nor is any representation made as to the tax status of PSI in such
states. All investors should consult their own tax advisors as to the treatment
of PSI under the respective state tax laws applicable to them.
LEGAL OPINIONS
David Goldberg, senior vice president and general counsel of PSI, will
deliver an opinion to the effect that the shares of PSI common stock to be
issued in the merger will be validly issued, fully paid and nonassessable. Mr.
Goldberg owns 87,865 shares of PSI common stock, 1,000 shares of PSI convertible
preferred stock and 600 shares of PSI senior preferred stock and has options to
acquire an additional 150,834 shares of PSI common stock. Hogan & Hartson
L.L.P., Washington, D.C., has rendered an opinion to the effect that the
discussion under "Federal Income Tax Considerations" fairly summarizes the
material federal income tax considerations to a PSP20 shareholder as a result of
the merger, and the subsequent ownership of PSI common stock, as well as to the
effect that the merger will constitute a reorganization under Section 368(a) of
the Code (based on certain factual assumptions and representations made by PSI,
PSP20, and certain PSP20 shareholders). Hogan & Hartson L.L.P. has performed
certain legal services on behalf of PSI, including the representation of PSI in
the PSMI Merger.
EXPERTS
The consolidated financial statements of PSI as at December 31, 1997 and
1996 and for the three years in the period ended December 31, 1997 which are
included in PSI's Annual Report on Form 10-K have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report with respect thereto and
incorporated herein by reference.
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The financial statements of PSP20 as at December 31, 1997 and 1996 and for
the three years in the period ended December 31, 1997 appearing herein and in
the Annual Report on Form 10-K of PSP20 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein. Such
financial statements are included herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
INDEPENDENT AUDITORS
It is anticipated that representatives of Ernst & Young LLP, which has
acted as the independent auditors of PSI and PSP20 since its organization, will
be in attendance at the special meeting of PSP20 shareholders with the
opportunity to make a statement if they desire to do so and to respond to any
appropriate inquiries of PSP20 shareholders or their representatives.
SHAREHOLDER PROPOSALS
Any proposal that a PSP20 shareholder wishes to submit for consideration
for inclusion in the proxy statement for the next annual meeting of shareholders
must have been received by PSP20 no later than March 1, 1998.
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GLOSSARY
The following are definitions of certain terms used in this proxy
statement:
"Merger." The merger of PSP20 with and into PSI.
"PSP20." Public Storage Properties XX Inc., a REIT organized as a
California corporation.
"PSP20 Common Stock." Shares of Common Stock Series A, par value $.01 per
share, of PSP20.
"PSP20 Partnership." Public Storage Properties XX Ltd., a California
Limited Partnership, the predecessor to PSP20.
"PSP20 shareholder." A holder of shares of PSP20 Common Stock.
"PSI." Public Storage, Inc., a REIT organized as a California corporation
(formerly Storage Equities, Inc.).
"PSI common stock." Shares of Common Stock, par value $.10 per share, of
PSI.
"PSI shareholder." A holder of shares of PSI common stock.
"PSMI." Public Storage Management, Inc., a California corporation, which,
together with its affiliates, was merged into Storage Equities, Inc. on November
16, 1995.
"REIT." A real estate investment trust.
87
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Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as
of this 13th day of February, 1998, by and among PUBLIC STORAGE, INC., a
California corporation ("PSI") and PUBLIC STORAGE PROPERTIES XX, INC., a
California corporation ("PSP20").
A. The parties intend that this Agreement shall constitute a Plan of
Reorganization for purposes of Section 368(a) of the Internal Revenue Code of
1986, as amended. The Plan of Reorganization provides for the merger of PSP20
with and into PSI in accordance with the applicable provisions of the General
Corporation Law of California (the "GCLC") and the Agreement of Merger
substantially in the form attached hereto as Exhibit A ("Merger Agreement").
B. The Boards of Directors of PSI and PSP20 believe that it is in the best
interests of such corporations and their respective shareholders to enter into
and complete this Agreement and they have approved this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. ADOPTION OF PLAN. The parties hereby adopt the Plan of Reorganization
hereinafter set forth.
2. THE MERGER.
2.1 COMPLETION OF THE MERGER. At the Effective Time (as defined
below), PSP20 will be merged with and into PSI (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Merger Agreement.
The Merger shall become effective at the time at which the Merger Agreement,
together with the requisite Officers' Certificates of PSI and PSP20 are filed
with the California Secretary of State in accordance with the GCLC (the
"Effective Time"). PSI and PSP20 are sometimes collectively referred to herein
as the "Constituent Corporations" and PSI, as the surviving corporation of the
Merger, is sometimes referred to herein as the "Surviving Corporation."
2.2 EFFECT OF THE MERGER. At the Effective Time:
2.2.1 CONSTITUENT CORPORATIONS. The separate corporate existence
of PSP20 shall cease and the Surviving Corporation shall thereupon succeed,
without other transfer, to all the rights and property of PSP20 and shall be
subject to all the debts and liabilities of PSP20 in the same manner as if the
Surviving Corporation had itself incurred them; all rights of creditors and all
liens upon the property of each of the Constituent Corporations shall be
preserved unimpaired, provided that such liens upon property of PSP20 shall be
limited to the property affected thereby immediately prior to the Effective
Time; and any action or proceeding pending by or against PSP20 may be prosecuted
to judgment, which shall bind the Surviving Corporation, or the Surviving
Corporation may be proceeded against or substituted in its place.
2.2.2 ARTICLES AND BYLAWS. The Articles of Incorporation and the
Bylaws of PSI, as then amended, shall continue to be the Articles of
Incorporation and the Bylaws of the Surviving Corporation until changed as
provided by law and their respective provisions.
2.2.3 OFFICERS AND DIRECTORS. The officers and directors of PSI
shall continue as officers and directors of the Surviving Corporation until
their successors are elected and qualified as provided by law and in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation.
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2.3 CONVERSION OF COMMON STOCK SERIES A. The manner of converting the
outstanding shares of Common Stock Series A ($.01 par value) of PSP20 (the
"PSP20 Shares") into cash and/or shares of Common Stock ($.10 par value) of PSI
(the "PSI Shares") shall be as follows:
2.3.1 CASH ELECTION. At the Effective Time, subject to Sections
2.6 and 6.8 hereof, each PSP20 Share as to which a cash election has been made
in accordance with the provisions of Section 2.5 hereof and has not been
revoked, relinquished or lost pursuant to Section 2.5 hereof (the "Cash Election
Shares") shall be converted into and shall represent the right to receive $22.57
in cash (the "Cash Election Price"). As soon as practicable after the Effective
Time, the registered holders of Cash Election Shares shall be paid the cash to
which they are entitled hereunder in respect of such Cash Election Shares.
2.3.2 SHARE EXCHANGE. At the Effective Time, subject to Sections
2.4, 2.5, 2.7 and 6.8 hereof, each PSP20 Share (other than Cash Election Shares
and PSP20 Shares owned by PSI) shall be converted into that number of PSI Shares
equal to, rounded to the nearest thousandth, the quotient (the "Conversion
Number") derived by dividing $22.57 by the average of the per share closing
prices on the New York Stock Exchange, Inc. (the "NYSE") of PSI Shares during
the 20 consecutive trading days ending on the fifth trading day prior to the
meeting of shareholders of PSP20 provided for in Section 6.2 hereof. If, prior
to the Effective Time, PSI should split or combine the PSI Shares, or pay a
stock dividend, the Conversion Number will be appropriately adjusted to reflect
such action.
2.4 NO FRACTIONAL SHARES. Notwithstanding any other term or provision
of this Agreement, no fractional PSI Shares and no certificates or script
therefor, or other evidence of ownership thereof, will be issued in the Merger.
In lieu of any such fractional share interests, each holder of PSP20 Shares who
would otherwise be entitled to such fractional share will, upon surrender of the
certificate representing such PSP20 Shares, receive a whole PSI Share if such
fractional share to which such holder would otherwise have been entitled is .5
of an PSI Share or more, and such fractional share shall be disregarded if it
represents less than .5 of an PSI Share; provided, however, that, such
fractional share shall not be disregarded if such fractional share to which such
holder would otherwise have been entitled represents .5 of 1% or more of the
total number of PSI Shares such holder is entitled to receive in the Merger. In
such event, such holder shall be paid an amount in cash (without interest),
rounded to the nearest $.01, determined by multiplying (i) the per share closing
price on the NYSE of the PSI Shares at the Effective Time by (ii) the fractional
interest.
2.5 PROCEDURE FOR CASH ELECTION. At the time of the mailing of the
Proxy Statement and Prospectus provided for in Section 6.5 hereof, PSI will send
to each holder of record of PSP20 Shares at the record date for PSP20 meetings
of shareholders referred to in Section 6.2 hereof a cash election form (the
"Form of Election") providing such holder with the option to elect to receive
the Cash Election Price with respect to all or any portion of such holder's
PSP20 Shares. Any such election to receive the cash payment contemplated by
Section 2.3.1 hereof shall have been properly made only if American Stock
Transfer & Trust Company (the "Depositary") shall have received at its
designated office, by 5:00 p.m., New York time, on the last business day
preceding the day of such meeting of shareholders, a Form of Election properly
completed and accompanied by certificates for the shares to which such Form of
Election relates (or an appropriate guarantee of delivery in a form and on terms
satisfactory to PSI), as set forth in such Form of Election. Any Form of
Election may be revoked by the person submitting the same to the Depositary only
by written notice received by the Depositary prior to 5:00 p.m., New York time,
on the last business day before the day of the meeting of shareholders referred
to in Section 6.2 hereof. In addition, all Forms of Election shall
automatically be revoked if the Depositary is notified in writing by the parties
hereto that the Merger have been abandoned. If a Form of Election is revoked
pursuant to this Section 2.5, the certificate or certificates or any guarantee
of delivery in respect of the PSP20 Shares to which such Form of Election
relates shall be promptly returned to the person submitting the same to the
Depositary. The Depositary may determine whether or not elections to receive
cash have been properly made or revoked pursuant to this Section 2.5, and any
such determination shall be conclusive and binding. If the Depositary
determines that any election to receive cash was not properly or timely made,
the PSP20 Shares covered thereby shall not be treated as Cash Election Shares,
and shall be converted in the Merger as provided in Section 2.3.2 hereof. The
Depositary may, with the agreement of PSI and PSP20, establish such procedures,
not inconsistent with this Section 2.5, as may be necessary or desirable to
implement this Section 2.5.
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2.6 PROCEDURE FOR PRORATION.
2.6.1 NO PRORATION OF PSP20 SHARES. If the aggregate number of
Cash Election Shares and Dissenting Shares (as defined below) of PSP20 is 20% or
less than the number of PSP20 Shares outstanding as of the record date for the
meeting of shareholders of PSP20 referred to in Section 6.2, then each Cash
Election Share of PSP20 shall be converted in the Merger into the right to
receive the Cash Election Price for PSP20 Shares.
2.6.2 PRORATION OF PSP20 SHARES. If the aggregate number of
Cash Election Shares and Dissenting Shares of PSP20 exceeds 20%, then each Cash
Election Share of PSP20 shall be converted in the Merger into the right to
receive cash or into PSI Shares as follows: the number of Cash Election Shares
of PSP20 owned by a holder of PSP20 Shares that shall be converted into the
right to receive the Cash Election Price for PSP20 Shares shall equal the number
obtained by multiplying (i) (A) 20% of outstanding PSP20 Shares less (B) the
number of Dissenting Shares (as hereinafter defined) of PSP20, if any, by (ii) a
fraction of which the numerator shall be the number of Cash Election Shares
owned by such holder and the denominator shall be the aggregate number of Cash
Election Shares of PSP20. The balance of such Cash Election Shares shall be
converted into PSI Shares in accordance with the provisions of Section 2.3.2
hereof. Notwithstanding the foregoing, PSI, in its sole discretion, may allow
Cash Election Shares of PSP20 to receive the Cash Election Price for PSP20
Shares even if the aggregate number of Cash Election Shares and Dissenting
Shares of PSP20 exceeds 20% of the number of PSP20 Shares outstanding as of the
record date for the meeting of shareholders of PSP20 referred to in Section 6.2,
provided that in no event shall the number of Cash Election Shares exceed 50% of
the outstanding PSP20 Shares.
2.7 DISSENTING SHARES. PSP20 Shares held by a holder who has demanded
and perfected his right to an appraisal of such shares in accordance with
Section 1300 et seq. of the GCLC and who has not effectively withdrawn or lost
his right to appraisal ("Dissenting Shares") shall not be converted into or
represent the right to receive cash and/or PSI Shares, but the holder thereof
shall be entitled only to such rights as are granted by Section 1300 et seq. of
the GCLC. Each holder of Dissenting Shares who becomes entitled to payment for
PSP20 Shares pursuant to these provisions of the GCLC shall receive payment
therefor from the Surviving Corporation in accordance therewith. If any holder
of PSP20 Shares who demands appraisal in accordance with Section 1300 et seq. of
the GCLC shall effectively withdraw with the consent of the Surviving
Corporation or lose (through failure to perfect or otherwise) his right to
appraisal with respect to PSP20 Shares, such PSP20 Shares shall automatically be
converted into the right to receive PSI Shares pursuant to Section 2.3.2 hereof.
2.8 PSI SHARES UNAFFECTED. The Merger shall effect no change in any
of the outstanding PSI Shares and no outstanding PSI Shares shall be converted
or exchanged as a result of the Merger, and no cash shall be exchangeable, and
no securities shall be issuable, with respect thereto.
2.9 CANCELLATION OF SHARES HELD OR OWNED BY PARTIES. At the Effective
Time, any PSP20 Shares owned by PSI shall be cancelled and retired and no shares
shall be issuable, and no cash shall be exchangeable, with respect thereto.
2.10 EXCHANGE OF CERTIFICATES. After the Effective Time, each holder
of a certificate theretofore evidencing outstanding PSP20 Shares which were
converted into PSI Shares pursuant hereto, upon surrender of such certificate to
BankBoston N.A. (the "Exchange Agent") or such other agent or agents as shall be
appointed by the Surviving Corporation, shall be entitled to receive a
certificate representing the number of whole PSI Shares into which the PSP20
Shares theretofore represented by the certificate so surrendered shall have been
converted as provided in Section 2.3.2 hereof and cash payment in lieu of
fractional share interests, if any, as provided in Section 2.4 hereof. As soon
as practicable after the Effective Time, the Exchange Agent will send a notice
and a transmittal form to each holder of PSP20 Shares of record at the Effective
Time whose stock shall have been converted into PSI Shares, advising such holder
of the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent certificates evidencing PSP20 Shares in exchange for certificates
evidencing PSI Shares.
2.11 STATUS UNTIL SURRENDERED. Until surrendered as provided in
Section 2.10 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP20 Shares (other than Cash Election Shares and Dissenting
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole
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PSI Shares into which the PSP20 Shares evidenced thereby were converted.
However, until such outstanding certificates formerly evidencing PSP20 Shares
are so surrendered, no dividend payable to holders of record of PSI Shares shall
be paid to the holders of such outstanding certificates in respect of PSP20
Shares, but upon surrender of such certificates by such holders there shall be
paid to such holders the amount of any dividends (without interest) theretofore
paid with respect to such whole PSI Shares as of any record date on or
subsequent to the Effective Time and the amount of any cash (without interest)
payable to such holder in lieu of fractional share interests pursuant to Section
2.4 hereof.
2.12 TRANSFER OF SHARES. After the Effective Time, there shall be no
further registration of transfers of PSP20 Shares on the records of PSP20 and,
if certificates formerly evidencing such shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for certificates evidencing
PSI Shares and cash in lieu of fractional share interests as herein provided.
2.13 CONVERSION OF COMMON STOCK SERIES B AND C. At the Effective
Time, subject to Section 6.8 hereof, each share of Common Stock Series B and C
($.01 par value) of PSP20 (other than shares owned by PSI) shall be converted
(or deemed to be converted) into that number of PSI Shares equal to, rounded to
the nearest thousandth, the quotient derived by dividing $10.90 by the average
per share closing prices on the NYSE of PSI Shares during the 20 consecutive
trading days ending on the fifth trading day prior to the meeting of
shareholders of PSP20 provided for in Section 6.2 hereof. If, prior to the
Effective Time, PSI should split or combine the PSI Shares, or pay a stock
dividend, such conversion number will be appropriately adjusted to reflect such
action. At the Effective Time, any Common Stock Series B and C of PSP20 owned
by PSI shall be cancelled and retired and no shares shall be issuable with
respect thereto.
3. CLOSING.
3.1 TIME AND PLACE OF CLOSING. If this Agreement is approved by the
shareholders of PSP20, a meeting (the "Closing") shall take place as promptly as
practicable thereafter at which the applicable parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as PSI may designate. The date of the
Closing shall be referred to as the "Closing Date."
3.2 EXECUTION AND FILING OF MERGER AGREEMENT. At or before the
Closing and after shareholder approval of PSP20, the applicable parties shall
execute and deliver the Merger Agreement, together with the requisite Officers'
Certificates, for filing with the California Secretary of State. The Merger
Agreement, together with the requisite Officers' Certificates, shall be duly
filed with the California Secretary of State in accordance with the GCLC as soon
as practicable following the Closing.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSP20. PSP20 represents,
warrants and agrees with PSI that:
4.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of PSP20, (i) the execution, delivery and performance of this
Agreement by PSP20 has been duly authorized and approved by all necessary
corporate action of PSP20, and (ii) PSP20 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.2 ORGANIZATION AND RELATED MATTERS. PSP20 is a corporation duly
organized, existing and in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSP20. PSP20 has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
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4.3 CAPITAL STOCK. The authorized capital stock of PSP20 consists
solely of (i) 1,393,709 shares of Common Stock Series A ($.01 par value),
860,734 of which were issued and outstanding as of December 31, 1997, (ii)
90,859 shares of Common Stock Series B ($.01 par value), all of which were
issued and outstanding as of December 31, 1997 and (iii) 257,432 shares of
Common Stock Series C ($.01 par value), all of which were issued and outstanding
as of December 31, 1997. All of the issued and outstanding shares of Common
Stock Series A, B and C of PSP20 have been duly and validly authorized and
issued, and are fully paid and nonassessable. There are no options or
agreements to which PSP20 is a party or by which it is bound calling for or
requiring the issuance of any of PSP20's capital stock, except that the shares
of Common Stock Series B and C are convertible into shares of Common Stock
Series A in accordance with PSP20's Articles of Incorporation.
4.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of the
Merger and of this Agreement by the shareholders of PSP20, neither the execution
and delivery of this Agreement nor the consummation by PSP20 of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which PSP20 is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of PSP20's real property, (E) as may be required by any applicable
state securities or takeover laws, or (F) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on PSP20
or adversely affect the ability of PSP20 to consummate the transactions
contemplated hereby; (iii) result in a violation or breach of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, mortgage,
agreement or other instrument or obligation to which PSP20 is a party or any of
its properties or assets may be bound, except for such violations, breaches and
defaults which, in the aggregate, would not have a material adverse effect on
PSP20 or adversely affect the ability of PSP20 to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PSP20 or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSP20 or adversely affect the ability of PSP20 to consummate the
transactions contemplated hereby.
4.5 LITIGATION. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSP20, threatened against PSP20 or
involving any of its properties or assets.
4.6 SEC REPORTS. Since January 1, 1994, PSP20 has filed all forms,
reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the rules
and regulations promulgated by the SEC thereunder, all of which complied in all
material respects with all applicable requirements of the federal securities
laws and such rules and regulations (collectively, the "PSP20 SEC Reports").
None of the PSP20 SEC Reports, including without limitation any financial
statements or schedules included therein, at the time filed contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4.7 FINANCIAL STATEMENTS. The financial statements included in the
PSP20 SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSP20
as of their respective dates, and the results of operations of PSP20 for the
periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
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4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1997, the
business of PSP20 has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS.
None of the information supplied or to be supplied by PSP20 for inclusion or
incorporation by reference in the S-4 Registration Statement or the Proxy
Statement and Prospectus (as such terms are defined in Section 6.5 hereof) will
(i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meetings of the
shareholders of PSP20, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
4.10 INSURANCE. All material insurance of PSP20 is currently in full
force and effect and PSP20 has reported all claims and occurrences to the extent
required by such insurance.
4.11 DISCLOSURE. The representations and warranties by PSP20 in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSI. PSI hereby
represents, warrants and agrees with PSP20 that:
5.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement by PSI have been duly authorized and approved by all necessary
corporate action of PSI, and PSI has all necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
complete the transactions contemplated hereby.
5.2 ORGANIZATION AND RELATED MATTERS. PSI is a corporation duly
organized, existing and in good standing under the laws of the State of
California, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSI.
5.3 CAPITAL STOCK. The authorized capital stock of PSI consists
solely of (i) 200,000,000 shares of Common Stock ($.10 par value), 105,102,145
of which were issued and outstanding as of December 31, 1997, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of December 31, 1997, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 13,261,884 of which were issued and outstanding as of December
31, 1997 and (iv) 200,000,000 shares of Equity Stock ($.01 par value), 225,000
of which were issued and outstanding at December 31, 1997. All of the issued and
outstanding shares of Common Stock, Class B Common Stock, Preferred Stock and
Equity Stock of PSI have been duly and validly authorized and issued, and are
fully paid and nonassessable. The issuance of the PSI Shares in the Merger has
been duly and validly autho rized and, when issued and delivered as provided in
this Agreement, the PSI Shares will have been duly and validly issued, fully
paid and nonassessable; and the shareholders of PSI have no preemptive rights
with respect to any shares of capital stock of PSI.
5.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement nor the consummation by PSI of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization
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or permit of, or filing with or notification to, any governmental or regulatory
authority, except (A) in connection with the applicable requirements, if any, of
the HSR Act, (B) pursuant to the applicable requirements of the federal
securities laws and the rules and regulations promulgated thereunder, (C) the
filing of the Merger Agreement and Officers' Certificates pursuant to the GCLC
and appropriate documents with the relevant authorities of other states in which
PSI is authorized to do business, (D) in connection with any state or local tax
which is attributable to the beneficial ownership of the real property of PSP20,
(E) as may be required by any applicable state securities or takeover laws, or
(F) where the failure to obtain such consent, approval, authorization or permit,
or to make such filing or notification, would not in the aggregate have a
material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, mortgage, agreement or other instrument or obligation to
which PSI is a party or any of its properties or assets may be bound, except for
such violations, breaches and defaults which, in the aggregate, would not have a
material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
this Section 5.4 are duly and timely obtained or made, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to PSI or its
properties or assets, except for violations which would not in the aggregate
have a material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby.
5.5 LITIGATION. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSI, threatened against PSI or
involving any of its properties or assets.
5.6 SEC REPORTS. Since January 1, 1994, PSI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 FINANCIAL STATEMENTS. The financial statements included in PSI's
SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSI as
of their respective dates, and the results of operations of PSI for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1997, the
business of PSI has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
5.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS.
None of the information supplied or to be supplied by PSI for inclusion or
incorporation by reference in the S-4 Registration Statement or the Proxy
Statement and Prospectus (as those terms are defined in Section 6.5 hereof) will
(i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meetings of the
shareholders of PSP20, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
5.10 INSURANCE. All material insurance of PSI is currently in full
force and effect and PSI has reported all claims and occurrences to the extent
required by such insurance.
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5.11 DISCLOSURE. The representations and warranties by PSI in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
6. COVENANTS AND AGREEMENTS.
6.1 ORDINARY COURSE. Except as contemplated by this Agreement, during
the period from the date of this Agreement to the Effective Time, each of PSI
and PSP20 will carry on its business in the ordinary course in substantially the
same manner as heretofore conducted and use all reasonable efforts to: (a)
preserve intact its present business, organization and goodwill, (b) maintain
all permits, licenses and authorizations required by applicable laws, and (c)
keep available the services of its present employees and preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. PSP20 will not issue
any capital stock or debt securities convertible into capital stock. PSI and
PSP20 will promptly notify the others of any event or occurrence not in the
ordinary and usual course of business or which may have a material adverse
effect on the properties or financial condition of such party.
6.2 MEETINGS OF SHAREHOLDERS. PSP20 will take all action necessary in
accordance with applicable law to convene a meeting of its shareholders as
promptly as practicable to consider and vote upon approval of this Agreement, it
being understood that the principal terms of the Agreement must be approved by
the affirmative vote of a majority of the outstanding shares of Common Stock
Series A, B and C of PSP20, counted together as a single class with the shares
of Common Stock Series B and C voted with the holders of a majority of the
unaffiliated shares of Common Stock Series A.
6.3 TAX REPORTING. Each of PSI and PSP20 agrees to report the Merger
for federal and state income tax purposes, as a reorganization of the type
described in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
6.4 ACQUISITION PROPOSALS. PSP20 will not initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving PSP20, or any purchase of all or any significant portion of either of
their assets, or any equity interest in either of them, other than the
transactions contemplated hereby (an "Acquisition Proposal"), or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal;
provided, however, that the Board of Directors of PSP20 may furnish or cause to
be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
and discussions might cause the members of the Board of Directors of PSP20 to
breach their fiduciary duty to the shareholders of PSP20 under applicable law as
advised by counsel. PSP20 will notify PSI immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with PSP20,
and will keep PSI informed of the status and terms of any such proposals and any
such negotiations or discussions.
6.5 REGISTRATION AND PROXY STATEMENTS. PSP20 will promptly prepare
and file with the SEC a preliminary proxy statement in connection with the vote
of shareholders of PSP20 with respect to the Merger. PSI will, as promptly as
practicable, prepare and file with the SEC a registration statement on Form S-4
(the "S-4 Registration Statement"), containing a combined proxy
statement/prospectus, in connection with the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the PSI Shares to be issued to
holders of PSP20 Shares in the Merger (such combined proxy statement/prospectus,
together with any amendments thereof or supplements thereto, in each case in the
form or forms to be mailed to the shareholders of PSP20, being herein called the
"Proxy Statement and Prospectus"). PSI and PSP20 will use their best efforts to
have or cause the S-4 Registration Statement to be declared effective as
promptly as practicable, and also will take any other action required to be
taken under federal or state securities laws, and PSP20 will use its best
efforts to cause the Proxy Statement and Prospectus to be mailed to its
shareholders at the earliest practicable date. PSP20 agrees that if at any time
prior to the Effective Time any event with respect to PSP20 should occur which
is required to be described in an amendment of, or a supplement to, the Proxy
Statement and Prospectus or the S-4 Registration Statement, such event shall be
so described, and such
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amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the shareholders of PSP20 and (ii) the Proxy Statement and
Prospectus will (with respect to PSP20) comply as to form in all material
respects with the requirements of the federal securities laws. PSI agrees that
(i) if at any time prior to the Effective Time any event with respect to PSI
should occur which is required to be described in an amendment of, or a
supplement to, the Proxy Statement and Prospectus or the S-4 Registration
Statement, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of PSP20 and (ii) the Proxy Statement and Prospectus will (with
respect to PSI) comply as to form in all material respects with the requirements
of the federal securities laws.
6.6 BEST EFFORTS. Each of PSI and PSP20 shall: (i) promptly make its
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best efforts to promptly take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 REGISTRATION AND LISTING OF PSI SHARES. PSI will use its best
efforts to register the PSI Shares under the applicable provisions of the
Securities Act and to cause the PSI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 DISTRIBUTIONS. PSP20 will not, at any time prior to the Effective
Time, declare or pay any cash distribution on its capital stock or make any
other distribution of assets to its shareholders, except (i) regular quarterly
dividends on its Common Stock at a quarterly rate not in excess of $.28 per
share, (ii) distributions to shareholders of record immediately prior to the
Effective Time in an aggregate amount equal to the amount by which the estimated
Net Asset Value of PSP20 (as defined below) allocable to the shareholders as of
the Effective Time exceeds $22.57 per share in the case of the PSP20 Shares and
$10.90 per share in the case of the PSP20 Common Stock Series B and C and (iii)
pre-Merger cash distributions required to satisfy PSP20's REIT distribution
requirements (the number of PSI Shares issued in the Merger and the amount
receivable upon Cash Elections would be reduced on a pro rata basis in an
aggregate amount equal to such additional distributions). For this purpose, the
Net Asset Value of PSP20 is the sum of (a) the fair market value of PSP20's real
estate assets as determined by appraisal by The Nicholson Group, Ltd. as of
October 31, 1997, and (b) the book value of PSP20's non-real estate assets as of
the date of determination, and less (c) PSP20's liabilities as of the date of
determination. The determination of book value and liabilities shall be from
PSP20's financial statements prepared in accordance with generally accepted
accounting principles on a basis consistent with prior periods.
7. CONDITIONS.
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or prior to the Closing of each of
the following conditions, any or all of which may be waived in whole or in part,
to the extent permitted by applicable law:
7.1.1 PSP20 SHAREHOLDER APPROVAL. This Agreement and the
transactions contemplated hereby shall have been duly approved by the
shareholders of PSP20 as contemplated by Section 6.2.
7.1.2 GOVERNMENTAL AND REGULATORY CONSENTS. All filings required
to be made prior to the Effective Time with, and all consents, approvals,
permits and authorizations required to be obtained prior to the Effective Time
from, governmental and regulatory authorities in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby (including the expiration of the waiting period requirements
of the HSR Act) shall have been made or obtained (as the case may be) without
material restrictions, except where the failure to obtain such consents,
approvals, permits and authorizations could not reasonably be expected to have a
material adverse effect on PSI, PSP20.
7.1.3 LITIGATION. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree,
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injunction or other order (whether temporary, preliminary or permanent) or taken
any action which prohibits the consummation of the transactions contemplated by
this Agreement; provided, however, that the party invoking this condition shall
use its best efforts to have any such judgment, decree, injunction or other
order vacated.
7.1.4 REGISTRATION STATEMENT. The S-4 Registration Statement
shall have been declared effective and no stop order suspending effectiveness
shall have been issued, no action, suit, proceeding or investigation by the SEC
to suspend the effectiveness thereof shall have been initiated and be
continuing, and all necessary approvals under federal and state securities laws
relating to the issuance or trading of the PSI Shares shall have been received.
7.1.5 LISTING OF PSI SHARES ON NYSE. The PSI Shares shall have
been approved for listing on the NYSE upon official notice of issuance.
7.1.6 FAIRNESS OPINION. The Boards of Directors of PSP20 shall
have received the opinion of Robert A. Stanger & Co., Inc. in form and substance
satisfactory to them to the effect that the consideration to be received by the
shareholders of PSP20 in the Merger is fair to such shareholders from a
financial point of view, and such opinion shall not have been withdrawn or
revoked.
7.1.7 TAX OPINION. The Boards of Directors of PSI and PSP20 shall
have received a legal opinion of Hogan & Hartson L.L.P. that the Merger will
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
7.1.8 PSI BOARD APPROVAL. This Agreement and the transactions
contemplated hereby shall have been duly approved by the Board of Directors of
PSI.
7.2 CONDITIONS TO OBLIGATIONS OF PSI. The obligations of PSI to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSI to the extent permitted by applicable law:
7.2.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSP20 contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSP20 shall have performed or complied with all agreements
and covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
7.2.2 CERTIFICATE OF OFFICERS. PSI shall have received such
certificates of officers of PSP20 as PSI may reasonably request in connection
with the Closing, including upon request a certificate satisfactory to it of the
Chief Executive Officer and the Chief Financial Officer of PSP20, to the effect
that, to the best of their knowledge, all representations and warranties of
PSP20 contained in this Agreement are true and correct in all material respects
at and as of the Closing Date as if made at and as of the Closing Date, and
PSP20 have performed or complied with all agreements and covenants required by
this Agreement to be performed or complied with by them at or prior to the
Closing.
7.2.3 TITLE TO PROPERTIES; ENVIRONMENTAL AUDITS. PSI in its sole
discretion shall be satisfied as to the status of title to (including the
existence and effect of liens and encumbrances), and the results of an
environmental audit of, each of the real properties owned by PSP20.
7.2.4 TRADING PRICE OF PSI SHARES. The average of the per share
closing prices of the PSI Shares on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the meeting of shareholders of
PSP20 provided for in Section 6.2 hereof (the "Average PSI Share Price") shall
be not less than $28.
7.2.5 DISSENTING SHARES. The number of Dissenting Shares shall be
less than 5% of the outstanding PSP20 Shares.
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7.3 CONDITIONS TO OBLIGATIONS OF PSP20. The obligations of PSP20 to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSP20 to the extent permitted by applicable law.
7.3.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSI contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSI shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing.
7.3.2 CERTIFICATE OF OFFICERS. PSP20 shall have received such
certificates of officers of PSI as PSP20 may reasonably request in connection
with the Closing, including upon request a certificate satisfactory to them of
the Chief Executive Officer and the Chief Financial Officer of PSI, to the
effect that, to the best of their knowledge, all representations and warranties
of PSI contained in this Agreement are true and correct in all material respects
at and as of the Closing Date as if made at and as of the Closing Date, and PSI
has performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing.
8. TERMINATION.
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after shareholder approval, by the mutual written consent of PSI, PSP20.
8.2 TERMINATION BY PSI, PSP20. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of PSI, PSP20 if
(i) the Merger shall not have been consummated by December 31, 1998 (provided
that the right to terminate this Agreement under this Section 8.2(i) shall not
be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); (ii) any court of competent jurisdiction in the
United States or some other governmental body or regulatory authority shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable; or
(iii) the shareholders of PSP20 shall have failed to approve this Agreement and
the transactions contemplated hereby at its meeting of shareholders.
8.3 TERMINATION BY PSI. This Agreement may be terminated by PSI, and
the Merger may be abandoned at any time prior to the Effective Time, as to the
defaulting party if (i) PSP20 shall have failed to comply in any material
respect with any of the covenants, conditions or agreements contained in this
Agreement to be complied with or performed by such party at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to such party of such failure to comply, or (ii)
any representation or warranty of PSP20 contained in this Agreement shall not be
true in all material respects when made, which inaccuracy or breach (if capable
of cure) has not been cured within five business days following notice to such
party of the inaccuracy or breach, or on and as of the Closing as if made on and
as of the Closing Date.
8.4 TERMINATION BY PSP20. This Agreement may be terminated by PSP20
and the Merger may be abandoned at any time prior to the Effective Time, before
or after shareholder approval, if (i) PSI shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in this Agreement to be complied with or performed by PSI at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to PSI of such failure to comply, or (ii) any
representation or warranty of PSI contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or beach (if capable of
cure) has not been cured within five business days following notice to PSI of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Section 8, no party (or any directors, officers, employees, agents or
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representatives of any party) shall have any liability or further obligation to
any other party or any person who controls a party within the meaning of the
Securities Act, except as provided in Section 9.1 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
9. MISCELLANEOUS.
9.1 PAYMENT OF EXPENSES. If the Merger are consummated, the Surviving
Corporation shall pay all the expenses incident to preparing for, entering into
and carrying out this Agreement and the consummation of the transactions
contemplated hereby. If the Merger are not consummated, each of PSI and PSP20
shall pay its own expenses, except that any expenses incurred in connection with
the printing of the S-4 Registration Statement and the Proxy Statement and
Prospectus, the real estate appraisals and environmental audits of the
properties of PSP20 and preparation for real estate closings, and any filing
fees under the HSR Act, the Securities Act and the Securities Exchange Act of
1934, as amended shall be paid 50% by PSI and 50% by PSP20.
9.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
respective representations and warranties of PSI and PSP20 contained herein or
in any certificate or document delivered pursuant hereto shall expire with and
be terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 MODIFICATION OR AMENDMENT. The parties may modify or amend this
Agreement by written agreement authorized by the Boards of Directors and
executed and delivered by officers of the respective parties; provided, however,
that after approval of this Agreement by the shareholders of a party, no
amendment shall be made which changes any of the principal terms of the Merger
or this Agreement, without the approval of such shareholders.
9.4 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the principles of conflict of laws thereof.
9.6 INTERPRETATION. This Agreement has been negotiated by the parties
and is to be interpreted according to its fair meaning as if the parties had
prepared it together and not strictly for or against any party. Each of the
capitalized terms defined in this Agreement shall, for all purposes of this
Agreement (and whether defined in the plural and used in the singular, or vice
versa), have the respective meaning assigned to such term in the Section in
which such meaning is set forth. References in this Agreement to "parties" or a
"party" refer to parties to this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation."
9.7 HEADINGS. The descriptive headings contained in the Sections and
subsections of this Agreement are for convenience of reference only and shall
not affect in any way the meaning or interpretation of this Agreement.
9.8 PARTIES IN INTEREST. This Agreement, and the rights, interests
and obligations created by this Agreement, shall bind and inure to the benefit
of the parties and their respective successors and permitted assigns, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
9.9 NOTICES. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or sent by U.S. mail, postage prepaid, addressed as follows or such
other address as the party to be notified has furnished in writing by a notice
given in accordance with this Section 9.9:
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If to PSI:
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PSP20:
Public Storage Properties XX, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: B. Wayne Hughes
Chief Executive Officer
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
9.11 ASSIGNMENT. No rights, interests or obligations of either party
under this Agreement may be assigned or delegated without the prior written
consent of the other party.
9.12 ENTIRE AGREEMENT. This Agreement, including the Merger
Agreement, embodies the entire agreement and understanding between the parties
pertaining to the subject matter hereof, and supersedes all prior agreements,
understandings, negotiations, representations and discussions, whether written
or oral.
9.13 SEVERABLE PROVISIONS. If any of the provisions of this Agreement
may be determined to be illegal or otherwise unenforceable, in whole or in part,
the remaining provisions, and any partially enforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.
9.14 FURTHER ACTION. If at any time after the Effective Time, the
Surviving Corporation shall determine that any assignments, transfers, deeds or
other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSP20, the officers of any Constituent Corporation are fully
authorized in the name of PSP20 or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
---------------------------
Harvey Lenkin
President
PUBLIC STORAGE PROPERTIES XX, INC.
By: /s/ B. WAYNE HUGHES
---------------------------
B. Wayne Hughes
Chief Executive Officer
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Exhibit A to
Appendix A
----------
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this
_____ day of _______________, 1998, by and between PUBLIC STORAGE, INC., a
California corporation ("PSI"), and PUBLIC STORAGE PROPERTIES XX, INC., a
California corporation ("PSP20"), with reference to the following:
A. PSI was incorporated in 1980 under the laws of California, and on
the date hereof its authorized capital stock consists of 200,000,000 shares of
Common Stock, $.10 par value (the "PSI Shares"), ___________ of which are issued
and outstanding, 7,000,000 shares of Class B Common Stock, $.10 par value, all
of which are issued and outstanding, 50,000,000 shares of Preferred Stock, $.01
par value, ___________ of which are issued and outstanding and 200,000,000
shares of Equity Stock, $.01 par value, _______________ of which are issued and
outstanding.
B. PSP20 was incorporated in 1990 under the laws of California, and
on the date hereof has outstanding __________ shares of Common Stock Series A,
$.01 par value (the "PSP20 Shares"), _________ shares of Common Stock Series B
and _________ shares of Common Stock Series C.
C. PSI and PSP20 have entered into an Agreement and Plan of
Reorganization dated as of February 13, 1998 (the "Plan"), setting forth certain
representations, warranties, conditions and agreements pertaining to the Merger
(as defined below).
D. The Boards of Directors of PSI and PSP20 have approved the Plan
and this Agreement of Merger, and the requisite shareholder approval has been
obtained.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
---------
1.1 THE MERGER. At the Effective Time (as defined below), PSP20
will be merged with and into PSI (the "Merger") and PSI shall be the surviving
corporation. PSI and PSP20 are sometimes collectively referred to herein as the
"Constituent Corporations" and PSI, as the surviving corporation of the Merger,
is sometimes referred to herein as the "Surviving Corporation."
1.2 EFFECTIVE TIME. The Merger shall become effective at the
time at which this Agreement, together with the requisite Officers' Certificates
of PSI and PSP20, are filed with the California Secretary of State (the
"Effective Time").
1.3 EFFECT OF THE MERGER. At the Effective Time:
(a) The separate corporate existence of PSP20 shall cease and the
Surviving Corporation shall thereupon succeed, without other transfer, to all
the rights and property of PSP20 and shall be subject to all the debts and
liabilities of PSP20 in the same manner as if the Surviving Corporation had
itself incurred them; all rights of creditors and all liens upon the property of
each of the Constituent Corporations shall be preserved unimpaired, provided
that such liens upon property of PSP20 shall be limited to the property affected
thereby immediately prior to the Effective Time; and any action or proceeding
pending by or against PSP20 may be prosecuted to judgment, which shall bind the
Surviving Corporation, or the Surviving Corporation may be proceeded against or
substituted in its place.
E.A-1
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(b) The Articles of Incorporation and the Bylaws of PSI, as
then amended, shall continue to be the Articles of Incorporation and the Bylaws
of the Surviving Corporation until changed as provided by law and their
respective provisions.
(c) The directors of PSI shall continue as directors of the
Surviving Corporation until their successors are elected and qualified as
provided by law and in accordance with the Articles of Incorporation and Bylaws
of the Surviving Corporation.
ARTICLE II
----------
2.1 CONVERSION OF PSP20 SHARES. The manner of converting the
outstanding PSP20 Shares into cash and/or PSI Shares shall be as follows:
(a) At the Effective Time, subject to Section 2.6 of the Plan,
each PSP20 Share as to which a cash election has been made in accordance with
the provisions of Section 2.5 of the Plan and has not been revoked, relinquished
or lost pursuant to Section 2.5 of the Plan (the "Cash Election Shares") shall
be converted into and shall represent the right to receive $_______ in cash (the
"Cash Election Price"). As soon as practicable after the Effective Time, the
registered holders of Cash Election Shares shall be paid the cash to which they
are entitled hereunder in respect of such Cash Election Shares.
(b) At the Effective Time, subject to Sections 2.4, 2.5 and
2.7 of the Plan, each PSP20 Share (other than Cash Election Shares and PSP20
Shares owned by PSI) shall be converted into ______ PSI Shares.
2.2 NO FRACTIONAL SHARES. Notwithstanding any other term or
provision of this Agreement or the Plan, no fractional PSI Shares and no
certificates or script therefor, or other evidence of ownership thereof, will be
issued in the Merger. In lieu of any such fractional share interests, each
holder of PSP20 Shares who would otherwise be entitled to such fractional share
will, upon surrender of the certificate representing such PSP20 Shares, receive
a whole PSI Share if such fractional share to which such holder would otherwise
have been entitled is .5 of an PSI Share or more, and such fractional share
shall be disregarded if it represents less than .5 of an PSI Share; provided,
however, that, such fractional share shall not be disregarded if such fractional
share to which such holder would otherwise have been entitled represents .5 of
1% or more of the total number of PSI Shares such holder is entitled to receive
in the Merger. In such event, such holder shall be paid an amount in cash
(without interest), rounded to the nearest $.01, determined by multiplying (i)
the per share closing price on the New York Stock Exchange, Inc. of the PSI
Shares at the Effective Time by (ii) the fractional interest.
2.3 DISSENTING SHARES. PSP20 Shares held by a holder who has
demanded and perfected his right to an appraisal of such shares in accordance
with Section 1300 et seq. of the General Corporation Law of California (the
"GCLC") and who has not effectively withdrawn or lost his right to appraisal
("Dissenting Shares") shall not be converted into or represent the right to
receive cash and/or PSI Shares, but the holder thereof shall be entitled only to
such rights as are granted by Section 1300 et seq. of the GCLC. Each holder of
Dissenting Shares who becomes entitled to payment for PSP20 Shares pursuant to
these provisions of the GCLC shall receive payment therefor from the Surviving
Corporation in accordance therewith. If any holder of PSP20 Shares who demands
appraisal in accordance with Section 1300 et seq. of the GCLC shall effectively
withdraw with the consent of the Surviving Corporation or lose (through failure
to perfect or otherwise) his right to appraisal with respect to PSP20 Shares,
such PSP20 Shares shall automatically be converted into the right to receive PSI
Shares pursuant to Section 2.1(b) hereof.
2.4 PSI SHARES UNAFFECTED. The Merger shall effect no change in
any of the outstanding PSI Shares and no outstanding PSI Shares shall be
converted or exchanged as a result of the Merger, and no cash shall be
exchangeable and no securities shall be issuable, with respect thereto.
2.5 CANCELLATION OF SHARES HELD OR OWNED BY PARTIES. At the
Effective Time, any PSP20 Shares owned by PSI shall be cancelled and retired and
no shares shall be issuable, and no cash shall be exchangeable, with respect
thereto.
E.A-2
<PAGE>
2.6 EXCHANGE OF CERTIFICATES. After the Effective Time, each
holder of a certificate theretofore evidencing outstanding PSP20 Shares which
were converted into PSI Shares pursuant hereto, upon surrender of such
certificate to BankBoston N.A. (the "Exchange Agent") or such other agent or
agents as shall be appointed by the Surviving Corporation, shall be entitled to
receive a certificate representing the number of whole PSI Shares into which the
PSP20 Shares theretofore represented by the certificate so surrendered shall
have been converted and cash payment in lieu of fractional share interests, if
any. As soon as practicable after the Effective Time, the Exchange Agent will
send a notice and a transmittal form to each holder of PSP20 Shares of record at
the Effective Time whose stock shall have been converted into PSI Shares,
advising such holder of the effectiveness of the Merger and the procedure for
surrendering to the Exchange Agent certificates evidencing PSP20 Shares in
exchange for certificates evidencing PSI Shares.
2.7 STATUS UNTIL SURRENDERED. Until surrendered as provided in
Section 2.6 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP20 Shares (other than Cash Election Shares and Dissenting
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole PSI Shares into which the PSP20 Shares evidenced thereby
were converted. However, until such outstanding certificates formerly evidencing
PSP20 Shares are so surrendered, no dividend payable to holders of record of PSI
Shares shall be paid to the holders of such outstanding certificates in respect
of PSP20 Shares, but upon surrender of such certificates by such holders there
shall be paid to such holders the amount of any dividends (without interest)
theretofore paid with respect to such whole PSI Shares as of any record date on
or subsequent to the Effective Time and the amount of any cash (without
interest) payable to such holder in lieu of fractional share interests.
2.8 TRANSFER OF SHARES. After the Effective Time, there shall be
no further registration of transfers of PSP20 Shares on the records of PSP20
and, if certificates formerly evidencing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged for certificates
evidencing PSI Shares and cash in lieu of fractional share interests as herein
provided.
2.9 CONVERSION OF COMMON STOCK SERIES B AND C. At the Effective
Time, each share of Common Stock Series B (other than shares owned by PSI) shall
be converted into ______ PSI Shares and each share of Common Stock Series C
(other than shares owned by PSI) shall be converted into ______ PSI Shares.
ARTICLE III
-----------
3.1 HEADINGS. The descriptive headings contained in the
Sections of this Agreement are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
3.2 PARTIES IN INTEREST. This Agreement, and the rights,
interests and obligations created by this Agreement, shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 FURTHER ACTION. If at any time after the Effective Time,
the Surviving Corporation shall determine that any assignments, transfers, deeds
or other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSP20, the officers of either Constituent Corporation are fully
authorized in the name of PSP20 or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
3.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
3.6 ABANDONMENT OF MERGER. The Constituent Corporations have
the power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
E.A-3
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PUBLIC STORAGE, INC.
By: ________________________________
Harvey Lenkin
President
By: ________________________________
Obren B. Gerich
Assistant Secretary
PUBLIC STORAGE PROPERTIES XX, INC.
By: ________________________________
Harvey Lenkin
President
By: ________________________________
Obren B. Gerich
Secretary
E.A-4
<PAGE>
[LETTERHEAD OF THE NICHOLSON GROUP, LTD.]
APPENDIX B
__________
555 Industrial Drive
Suite 207
Hartland, Wisconsin 53029
Phone (414) 369-5400 Fax (414) 369-5401
________________________________________________________________________________
February 9, 1998
PUBLIC STORAGE PROPERTIES XX, INC.
701 Western Avenue
Glendale, California 91201
Subject: PUBLIC STORAGE PROPERTIES XX, INC.: A SEVEN PROPERTY PORTFOLIO
<TABLE>
<C> <S> <C> <C>
02001 2250 W. 117th Street Cleveland OH
02002 5570 Airdrome Street Los Angeles CA
02003 945 N. Farnsworth Aurora IL
02004 914 Hopper Avenue Santa Rosa CA
02005 2300 Winnetka Golden Valley MN
02006 11837 Benham Road St. Louis MO
02007 8484 S. South Chicago Avenue Chicago IL
</TABLE>
Gentlemen:
We have completed a limited appraisal of the real estate identified above and
submit our findings in this Restricted Appraisal Report. We understand that our
valuation opinion will be utilized in conjunction with the proposed merger of
Public Storage Properties XX, Inc. into Public Storage, Inc. and may be included
or referred to in solicitation materials filed with the Securities and Exchange
Commission and distributed to shareholders of Public Storage Properties XX, Inc.
and Public Storage, Inc.
This report is a Restricted Appraisal Report which is intended to comply with
the reporting requirements set forth under Standards Rule 2-2(c) of the Uniform
Standards of Professional Appraisal Practice for a Restricted Appraisal Report.
As such, it does not include discussions of the data, reasoning, and analyses
that were used in the appraisal process to develop the appraiser's opinion of
value. Supporting documentation concerning the data, reasoning, and analyses is
retained in the appraiser's file. The depth of discussion contained in this
report is specific to the needs of the client and for the intended use stated
above. The appraiser is not responsible for unauthorized use of this report.
<PAGE>
Public Storage Properties XX, Inc.
Page 2
________________________________________________________________________________
Furthermore, as agreed, this report is the result of a limited appraisal process
in that certain allowable departures from specific guidelines of the Uniform
Standards of Appraisal Practice were invoked. The valuation analysis has
considered all appropriate approaches to value: the Cost, Income Capitalization
and Sales Comparison approaches. Our appraisal is limited in that we physically
inspected the subject properties, conducted some investigative market due
diligence, and have relied primarily on the Income Capitalization Approach to
value; the results were then compared to the indicated value by the Sales
Comparison Approach which used a regression analysis of sales of self-storage
facilities located throughout the nation. The Cost Approach was not considered
appropriate since today's investors do not rely upon the Cost Approach in making
investment decisions. Given the income-producing nature of the subject
properties, the Income Capitalization Approach is considered the most applicable
approach to value. Utilizing this methodology, in our opinion, we have performed
all actions necessary to ensure a fair valuation of the portfolio.
The general analytical process that was undertaken included a review of the each
property's unit mix, rental rates and historical financial statements.
Following these reviews a stabilized level of operating income was projected for
each property. The value estimate by the Income Capitalization Approach was
then made using direct capitalization and a discounted cash flow analysis. As
additional support for the indicated value for the self-storage properties, we
prepared a regression analysis on sales of self-storage properties that have
occurred throughout the nation in 1996 and 1997. Based upon a correlation of
these methodologies, we arrived at an opinion of value for the portfolio of
properties. Lastly, as a reasonableness check, the resultant property and
portfolio level capitalization rates were compared to reported capitalization
rates of recent and pending transactions of self-storage property portfolios,
some of which involved Public Storage, Inc., as a party to the transaction.
Historical operating statements, unit mix, net rentable area, rental rates and
other property-specific data for the properties appraised were furnished by
Public Storage, Inc. These financial operating statements and other information
have been accepted as correctly representing operations and conditions of the
subject properties.
Assets included within the scope of our valuation include land, land
improvements, building improvements, and all fixed service equipment. Assets
excluded are furniture, fixtures, machinery or equipment, personal property,
supplies, materials on hand, inventories, company records, and any current or
intangible assets that may exist.
We have made no investigations of, nor assume any responsibility for the
existence or impact of any hazardous substance, which may or may not be present
on the properties, in the development of our limited appraisal opinion.
<PAGE>
Public Storage Properties XX, Inc.
Page 3
________________________________________________________________________________
Market value is generally defined as:
"the most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and seller
each acting prudently and knowledgeably, and assuming the price is not affected
by undue stimulus. Implicit in this definition is the consummation of a sale
as of a specified date and the passing of title from seller to buyer under
conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised and acting in what they
consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale."
Fee Simple Interest (Estate) is defined as:
"Absolute ownership unencumbered by any other interest or estate, subject only
to the limitations imposed by the governmental powers of taxation, eminent
domain, police power, and escheat."
The market value estimate set forth herein assumes that the portfolio of
properties would be disposed of in an orderly manner, allowing sufficient time
for exposure on the open market.
Based upon the analyses as described, it is our opinion, as of October 1, 1997,
that the market value of the fee simple interest in the Public Storage
Properties XX, Inc., seven property portfolio, is:
TWENTY TWO MILLION TWO HUNDRED THOUSAND DOLLARS
($22,200,000)
Our compensation was not contingent upon the reporting of a predetermined value
or direction in value that favors the cause of the client, the amount of the
value estimate, the attainment of a stipulated result, the occurrence of a
subsequent event, or the approval of a loan.
<PAGE>
Public Storage Properties XX, Inc.
Page 4
________________________________________________________________________________
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that he has the professional qualifications and
competency necessary to complete this appraisal assignment in an appropriate
manner.
No investigation was made of the title to, or any liabilities against the
property appraised.
Respectfully submitted,
THE NICHOLSON GROUP, LTD.
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
Professional Assistance By:
Michael J. Tompkins
Ann M. Donohoo
attachments
97060
<PAGE>
Public Storage Properties XX, Inc.
Page 5
________________________________________________________________________________
EXHIBIT A
ASSUMPTIONS AND LIMITING CONDITIONS
As agreed upon with the clients prior to the preparation of this appraisal, this
is a Limited Appraisal; it invokes the Departure Provision of the Uniform
Standards of Professional Appraisal Practice. The intended user of this report
is warned that the reliability of the value conclusion provided may be impacted
to the degree there is a departure from specific guidelines of USPAP. Although
the Departure Provision has been invoked, it is our opinion that we have
performed actions necessary to develop an opinion as to the market value of the
portfolio.
This is a Restricted Report which is intended to comply with the reporting
requirements set forth under Standards Rule 2-2(c) of the Uniform Standards of
Professional Appraisal Practice for a Restricted Appraisal Report. As such, it
does not include discussions of the data, reasoning, and analyses that were used
in the appraisal process to develop the appraiser's opinion of value. Supporting
documentation concerning the data, reasoning, and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is specific
to the needs of the client and for the intended use stated above. The appraiser
is not responsible for unauthorized use of this report.
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property appraised.
The appraisal presumes, unless otherwise noted, that the owner's claim is valid,
the property rights are good and marketable, and there are no encumbrances which
cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, coal, or other subsurface mineral and
use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remediation cost.
<PAGE>
Public Storage Properties XX, Inc.
Page 6
________________________________________________________________________________
ASSUMPTIONS AND LIMITING CONDITIONS, CONTINUED
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. Unless otherwise noted, this date represents the last
date of our physical inspection of the property. The value opinion herein
rendered is based on the status of the national business economy and the
purchasing power of the U.S. dollar as of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this appraisal report is a member or candidate
of the Appraisal Institute. The Bylaws and Regulations of the Institute require
each member and candidate to control the use and distribution of each appraisal
report signed by them.
Except as specifically presented in the letter of transmittal, possession of
this report or any copy thereof does not carry with it the right of publication.
No portion of this report (especially any conclusion of value, the identity of
the appraiser or the firm with which he/she is connected, or any reference to
the Appraisal Institute or the designations awarded by this organization) shall
be disseminated to the public through prospectus, advertising, public relations,
news, or any other means of communication without the written consent and
approval of The Nicholson Group, Ltd.
<PAGE>
Public Storage Properties XX, Inc.
Page 7
________________________________________________________________________________
EXHIBIT B
APPRAISAL CERTIFICATION
I certify that, to the best of my knowledge and belief:
. the statements of fact contained in this report are true and accurate.
. the reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal, unbiased
professional analyses, opinions, and conclusions.
. I have no present or prospective interest in the properties that are the
subject of this report, and I have no personal interest or bias with respect
to the parties involved.
. my compensation is not contingent upon the reporting of a predetermined value
or direction in value that favors the cause of the client, the amount of the
value estimate, the attainment of a stipulated result, or the occurrence of a
subsequent event.
. my analyses, opinions, and conclusions were developed, and this report has
been prepared in conformity with the requirements of the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the Appraisal
Institute and in conformance with the Uniform Standards of Professional
Appraisal Practice.
. I certify that the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized individuals.
. Each of the properties was inspected by a representative of The Nicholson
Group, Ltd., however, I have not made a personal inspection of the properties
that are the subject of this report.
. unless noted in this report, no one else has provided significant
professional assistance to the person signing this report.
. I certify that as of the date of this report, I have completed the
requirements under the continuing education program of the Appraisal
Institute.
. this appraisal assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
<PAGE>
APPENDIX C
[LETTERHEAD OF ROBERT A. STANGER & CO., INC.]
The Special Committee of
The Board of Directors of
Public Storage Properties XX, Inc.
701 Western Avenue, Suite 200
Glendale, CA 91201
Gentlemen:
We have been advised that Public Storage Properties XX, Inc. ("PSP20") is
entering into a transaction (the "Transaction") in which PSP20 will be merged
with Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the shareholders of PSP20 will be asked
to approve the merger of PSP20 into PSI and the conversion of outstanding shares
of PSP20 Common Stock Series A, other than shares held by Series A shareholders
of PSP20 who have properly exercised dissenters rights under California law
("Dissenting Shares"), Series B and Series C into newly issued shares of PSI
Common Stock or, at the option of the PSP20 shareholders with respect to up to
20% of the outstanding PSP20 Common Stock Series A less any Dissenting Shares,
cash (collectively, the "Consideration"). We have been further advised that
each share of PSP20 Common Stock Series A, other than Dissenting Shares held by
PSP20 shareholders, will be converted into $22.57 (the net asset value per
Series A share of PSP20 Common Stock based on an independent appraisal of
PSP20's properties) in cash or shares of PSI Common Stock with an equivalent
market value based on average closing prices on the New York Stock Exchange of
PSI Common Stock during the twenty consecutive trading days ending on the fifth
trading day prior to the special meeting of the shareholders of PSP20. We also
have been advised that (i) additional distributions will be made to the
shareholders of PSP20 prior to the consummation of the Transaction to the extent
required to cause PSP20's net asset value as of the date of the Transaction to
be substantially equivalent to the estimate of PSP20's net asset value as of
April 30, 1998 contained in the Proxy Statement and Prospectus filed with the
Securities and Exchange Commission dated April 2, 1998, and (ii) if additional
cash distributions are required to satisfy PSP20's REIT distribution
requirements and are paid to PSP20 shareholders prior to the consummation of the
Transaction, the Consideration would be reduced to reflect such additional cash
distributions.
PSP20 has formed a Special Committee of the Board of Directors to consider
certain matters relating to the Transaction, and the Special Committee has
requested that Robert A. Stanger & Co., Inc. ("Stanger") provide its opinion as
to the fairness to the public shareholders of PSP20 (excluding PSI or its
affiliates), from a financial point of view, of the Consideration to be received
in the Transaction.
1
<PAGE>
In the course of our review to render this opinion, we have, among other
things:
o Reviewed the Combined Proxy Statement and Prospectus related to the
Transaction and filed with the Securities and Exchange Commission (the
"SEC") on April 2, 1998;
o Reviewed PSP20's and PSI's annual reports to shareholders filed with
the SEC on Form 10-K for the three fiscal years ending December 31,
1995, 1996 and 1997, which reports PSP20's management and PSI's
management have indicated to be the most current financial statements
available;
o Reviewed the MAI-certified portfolio appraisal of the properties owned
by PSP20 dated October 1, 1997 performed by The Nicholson Group, Ltd.
(the "Appraisal"), and discussed with management of PSP20 and the
appraiser the methodologies and procedures employed in preparing the
Appraisal;
o Reviewed information regarding purchases and sales of self-storage
properties by PSI or any affiliated entities during the prior 24-month
period and other information available relating to acquisition
criteria for self-storage properties;
o Reviewed internal financial analyses and forecasts prepared by PSP20,
and based in part on the Appraisal, of the current net liquidation
value per common share of PSP20's assets and projections of cash flow
from operations, dividend distributions and going-concern values for
PSP20, and the calculation of the allocation of such values among the
PSP20 Shareholders and the holders of PSP20 Common Stock Series B and
C;
o Discussed with members of senior management of PSP20 and PSI
conditions in self-storage property markets, conditions in the market
for sales/acquisitions of properties similar to those owned by PSP20,
current and projected operations and performance, financial condition
and future prospects of PSP20 and PSI;
o Reviewed historical market prices, trading volume and dividends for
PSP20 and PSI Common Stock; and
o Conducted other studies, analyses, inquiries and investigations as we
deemed appropriate.
In rendering this fairness opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the Combined Proxy Statement and Prospectus
or that was furnished or otherwise communicated to us by PSP20 and PSI. We have
not performed an independent appraisal of the assets and liabilities of PSP20 or
PSI and have relied upon and assumed the accuracy of the appraisals
2
<PAGE>
performed by The Nicholson Group, Ltd. We have also relied on the assurance of
PSP20 and PSI that any pro forma financial statements, projections, budgets,
estimates of environmental liability, or value estimates contained in the
Combined Proxy Statement and Prospectus or otherwise provided to us, were
reasonably prepared on bases consistent with actual historical experience and
reflect the best currently available estimates and good faith judgments; that
the allocation of Consideration between the Series A, Series B and Series C
shareholders has been determined by PSP20 in accordance with the provisions of
the Articles of Incorporation of PSP20; that no material changes have occurred
in the appraised value of the properties or the information reviewed between the
date of the Appraisal or the date of the other information provided and the date
of this letter; and that PSP20 and PSI are not aware of any information or facts
that would cause the information supplied to us to be incomplete or misleading
in any material respect.
We have not been requested to, and therefore did not: (i) select the
method of determining the Consideration offered in the Transaction; (ii) make
any recommendation to the shareholders of PSP20 or PSI with respect to whether
to approve or reject the Transaction or whether to select the cash or Common
Stock option in the Transaction; or (iii) express any opinion as to the business
decision to effect the Transaction, alternatives to the Transaction, the impact
of any possible transfer by PSI of its business park properties to a separate
entity, or tax factors resulting from the PSMI Merger or relating to PSI's
continued qualification as a REIT. Our opinion is based on business, economic,
real estate and securities markets, and other conditions as of the date of our
analysis and addresses the Transaction in the context of information available
as of the date of our analysis. Events occurring after that date may materially
affect the assumptions used in preparing the opinion.
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that as of the date of this letter the Consideration to be received in
the Transaction is fair to the public shareholders of PSP20 from a financial
point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Board of Directors of PSP20 that our entire analysis must be
considered as a whole and that selecting portions of our analysis and the
factors considered by us, without considering all analyses and facts, could
create an incomplete view of the evaluation process underlying this opinion.
Yours truly,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
April 2, 1998
3
<PAGE>
Appendix D
GENERAL CORPORATION LAW OF CALIFORNIA
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value of the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by
the Board of Governors of the Federal Reserve System, and the notice of
meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not
apply to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization, or
which were held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph (B)
of this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with
Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
D-1
<PAGE>
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
D-2
<PAGE>
(S) 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares
is in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT -- PAYMENT COSTS.
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the
D-3
<PAGE>
corporation of the certificates for the shares described in the judgment. Any
party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
D-4
<PAGE>
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for the
shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10-days prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE>
Appendix E
PROPOSED AMENDMENT TO PSP20'S BYLAWS
Add a new subsection (f) to Article IX, Section 8 of the Bylaws of PSP20 so
that Section 8 would read in its entirety as follows:
Section 8. Restrictions on Transactions with Affiliates.
--------------------------------------------
(a) The corporation shall not purchase or lease property in which PSI
or any of its affiliates have an interest except as permitted in Section
2(f) of Article X. The provisions of this Section 8(a) notwithstanding,
PSI or its affiliates may purchase property in their own name and
temporarily hold title thereto for the purpose of facilitating the
acquisition of such property, for the corporation, provided that such
property is purchased by the corporation for a price no greater than the
cost of such property to PSI or its affiliates, including development costs
actually incurred by PSI or its affiliates, and provided further that there
is no difference in interest rates of any loans secured by the property at
the time acquired by PSI or its affiliates and the time acquired by the
corporation, nor any other benefit to PSI or its affiliates arising out of
such transaction other than the compensation permitted in these bylaws.
(b) The corporation shall not sell or lease property to PSI or its
affiliates, other than as permitted in Section 2(f) of Article X, except
that the corporation may lease space to PSI or its affiliates for their
use, provided that (i) the terms of any such lease are competitive with
those contained in leases with persons who are not affiliated with PSI or
its affiliates, (ii) the aggregate amount of space rented pursuant to such
leases does not exceed 2% of the aggregate net rentable area of the
corporation's properties, (iii) neither PSI nor its affiliates receive any
property management fees in connection with such leases and (iv) the
corporation recoups any profit in connection with subleases or assignments
of such leases.
(c) No loans may be made by the corporation to PSI or any of its
affiliates.
(d) Except as permitted by Section 8(a) of this Article IX or Section
2(f) of Article X, the corporation shall not acquire property from any of
the following persons or entities in which PSI or any of its affiliates has
an interest: a limited or general partnership, joint venture,
unincorporated association or similar organization other than a corporation
formed and operated for the primary purpose of investment in and the
operation of or gain from an interest or interests in real property.
(e) The compensation paid to the General Partners or their affiliates
for insurance services, property management services and real estate
brokerage services shall be competitive in price and terms with persons who
are not affiliated with the General Partners or their affiliates rendering
comparable services which could reasonably be made available to the
corporation.
(f) Notwithstanding anything in the Bylaws to the contrary, the
corporation may merge with Public Storage, Inc. or a subsidiary, provided
that such merger is approved by the vote or written consent of holders of a
majority of the outstanding shares of the corporation entitled to vote.
<PAGE>
APPENDIX F
----------
PUBLIC STORAGE PROPERTIES XX, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
References
----------
<S> <C>
Report of Independent Auditors F-1
Financial Statements and Schedule:
Balance Sheets as of December 31, 1997 and 1996 F-2
For each of the three years in the period ended December 31, 1997:
Statements of Income F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-10
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Public Storage Properties XX, Inc.
We have audited the accompanying balance sheets of Public Storage Properties XX,
Inc. as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the schedule listed in the
index at item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Storage Properties XX,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
February 18, 1998
Los Angeles, California
F-1
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,252,000 $ 881,000
Marketable securities of affiliate,
at market value (cost of $148,000) 294,000 310,000
Rent and other receivables 43,000 40,000
Prepaid expenses 57,000 46,000
Real estate facilities at cost:
Building, land improvements and equipment 11,927,000 11,795,000
Land 5,824,000 5,824,000
------------ ------------
17,751,000 17,619,000
Less accumulated depreciation (3,645,000) (3,170,000)
------------ ------------
14,106,000 14,449,000
------------ ------------
Total assets $ 15,752,000 $ 15,726,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 419,000 $ 383,000
Dividends payable 647,000 714,000
Note payable to bank - -
Advance payments from renters 91,000 81,000
Shareholders' equity:
Series A common, $.01 par value,
1,393,165 shares authorized,
860,734 shares issued and outstanding 8,000 8,000
Convertible Series B common, $.01 par
value, 90,859 shares authorized,
issued and outstanding 1,000 1,000
Convertible Series C common, $.01 par
value, 257,432 shares authorized,
issued and outstanding 3,000 3,000
Paid-in-capital 15,634,000 15,634,000
Cumulative net income 6,679,000 5,170,000
Cumulative distributions (7,876,000) (6,430,000)
Unrealized gain in marketable securities 146,000 162,000
------------ ------------
Total shareholders' equity 14,595,000 14,548,000
------------ ------------
Total liabilities and shareholders' equity $ 15,752,000 $ 15,726,000
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income $ 3,420,000 $ 3,192,000 $ 2,913,000
Dividends from marketable securities of affiliate 9,000 9,000 9,000
Interest income 37,000 25,000 34,000
----------- ----------- -----------
3,466,000 3,226,000 2,956,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of operations 1,165,000 1,045,000 969,000
Management fees paid to affiliate 205,000 169,000 175,000
Depreciation 475,000 469,000 471,000
Administrative 112,000 102,000 100,000
Interest expense - 2,000 -
Environmental cost - - 156,000
----------- ----------- -----------
1,957,000 1,787,000 1,871,000
----------- ----------- -----------
NET INCOME $ 1,509,000 $ 1,439,000 $ 1,085,000
=========== =========== ===========
Basic earnings per share-Series A $ 1.59 $ 1.49 $ 1.06
=========== =========== ===========
Diluted earnings per share-Series A $ 1.25 $ 1.18 $ 0.85
=========== =========== ===========
Dividends declared per share:
Series A $ 1.52 $ 1.59 $ 1.40
=========== =========== ===========
Series B $ 1.52 $ 1.59 $ 1.40
=========== =========== ===========
Weighted average Common shares outstanding:
Basic- Series A 860,734 867,309 898,001
=========== =========== ===========
Diluted- Series A 1,209,025 1,215,600 1,246,292
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Convertible Convertible
Series A Series B Series C Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 945,534 $ 9,000 90,859 $ 1,000 257,432 $ 3,000 $ 16,969,000
Net income
Repurchase of shares (74,800) (1,000) (1,146,000)
Unrealized gain
in marketable securities
Cash distributions declared:
$1.40 per share-Series A
$1.40 per share-Series B
--------------------------------------------------------------------------------------------
Balances at December 31, 1995 870,734 8,000 90,859 1,000 257,432 3,000 15,823,000
Net income
Repurchase of shares (10,000) - (189,000)
Unrealized gain
in marketable securities
Cash distributions declared:
$1.59 per share-Series A
$1.59 per share-Series B
--------------------------------------------------------------------------------------------
Balances at December 31, 1996 860,734 8,000 90,859 1,000 257,432 3,000 15,634,000
Net income
Repurchase of shares
Unrealized loss
in marketable securities
Cash distributions declared:
$1.52 per share-Series A
$1.52 per share-Series B --------------------------------------------------------------------------------------------
Balances at December 31, 1997 860,734 $ 8,000 90,859 $ 1,000 257,432 $ 3,000 $ 15,634,000
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Cumulative gain (loss) Total
net Cumulative in marketable shareholders'
income distributions securities equity
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ 2,646,000 $ (3,539,000) $ (4,000) $ 16,085,000
Net income 1,085,000 1,085,000
Repurchase of shares (1,147,000)
Unrealized gain
in marketable securities 46,000 46,000
Cash distributions declared:
$1.40 per share-Series A (1,243,000) (1,243,000)
$1.40 per share-Series B (129,000) (129,000)
--------------------------------------------------------------
Balances at December 31, 1995 3,731,000 (4,911,000) 42,000 14,697,000
Net income 1,439,000 1,439,000
Repurchase of shares (189,000)
Unrealized gain
in marketable securities 120,000 120,000
Cash distributions declared:
$1.59 per share-Series A (1,373,000) (1,373,000)
$1.59 per share-Series B (146,000) (146,000)
--------------------------------------------------------------
Balances at December 31, 1996 5,170,000 (6,430,000) 162,000 14,548,000
Net income 1,509,000 1,509,000
Repurchase of shares
Unrealized loss
in marketable securities (16,000) (16,000)
Cash distributions declared:
$1.52 per share-Series A (1,306,000) (1,306,000)
$1.52 per share-Series B (140,000) (140,000)
--------------------------------------------------------------
Balances at December 31, 1997 $ 6,679,000 $ (7,876,000) $ 146,000 $ 14,595,000
==============================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,509,000 $ 1,439,000 $ 1,085,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 475,000 469,000 471,000
Increase in rent and other receivables (3,000) (12,000) (9,000)
Increase in prepaid expenses (11,000) (19,000) (2,000)
Amortization (payment) of prepaid management fees - 102,000 (102,000)
Increase (decrease) in accounts payable 36,000 (13,000) 182,000
Increase (decrease) in advance payments from renters 10,000 (7,000) 4,000
----------- ----------- -----------
Total adjustments 507,000 520,000 544,000
----------- ----------- -----------
Net cash provided by operating activities 2,016,000 1,959,000 1,629,000
----------- ----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (132,000) (64,000) (41,000)
----------- ----------- -----------
Net cash used in investing activities (132,000) (64,000) (41,000)
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (1,513,000) (1,363,000) (1,250,000)
Borrowing on credit facility - 150,000 -
Repayment of borrowing on credit facility - (150,000) -
Purchase of Company Series A common stock - (189,000) (1,147,000)
----------- ----------- -----------
Net cash used in financing activities (1,513,000) (1,552,000) (2,397,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 371,000 343,000 (809,000)
Cash and cash equivalents at the beginning of the year 881,000 538,000 1,347,000
----------- ----------- -----------
Cash and cash equivalents at the end of the year $ 1,252,000 $ 881,000 $ 538,000
=========== =========== ===========
Supplemental schedule of non-cash
investing and financing activities:
Decrease (increase) in fair value of
marketable securities of affiliate $ 16,000 $ (120,000) $ (46,000)
=========== =========== ===========
Unrealized (loss) gain on
marketable securities of affiliate $ (16,000) $ 120,000 $ 46,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Public Storage Properties XX, Inc. (the "Company") is a California
corporation which has elected to qualify as a real estate investment trust
("REIT") for Federal income tax purposes. The Company succeeded to the
business of Public Storage Properties XX, Ltd. (the "Partnership") in a
reorganization transaction which was effective August 27, 1991 (the
"Reorganization").
The Company owns and operates seven self-storage facilities located in
five states.
The term of the Company is until all properties have been sold and, in
any event, not later than December 31, 2038. The bylaws of the Company
provide that, during 1999, unless shareholders have previously approved
such a proposal, the shareholders will be presented with a proposal to
approve or disapprove (a) the sale or financing of all or substantially all
of the properties and (b) the distribution of the proceeds from such
transaction and, in the case of a sale, the liquidation of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes:
The Company has and intends to continue to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code (the Code). As a REIT,
the Company is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that the Company meets the
requirements of the Code. The Company believes it is in compliance with
these requirements and, accordingly, no provision for income taxes has been
made.
Statements of Cash Flows:
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Real Estate Facilities:
Cost of land includes appraisal and legal fees related to acquisition
and closing costs. Buildings, land improvements and equipment reflect costs
incurred through December 31, 1997 and 1996 to develop mini-warehouse
facilities. The mini-warehouse facilities provide self-service storage
spaces for lease, usually on a month-to-month basis, to the general public.
The buildings and equipment are depreciated on the straight-line basis over
estimated useful lives of 25 and 5 years, respectively.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement 121 in 1996 and based on current
circumstances, such adoption did not have any effect on the financial
statements.
F-6
<PAGE>
At December 31, 1997, the basis of real estate facilities (excluding
land) for Federal income tax purposes (after adjustment for accumulated
depreciation of $2,562,000) is $9,344,000.
Revenue Recognition:
Property rents are recognized as earned.
Investment in Affiliate:
In February 1994, the Company purchased 10,000 common shares of Public
Storage, Inc. (PSI), a publicly traded REIT and an affiliate of the
Company, for $148,000. The Company has designated its portfolio of
marketable securities as being available for sale. Accordingly, at December
31, 1997 and 1996, the Company has recorded the marketable securities at
fair value, based upon the closing quoted price of the securities at
December 31, 1997 and 1996, and has recorded a corresponding unrealized
loss, gain totaling $16,000 and $120,000, respectively, in shareholders'
equity. The Company recognized $9,000 in dividends in 1997, 1996 and 1995.
Net Income Per Share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share exclude
any dilutive effects of convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
to conform to the Statement 128 requirements.
Net income per share is presented on a basic and diluted basis. Basic
earnings per share represents the Series A shareholders' rights to
distributions out of the respective period's net income, which is
calculated by dividing net income after reduction for distributions to the
Convertible Series B shareholders (Series C shareholders are not entitled
to cash distributions) by the weighted average number of outstanding Series
A shares (Note 4). Diluted earnings per share assumes conversion of the
Convertible Series B and Series C shares into Series A shares.
Use of Estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Environmental Cost:
Substantially all of the Company's facilities were acquired prior to
the time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995,
the Company completed environmental assessments of its properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. These assessments were performed by an
independent environmental consulting firm. Based on the assessments, the
Company expensed $156,000 in 1995 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware
of any environmental contamination of any of its property sites which
individually or in the aggregate would be material to the Company's overall
business, financial condition, or results of operations.
F-7
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Company has a Management Agreement with Public Storage, Inc.
("PSI"). Under the terms of the agreement, PSI operates the mini-warehouse
facilities for a fee equal to 6% of the facilities' monthly gross revenue
(as defined).
The Management Agreement, as amended in February 1995, provides that
the agreement will expire in February 2002 provided that in February of
each year it shall be automatically extended for one year (thereby
maintaining a seven-year term) unless either party notifies the other that
the Management Agreement is not being extended, in which case it expires,
on the first anniversary of its then scheduled expiration date. The
Management Agreement may also be terminated by either party for cause, but
if terminated for cause by the Company, the Company retains the rights to
use the service marks and related designs until the then scheduled
expiration date, if applicable, or otherwise a date seven years after such
termination.
In August 1995, the Management Agreement for the mini-warehouse
facilities was amended to provide that upon demand from PSI made prior to
December 15, 1995, the Company agreed to prepay (within 15 days after such
demand) up to 12 months of management fees (based on the management fees
for the comparable period during the calendar year immediately preceding
such prepayment) discounted at the rate of 14% per year to compensate for
early payment. In November 1995, the Company prepaid, to PSI, 8 months of
1996 management fees at a cost of $102,000. The amount was expensed as
management fees paid to affiliate during 1996.
4. SHAREHOLDERS' EQUITY
Series A shares are entitled to all distributions of cash from sale or
refinancing and participate ratably with the Convertible Series B shares in
distributions of cash flow from operations. The Convertible Series C
shares (prior to conversion into Series A shares) will not participate in
any distributions.
The Convertible Series B shares and Convertible Series C shares will
convert automatically into Series A shares on a share-for-share basis (the
"Conversion") when (A) the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the Series A shares
(including liquidating distributions, but not including payments made to
redeem such stock other than in liquidation) and (2) the cumulative
Partnership distributions from all sources with respect to all units equals
(B) the product of $20 multiplied by the number of the then outstanding
"Original Series A shares". The term "Original Series A shares" means the
Series A shares issued in the Reorganization. Through December 31, 1997,
the Company has made and declared cumulative cash distributions of
approximately $7,169,000 with respect to the Series A shares. Accordingly,
assuming no repurchases or redemptions of Series A shares after December
31, 1997, Conversion will occur when $10,046,000 in additional
distributions with respect to the Series A shares have been made.
Assuming liquidation of the Company at its net book value at December
31, 1997 and 1996, each Series of common shares would receive the following
as a liquidating distribution:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Series A $ 13,283,000 $ 13,626,000
Convertible Series B 342,000 241,000
Convertible Series C 970,000 681,000
------------ ------------
Total $ 14,595,000 $ 14,548,000
============ ============
</TABLE>
F-8
<PAGE>
The Series A shares, Convertible Series B shares and Convertible
Series C shares have equal voting rights. The holders of the Convertible
Series B and Convertible Series C shares have agreed to vote along with the
majority of the unaffiliated Series A shareholders on matters other than
control of the Company and its business.
The Company's Board of Directors has authorized the Company to
purchase up to 300,000 shares of the Company's Series A common stock. As
of December 31, 1997, the Company had purchased and retired 184,140 shares
of Series A common stock, of which 10,000 were purchased and retired in
1996.
For Federal income tax purposes, all distributions declared by the
Board of Directors in 1997, 1996 and 1995 were ordinary income.
5. NOTE PAYABLE TO BANK
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $750,000 for working capital purposes and to repurchase
the Company's stock. Outstanding borrowings on the credit facility, at the
Company's option, bear interest at either the bank's prime rate plus .25%
or the bank's LIBOR rate plus 2.25%. Interest is payable monthly until
maturity. On December 31, 1999, all unpaid principal and accrued interest
is due and payable.
During the first quarter of 1996, the Company borrowed and repaid
$150,000 on its line of credit facility. At December 31, 1996, there was
no outstanding balance on the credit facility.
Under covenants of the credit facility, the Company is (1) required to
maintain a ratio of liabilities to assets (as defined) for each fiscal
quarter of not more than .3 to 1.0, (2) required to maintain a debt
coverage ratio (as defined) for each fiscal quarter of not less than 8
times the debt service, (3) required to maintain a fixed charge coverage
ratio (as defined) for each fiscal quarter of not less than 1.0 to 1.0 and
(4) required to maintain a minimum shareholder's equity (as defined) for
each fiscal quarter of $10 million.
6. PROPOSED MERGER
In February 1998, the Company and Public Storage, Inc. ("PSI") agreed,
subject to certain conditions, to merge. Upon the merger, each outstanding
share of the Company's common stock series A (other than shares held by PSI
or by holders of the Company's common stock series A ("Series A
Shareholders") who have properly exercised dissenters' rights under
California law ("Dissenting Shares")) will be converted into the right to
receive cash, PSI common stock or a combination of the two, as follows: (i)
with respect to a certain number of shares of the Company's common stock
series A (not to exceed 20% of the outstanding common stock series A of the
Company, less any Dissenting Shares), upon a Series A Shareholder's
election, $22.57 in cash, subject to reduction as described below or (ii)
that number (subject to rounding) of shares of PSI common stock determined
by dividing $22.57, subject to reduction as described below, by the average
of the per share closing prices on the New York Stock Exchange of PSI
common stock during the 20 consecutive trading days ending on the fifth
trading day prior to the special meeting of the Company's shareholders.
The consideration paid by PSI to the Series A Shareholders in the merger
will be reduced by the amount of cash distributions required to be paid to
the Series A Shareholders by the Company prior to completion of the merger
(estimated at $0.93 per share) in order to satisfy the Company's REIT
distribution requirements ("Required REIT Distributions"). The
consideration received by the Series A Shareholders in the merger, however,
along with any Required REIT Distributions, will not be less than $22.57
per share of the Company's common stock series A, which amount represents
the market value of the Company's real estate assets at October 1, 1997
(based on an independent appraisal) and interest of the Series A
Shareholders in the estimated net asset value of its other assets at April
30, 1997. Additional distributions will be made to the Series A
Shareholders to cause the Company's estimated net asset value allocable to
the Series A Shareholders as of the date of the merger to be substantially
equivalent to $22.57 per
F-9
<PAGE>
share. Upon the merger, each share of the Company's common stock series B
and common stock series C (other than shares held by PSI) would be
converted into the right to receive $10.90 in PSI common stock (valued as
in the case of the Company's common stock series A) plus (i) any additional
distributions equal to the amount by which the Company's estimated net
asset value allocable to the holders of the Company's common stock series B
and C as of the date of the merger exceeds $10.90 per share and (ii) the
estimated Required REIT Distributions payable to the holders of the
Company's common stock series B of $0.93 per share. The common stock of the
Company held by PSI will be canceled in the merger.
The merger is conditioned on, among other requirements, approval by
the Company's shareholders. It is expected that the merger will close in
the first half of 1998. PSI is the Company's mini-warehouse operator and
owns 24.18% of the total combined shares of the Company's common stock
series A, B and C.
7. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------
March 1997 June 1997 Sept. 1997 Dec. 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 807,000 $ 845,000 $ 912,000 $ 902,000
--------- --------- --------- ---------
Expenses 513,000 469,000 456,000 519,000
--------- --------- --------- ---------
Net income $ 294,000 $ 376,000 $ 456,000 $ 383,000
========= ========= ========= =========
Basic earnings per share- Series A $ 0.31 $ 0.41 $ 0.50 $ 0.37
========= ========= ========= =========
Diluted earnings per share- Series A $ 0.24 $ 0.31 $ 0.38 $ 0.32
========= ========= ========= =========
Three months ended
----------------------------------------------------------------
March 1996 June 1996 Sept. 1996 Dec. 1996
---------- --------- ---------- ----------
Revenues $ 755,000 $ 793,000 $ 836,000 $ 842,000
--------- --------- --------- ---------
Expenses 464,000 423,000 423,000 477,000
--------- --------- --------- ---------
Net income $ 291,000 $ 370,000 $ 413,000 $ 365,000
========= ========= ========= =========
Basic earnings per share- Series A $ 0.31 $ 0.39 $ 0.45 $ 0.34
========= ========= ========= =========
Diluted earnings per share- Series A $ 0.24 $ 0.30 $ 0.34 $ 0.30
========= ========= ========= =========
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
reflected to comply with Statement of Financial Accounting Standards No. 128,
Earnings per Share.
F-10
<PAGE>
APPENDIX G
PUBLIC STORAGE PROPERTIES XX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
- ----------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996. Net
----------------------------------------------------------------------
income in 1997 was $1,509,000 compared to $1,439,000 in 1996, representing an
increase of $70,000 or 5%. Net income per diluted Series A share was $1.25 in
1997 compared to $1.18 in 1996, representing an increase of $.07 or 6% per
share. These increases are due to an increase in property net operating income.
During 1997, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $66,000 from $1,509,000 in 1996 to $1,575,000 in 1997. This increase
is attributable to an increase in rental income at the Company's mini-warehouse
operations.
Rental income for the mini-warehouse operations increased $228,000 or 7%
from $3,192,000 in 1996 to $3,420,000 in 1997. Cost of operations (including
management fees paid to an affiliate of the Company) increased $156,000 or 13%
from $1,214,000 in 1996 to $1,370,000 in 1997. The results of these changes was
a net increase in property net operating income before depreciation expense of
$72,000 or 4% from $1,978,000 in 1996 to $2,050,000 in 1997. Rental income
increased primarily due to an increase in rental rates at all seven of the
Company's properties. The increase in cost of operations is mainly due to
increases in management fees, payroll, advertising and property tax expense.
Weighted average occupancy levels for the Company's mini-warehouse
facilities were 92% and 94% in 1997 and 1996, respectively.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse discounted at the rate of 14% per year to compensate for early
payment. As a result, management fee expense for the twelve month ended
December 31, 1996 was $22,000 lower than it would have without the discounted
fee structure.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. Net
----------------------------------------------------------------------
income in 1996 was $1,439,000 compared to $1,085,000 in 1995, representing an
increase of $354,000 or 33%. Net income per diluted Series A share was $1.18 in
1996 compared to $.85 in 1995, representing an increase of $.33 or 39% per
share. These increases are primarily due to an increase in property net
operating income combined with the favorable impact of comparing to expenses for
1995 which included a non-recurring charge for environmental assessments and
provision for future remediation costs.
During 1996, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $211,000 from $1,298,000 in 1995 to $1,509,000 in 1996. This increase
is primarily attributable to an increase in rental income at the Company's mini-
warehouse operations.
Rental income for the mini-warehouse operations increased $279,000 or 10%
from $2,913,000 in 1995 to $3,192,000 in 1996. Cost of operations (including
management fees paid to an affiliate of the Company) increased $70,000 or 6%
from $1,144,000 in 1995 to $1,214,000 in 1996. The results of these changes was
a net increase in property net operating income before depreciation expense of
$209,000 or 12% from $1,769,000 in 1995 to $1,978,000 in 1996. Rental income
increased primarily due to an increase in rental rates at all seven of the
Company's properties. The increase in cost of operations is mainly due to
increases in payroll, advertising and property tax expense. The increase in
property taxes is mainly attributable to a one-time tax refund received at the
Company's Los Angeles, California property in early 1995 from appealing prior
years tax assessments.
Weighted average occupancy levels for the Company's mini-warehouse
facilities were 94% and 92% in 1996 and 1995, respectively.
G-1
<PAGE>
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. In 1996, the
Company expensed the prepaid management fees. The amount is included in
management fees paid to affiliate in the statements of income. As a result of
the prepayment, the Company saved approximately $22,000 in management fees,
based on the management fees that would have been payable on rental income
generated in 1996 compared to the amount prepaid.
During 1996, the Company incurred $2,000 in interest expense on its line of
credit facility.
Mini-warehouse Operating Trends.
- --------------------------------
The following table illustrates the operating trends for the Company's 7
mini-warehouses:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Weighted average occupancy level 92% 94% 92%
Realized annual rent per occupied
square foot (1) $9.28 $8.45 $7.82
Operating margin: (2)
Before reduction for depreciation expense 60% 62% 61%
After reduction for depreciation expense 46% 47% 45%
</TABLE>
- -------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions. Includes administrative and late fees.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
Capital structure. The Company's financial profile has been characterized
-----------------
by increasing net income, increasing cash provided by operating activities and
increasing funds from operations ("FFO").
Net Cash Provided by Operating Activities and Funds from Operations. The
-------------------------------------------------------------------
Company believes that important measures of its performance as well as liquidity
are net cash provided by operating activities and FFO.
Net cash provided by operating activities (net income plus depreciation)
reflects the cash generated from the Company's business before distributions to
shareholders, capital expenditures and principal payments on debt. Net cash
provided by operating activities has increased over the past years from
$1,629,000 in 1995 to $2,016,000 in 1997.
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $750,000 for working capital purposes and to repurchase the
Company's stock. Outstanding borrowings on the credit facility, at the
Company's option, bear interest at either the bank's prime rate plus .25% or the
LIBOR rate plus 2.25%. Interest is payable monthly until maturity. On December
31, 1999, all unpaid principal and accrued interest is due and payable. During
the first quarter of 1996, the Company borrowed and repaid $150,000 on its line
of credit facility. At December 31, 1997, there was no outstanding balance on
the credit facility.
G-2
<PAGE>
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to
pay distributions to shareholders and repurchase its stock.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,509,000 $ 1,439,000 $ 1,085,000
Environmental cost - - 156,000
Depreciation 475,000 469,000 471,000
Changes in working capital 32,000 51,000 (83,000)
----------- ----------- -----------
Net cash provided by operating activities 2,016,000 1,959,000 1,629,000
Capital improvements to maintain facilities (132,000) (64,000) (41,000)
----------- ----------- -----------
Funds available for distributions to
shareholders and repurchase of stock 1,884,000 1,895,000 1,588,000
Cash distributions to shareholders (1,513,000) (1,363,000) (1,250,000)
----------- ----------- -----------
Excess funds available for principal
payments, cash distributions to
shareholders and repurchase of stock $ 371,000 $ 532,000 $ 338,000
=========== =========== ===========
</TABLE>
The Company believes that its rental revenues and interest and other income
will be sufficient over at least the next twelve months to meet the Company's
operating expenses, capital improvements and distributions to shareholders. For
1997, the Company anticipates expending approximately $159,000 for capital
improvements. During 1995, the Company's property operator commenced a program
to enhance the visual appearance of the mini-warehouse facilities operated by
it. Such enhancements include new signs, exterior color schemes, and
improvements to the rental offices. The vast majority of the costs associated
with these enhancements were incurred in 1995 and 1996.
FFO is defined by the Company, consistent with the definition of FFO by the
National Association of Real Estate Investment Trusts (NAREIT), as net income
(loss) (computed in accordance with generally accepted accounting principles)
before depreciation and extraordinary or non-recurring items. FFO for the years
ended December 31, 1997 and 1996 was $1,984,000 and $1,908,000, respectively.
FFO is presented because the Company, as well as many industry analysts,
consider FFO to be one measure of the performance of the Company, i.e., one that
generally reflects changes in the Company's net operating income. FFO does not
take into consideration scheduled principal payments on debt and capital
improvements. Accordingly, FFO is not necessarily a substitute for the Company's
cash flow or net income, as a measure of the Company's liquidity or operating
performance or ability to pay distributions. Furthermore, the NAREIT definition
of FFO does not address the treatment of certain items and all REITs do not
treat items the same way in computing FFO. Accordingly, comparisons of levels
of FFO among REITs may not necessarily be meaningful.
Funds from operations is computed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,509,000 $ 1,439,000 $ 1,085,000
Environmental cost - - 156,000
Depreciation 475,000 469,000 471,000
----------- ----------- -----------
Funds from operation $ 1,984,000 $ 1,908,000 $ 1,712,000
=========== =========== ===========
</TABLE>
In February 1994, the Company purchased 10,000 common shares of Public
Storage, Inc. ("PSI"), a publicly traded real estate investment trust and an
affiliate of the Company, for $148,000. The market value of these securities at
December 31, 1997 was $294,000. The Company recognized $9,000 in dividends
during 1997 and 1996.
G-3
<PAGE>
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
On November 12, 1997, the Company's Board of Directors declared a regular
quarterly distribution per share of $0.28. In addition, consistent with the
Company's REIT distribution requirements, the Company's Board of Directors
declared a special distribution of $0.40 per share. The distributions are
payable on January 15, 1998 to shareholders of record on December 31, 1997.
In August 1995, the Management Agreement for the mini-warehouse facilities
was amended to provide that upon demand from PSI made prior to December 15,
1995, the Company agreed to prepay (within 15 days after such demand) up to 12
months of management fees (based on the management fees for the comparable
period during the calendar year immediately preceding such prepayment)
discounted at the rate of 14% per year to compensate for early payment. In
November 1995, the Company prepaid, to PSI, 8 months of 1996 management fees at
a cost of $102,000. The amount has been expensed as management fees paid to
affiliate during 1996.
DISTRIBUTIONS
- -------------
The Company has established a conservative distribution policy. The
aggregate amount of dividends paid or accrued to the shareholders in each year
since inception of the Company were as follows:
<TABLE>
<CAPTION>
Series A Series B Total
------------ ---------- -----------
<S> <C> <C> <C>
1988 $ 52,000 $ 4,000 $ 56,000
1989 196,000 17,000 213,000
1990 209,000 18,000 227,000
1991 339,000 30,000 369,000
1992 568,000 50,000 618,000
1993 884,000 79,000 963,000
1994 999,000 94,000 1,093,000
1995 1,243,000 129,000 1,372,000
1996 1,373,000 146,000 1,519,000
1997 1,306,000 140,000 1,446,000
----------- --------- -----------
Total $ 7,169,000 $ 707,000 $ 7,876,000
=========== ========= ===========
</TABLE>
The Convertible Series B shares and Convertible Series C shares will
convert automatically into Series A shares on a share-for-share basis (the
"Conversion") when (A) the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the Series A shares
(including liquidating distributions, but not including payments made to redeem
such stock other than in liquidation) and (2) the cumulative Partnership
distributions from all sources with respect to all units equals (B) the product
of $20 multiplied by the number of the then outstanding "Original Series A
shares". The term "Original Series A shares" means the Series A shares issued
in the Reorganization. Through December 31, 1997, the Company has made and
declared cumulative cash distributions of approximately $7,169,000 with respect
to the Series A shares. Accordingly, assuming no repurchases or redemptions of
Series A shares after December 31, 1997, Conversion will occur when $10,046,000
in additional distributions with respect to the Series A shares have been made.
REIT DISTRIBUTION REQUIREMENT
- -----------------------------
The Company has elected and intends to continue to qualify as REIT for
Federal income tax purposes. As a REIT, the Company must meet, among other
tests, sources of income, share ownership, and certain asset tests. As a REIT,
the Company is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that at least 95% of its taxable income
is so distributed to its shareholders prior to filing the Company's tax return.
Under certain circumstances, the Company can rectify a failure to meet the 95%
distribution test by making distributions after the close of a particular
taxable year and attributing those distributions to the prior year's taxable
income. The Company has satisfied the REIT distribution requirement for 1995,
1996 and 1997 by attributing
G-4
<PAGE>
distributions in 1995, 1996 and 1997 to the prior year's taxable income. The
extent to which the Company will be required to attribute distributions to the
prior year will depend on the Company's operating results (taxable income) and
the level of distributions as determined by the Board of Directors. The basic
difference between book income and taxable income is depreciation expense. In
1997, the Company's Federal tax depreciation is approximately $352,000.
The Company's Board of Directors has authorized the Company to purchase up
to 300,000 shares of Series A common stock. As of December 31, 1997, the
Company had purchased and retired 184,140 shares of Series A common stock.
YEAR 2000 SYSTEM ISSUES
- -----------------------
Public Storage has completed an initial assessment of its computer systems.
The majority of the computer programs were installed or upgraded over the past
few years and are Year 2000 compliant. Some of the older computer programs
utilized by Public Storage were written without regard for Year 2000 issues and
could cause a system failure or miscalculations with possible disruption of
operations. Each of these computer programs and systems has been evaluated to
be upgraded or replaced as part of Public Storage's Year 2000 project.
The cost of the Year 2000 project will be allocated to all companies that
use the Public Storage computer systems. The cost of the Year 2000 project
which is expected to be allocated to the Company is less than $30,000. The cost
of new systems will be capitalized and the cost of maintenance to existing
systems will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is prior to
any anticipated impact on operating systems. Public Storage believes that with
modifications to existing software and, in some instances, the conversion to
new software, the Year 2000 issue will not pose significant operational
problems. However, if such modifications are not made, or are not completed
timely, the Year 2000 issue could have a material impact on the operations of
the Company.
The costs of the project and the date on which Public Storage believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events.
There can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.
PROPOSED MERGER
- ---------------
In February 1998, the Company and Public Storage, Inc. ("PSI") agreed,
subject to certain conditions, to merge. Upon the merger, each outstanding share
of the Company's common stock series A (other than shares held by PSI or by
holders of the Company's common stock series A ("Series A Shareholders") who
have properly exercised dissenters' rights under California law ("Dissenting
Shares")) will be converted into the right to receive cash, PSI common stock or
a combination of the two, as follows: (i) with respect to a certain number of
shares of the Company's common stock series A (not to exceed 20% of the
outstanding common stock series A of the Company, less any Dissenting Shares),
upon a Series A Shareholder's election, $22.57 in cash, subject to reduction as
described below or (ii) that number (subject to rounding) of shares of PSI
common stock determined by dividing $22.57, subject to reduction as described
below, by the average of the per share closing prices on the New York Stock
Exchange of PSI common stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the Company's
shareholders. The consideration paid by PSI to the Series A Shareholders in the
merger will be reduced by the amount of cash distributions required to be paid
to the Series A Shareholders by the Company prior to completion of the merger
(estimated at $0.93 per share) in order to satisfy the Company's REIT
distribution requirements ("Required REIT Distributions"). The consideration
received by the Series A Shareholders in the merger, however, along with any
Required REIT Distributions, will not be less than $22.57 per share of the
Company's common stock series A, which amount represents the market value of the
Company's real estate assets at October 1, 1997 (based on an independent
appraisal) and interest of the Series A Shareholders in the estimated net asset
value of its other assets at April 30, 1998. Additional distributions will be
made to the Series A
G-5
<PAGE>
Shareholders to cause the Company's estimated net asset value allocable to the
Series A Shareholders as of the date of the merger to be substantially
equivalent to $22.57 per share. Upon the merger, each share of the Company's
common stock series B and common stock series C (other than shares held by PSI)
would be converted into the right to receive $10.90 in PSI common stock (valued
as in the case of the Company's common stock series A) plus (i) any additional
distributions equal to the amount by which the Company's estimated net asset
value allocable to the holders of the Company's common stock series B and C as
of the date of the merger exceeds $10.90 per share and (ii) the estimated
Required REIT Distributions payable to the holders of the Company's common stock
series B of $0.93 per share. The common stock of the Company held by PSI will be
canceled in the merger. The merger is conditioned on, among other requirements,
approval by the Company's shareholders. It is expected that the merger will
close in the first half of 1998. PSI is the Company's mini-warehouse operator
and owns 24.18% of the total combined shares of the Company's common stock
series A, B and C.
G-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS, OFFICERS AND AGENTS.
In August 1988, the Company's Articles of Incorporation were amended (as
approved by the shareholders in August 1988) to provide that the Company may
indemnify the agents of the Company to the maximum extent permitted under
California law. See Section V of the Certificate of Amendment of Articles of
Incorporation (Exhibit 3.11) and Article VII of the By-Laws (Exhibit 3.20) which
are incorporated herein by this reference. In October 1988, the Company also
entered into indemnity agreements (in the form approved by the shareholders in
August 1988) with its management and non-management directors and executive
officers. The agreements permit the Company to indemnify directors and
executive officers to the maximum extent permitted under California law and
prohibit the Company from terminating its indemnification obligations as to acts
or omissions of any director or executive officer occurring before the
termination. The indemnification and limitations on liability permitted by the
amendment to the Articles of Incorporation and the agreements are subject to the
limitations set forth by California law. The Company believes the
indemnification agreements will assist it in attracting and retaining qualified
individuals to serve as directors and executive officers of the Company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS: See Exhibit Index contained herein.
(b) FINANCIAL STATEMENT SCHEDULES:
See Index to Financial Statement Schedules in registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 and incorporated herein
by reference.
All other financial statement schedules are omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
S-1
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs 3.(i) and 3.(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
4. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
6. That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
7. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
8. Except as permitted by General Instruction H to Form S-4 (in a
transaction not covered by General Instruction I), to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described under Item 20 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Glendale, State of
California, on the 2nd day of April, 1998.
PUBLIC STORAGE, INC.
By: B. WAYNE HUGHES
---------------------------------------
B. Wayne Hughes, Chairman of the Board
Each person whose signature appears below hereby authorizes B. Wayne Hughes
and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on his behalf,
individually and in each capacity stated below, any amendment, including post-
effective amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
B. WAYNE HUGHES Chairman of the Board, Chief Executive April 2, 1998
________________________ Officer and Director (principal executive
B. Wayne Hughes officer)
HARVEY LENKIN President and Director April 2, 1998
________________________
Harvey Lenkin
JOHN REYES Senior Vice President and Chief April 2, 1998
________________________ Financial Officer (principal financial
John Reyes officer and principal accounting officer)
ROBERT J. ABERNETHY Director April 2, 1998
________________________
Robert J. Abernethy
DANN V. ANGELOFF Director April 2, 1998
________________________
Dann V. Angeloff
WILLIAM C. BAKER Director April 2, 1998
________________________
William C. Baker
URI P. HARKHAM Director April 2, 1998
________________________
Uri P. Harkham
B. WAYNE HUGHES, JR. Vice President and Director April 2, 1998
________________________
B. Wayne Hughes, Jr.
Director
________________________
Thomas J. Barrack, Jr.
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties XX, Inc. ("PSP20") dated as of February 13, 1998
(filed as Appendix 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.
3.14 Certificate of Determination for the Convertible Preferred Stock, Series
CC. Filed with Registrant's Registration Statement No. 333-03749 and
incorporated herein by reference.
3.15. Certificate of Correction of Certificate of Determination for the
Convertible Participating Preferred Stock. Filed with Registrant's
Registration Statement No. 333-08791 and incorporated herein by
reference.
S-4
<PAGE>
3.16 Certificate of Determination for 8 5/8% Cumulative Preferred Stock,
Series I. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 8 5/8% Cumulative Preferred Stock, Series I and
incorporated herein by reference.
3.17 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 333-18395 and incorporated
herein by reference.
3.18 Certificate of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference.
3.19 Certificate of Determination for 8% Cumulative Preferred Stock, Series
J. Filed with Registrant's Form 8-A/A Registration Statement relating to
the 8% Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.20 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.21 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.22 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.23 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.24 Amendment to Bylaws adopted on February 10, 1998. Filed with
Registrant's Current Report on Form 8-K dated February 10, 1998 and
incorporated herein by reference.
5.1 Opinion on legality. Filed herewith.
8.1 Opinion on tax matters. Filed herewith.
10.1 Loan Agreement between Registrant and Aetna Life Insurance Company dated
as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K
dated July 14, 1988 and incorporated herein by reference.
10.2 Amendment to Loan Agreement between Registrant and Aetna Life Insurance
Company dated as of September 1, 1993. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.3 Second Amended and Restated Credit Agreement by and among Registrant,
Wells Fargo Bank, National Association, as agent, and the financial
institutions party thereto dated as of February 25, 1997. Filed with
Registrant's Registration Statement No. 333-22665 and incorporated
herein by reference.
10.4 Note Assumption and Exchange Agreement by and among Public Storage
Management, Inc., Public Storage, Inc., Registrant and the holders of
the notes dated as of November 13, 1995. Filed with Registrant's
Registration Statement No. 33-64971 and incorporated herein by
reference.
*10.5 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
*10.6 Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
*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.
S-5
<PAGE>
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).
23.4 Consent of The Nicholson Group, Ltd. Filed herewith.
23.5 Consent of Robert A. Stanger & Co., Inc. Filed herewith.
99.1 Proxy card for PSP20. Filed herewith.
99.2 Cash Election Form. Filed herewith.
99.3 Real Estate Appraisal Report by The Nicholson Group, Ltd. dated February
9, 1998 (filed as Appendix B to the Proxy Statement and Prospectus).
99.4 Opinion of Robert A. Stanger & Co., Inc. dated April 2, 1998 (filed as
Appendix C to the Proxy Statement and Prospectus).
_______________
* Compensatory benefit plan.
S-6
<PAGE>
DAVID GOLDBERG
Senior Vice President and General Counsel
701 Western Avenue, Suite 200
Glendale, California 91201-2397
April 2, 1998
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Gentlemen:
As Senior Vice President and General Counsel of Public Storage, Inc. (the
"Company"), I have examined the Registration Statement on Form S-4, which is
expected to be filed by the Company with the Securities and Exchange Commission
on or about the date of delivery of this opinion (the "Registration Statement"),
which relates to the offer and sale of up to 750,000 shares of the Company's
common stock, par value $.10 per share (the "Shares").
I am familiar with the proceedings taken or to be taken by the Company
relating to the authorization and issuance of the Shares in the manner set forth
in the Registration Statement. I have also examined the Company's Restated
Articles of Incorporation and Revised Bylaws and have made such other
investigation as I have deemed necessary in order to express the opinions
contained herein.
It is my opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of California.
2. The Shares, when issued and delivered in the manner and on the terms
described in the Registration Statement, will be legally issued, fully paid and
nonassessable.
I hereby consent to the reference to me under the caption "Legal Opinions"
in the Registration Statement and to the filing of this opinion as an exhibit to
the Registration Statement or amendments thereto.
Very truly yours,
/S/ DAVID GOLDBERG
DAVID GOLDBERG
Exhibit 5.1
<PAGE>
Exhibit 8.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
April 2, 1998
Public Storage Properties XX, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section
7.1.7 of the Agreement and Plan of Reorganization (the "Reorganization
Agreement") dated as of February 13, 1998, by and between Public Storage, Inc.,
a California corporation ("PSI"), Public Storage Properties XX, Inc., a
California corporation ("PSP20"). Pursuant to the Reorganization Agreement,
PSP20 will merge with and into PSI (the "Merger"). We have acted as legal
counsel to PSP20 in connection with the Merger.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Reorganization Agreement and in the Proxy
Statement and Prospectus filed with the Securities and Exchange Commission on or
about the date of the delivery of this opinion (the "Proxy Statement and
Prospectus"). All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code").
In connection with the preparation of this opinion, we have examined
and with your consent relied upon (without any independent investigation or
review thereof) the following documents (including all exhibits and schedules
thereto):
1. The Reorganization Agreement;
2. Representations made to us by PSI;
3. Representations made to us by PSP20;
4. The Proxy Statement and Prospectus;
5. Such other instruments and documents related to the formation,
organization and operation of PSI and PSP20 or to the consummation of the Merger
and the transactions contemplated thereby as we have deemed necessary or
appropriate.
<PAGE>
Public Storage Properties XX, Inc.
April 2, 1998
Page 2
In connection with rendering this opinion, we have assumed or obtained
representations (and, with your consent, are relying thereon, without any
independent investigation or review thereof) that:
1. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion is
accurate, all copies are accurate, and all signatures are genuine. We have also
assumed that there has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
2. The Merger will be consummated in accordance with, and will
qualify as a statutory merger under, applicable state law.
3. Any representation or statement made "to the knowledge" or "to the
best of the knowledge" or similarly qualified is correct without such
qualification.
4. The Merger will be consummated in accordance with the
Reorganization Agreement and as described in the Proxy Statement and Prospectus
(including satisfaction of all covenants and conditions to the obligations of
the parties without amendment or waiver thereof); each of PSI and PSP20 will
comply with all reporting obligations with respect to the Merger required under
the Code and the Treasury Regulations thereunder; and the Reorganization
Agreement and all other documents and instruments referred to therein or in the
Proxy Statement and Prospectus are valid and binding in accordance with their
terms.
Based upon and subject to the foregoing, as well as the limitations
set forth below, it is our opinion that (1) for federal income tax purposes, the
Merger will constitute a "reorganization" as defined in Section 368(a) of the
Code, (2) PSI will continue to qualify as a REIT under Sections 856 through 860
of the Code following the merger of Public Storage Management, Inc. ("PSMI")
into PSI (the "PSMI Merger") SO LONG AS (A) PSI has met at all times since the
PSMI Merger and continues to meet the stock ownership and gross income
requirements applicable to REITs and (B) either (i) at the time of (and after
giving effect to) the PSMI Merger, PSMI was not considered to have any current
or accumulated earnings and profits for tax purposes or (ii) PSI made
distributions prior to the end of 1995 in an amount sufficient to eliminate such
earnings and profits, and (3) the discussion under the heading "Federal Income
Tax Considerations" in the Proxy Statement and
<PAGE>
Public Storage Properties XX, Inc.
April 2, 1998
Page 3
Prospectus, to the extent that it describes matters of law or legal conclusions,
is correct in all material respects.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the IRS's practices and procedures in
issuing private letter rulings, which are not binding on the IRS except with
respect to the taxpayer who receives such ruling) and published rulings and
procedures, all as of the date hereof. An opinion of counsel merely represents
counsel's best judgment with respect to the probable outcome on the merits and
is not binding on the Internal Revenue Service or the courts. There can be no
assurance that positions contrary to our opinions will not be taken by the
Internal Revenue Service, or that a court considering the issues would not hold
contrary to such opinions. PSI has not requested a ruling from the IRS (and no
such ruling will be sought) as to any of the federal income tax consequences
addressed in this opinion Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the application or interpretation of the federal income
tax laws.
2. This letter addresses only the specific tax opinion set forth
above. This letter does not address any other federal, state, local or foreign
tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). In
particular, we express no opinion regarding, among other things:
(i) whether and the extent to which any PSP20 Shareholder who has
provided or will provide services to PSP20 or PSI will have compensation income
under any provision of the Code and the effects of such compensation income,
including, but not limited to, the effect upon the basis and holding period of
the PSI Common Stock received by any such shareholder in the Merger;
(ii) the potential application of the "golden parachute" provisions
(Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax
<PAGE>
Public Storage Properties XX, Inc.
April 2, 1998
Page 4
provisions (Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, and
708 of the Code, or the regulations promulgated thereunder; and
(iii) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of PSP20 and/or holders of
options or warrants for PSP20 stock or that may be relevant to particular
classes of PSP20 Shareholders and/or holders of options or warrants for PSP20
stock, including but not limited to dealers in securities, corporate
shareholders subject to the alternative minimum tax, foreign persons, and
holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
3. No opinion is expressed as to any transaction other than the
Merger as described in the Reorganization Agreement or to any transaction
whatsoever, including the Merger, if all the transactions described in the
Reorganization Agreement are not consummated in accordance with the terms of
such Reorganization Agreement and without waiver or breach of any material
provision thereof or if all of the representations, warranties, statements and
assumptions upon which we relied are not true and accurate at all relevant
times. In the event any one of the statements, representations, warranties or
assumptions upon which we have relied to issue this opinion is incorrect, our
opinion might be adversely affected and may not be relied upon.
4. PSI's qualification and taxation as a REIT depend upon PSI's
ability to meet on a continuing basis, 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
level of distributions to shareholders, and the diversity of stock ownership.
Hogan & Hartson L.L.P. to the extent applicable, has relied upon representations
of PSI and PSP20 with respect to these matters and Hogan & Hartson L.L.P. has
not conducted an audit or investigation with respect to either PSI's or PSP20's
past compliance with these requirements and will not review PSI's compliance
with these requirements on a continuing basis. Accordingly, no assurance can be
given that the actual results of PSI's operations for any given taxable year in
the past or in the future will satisfy the requirements under the Code for
qualification and taxation as a REIT.
5. This opinion is intended solely for the purposes set forth in
Section 7.1.7 of the Reorganization Agreement; it may not be relied upon for any
other purpose or by any other person or entity, and may not be made available to
any other person or entity without our prior written consent.
<PAGE>
Public Storage Properties XX, Inc.
April 2, 1998
Page 5
We hereby consent to the filing of this opinion letter as Exhibit 8.1
to the Registration Statement and to the reference to this firm under the
captions "Legal Opinions" and "Federal Income Tax Considerations" in the Proxy
Statement and Prospectus. In giving the consent, we do not thereby admit that
we are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 (No. 333- ) with respect to Public
Storage, Inc.'s registration of common stock and in the related Proxy Statement
and Prospectus of Public Storage, Inc. and Public Storage Properties XX, Inc.
and to the incorporation by reference therein of our report dated February 23,
1998 with respect to the consolidated financial statements and schedule of
Public Storage, Inc. in its Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission, and to the
use of our report dated February 18, 1998 with respect to the financial
statements and schedule of Public Storage Properties XX, Inc. included in the
Registration Statement and Proxy Statement and Prospectus.
/S/ ERNST & YOUNG LLP
Los Angeles, California
April 2, 1998
<PAGE>
Exhibit 23.4
CONSENT OF THE NICHOLSON GROUP, LTD.
We hereby consent to the references to our firm under "The Merger -- Real
Estate Portfolio Appraisal by TNG" in the Proxy Statement and Prospectus which
is a part of this Registration Statement and to the other references to our firm
therein.
/s/ THE NICHOLSON GROUP, LTD.
April 2, 1998
Hartland, Wisconsin
<PAGE>
Exhibit 23.5
CONSENT OF ROBERT A. STANGER & CO., INC.
We hereby consent to the references to our firm under "The Merger --
Fairness Opinion from Stanger" in the Proxy Statement and Prospectus which is a
part of this Registration Statement and to the other references to our firm
therein.
/s/ ROBERT A. STANGER & CO., INC.
April 2, 1998
Shrewsbury, New Jersey
<PAGE>
Exhibit 99.1
PUBLIC STORAGE PROPERTIES XX, INC.
701 Western Avenue
Glendale, California 91201-2397
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints B. Wayne Hughes and Harvey Lenkin, or
either of them, with power of substitution, as Proxies, to appear and vote, as
designated below, all the shares of Common Stock Series A of Public Storage
Properties XX, Inc. ("PSP20") held of record by the undersigned on April 6,
1998, at the Special Meeting of Shareholders to be held on May __, 1998, and any
adjournments thereof.
In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED. IN THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR THE
PROPOSED MERGER AND THE PROPOSED AMENDMENT TO BYLAWS.
[X] Please mark votes as in this example.
1. PROPOSED MERGER. To consider and vote upon the merger of PSP20 with and
into Public Storage, Inc. ("PSI") pursuant to an Agreement and Plan of
Reorganization between PSP20 and PSI described in the accompanying Proxy
Statement and Prospectus.
[_] FOR [_] AGAINST [_] ABSTAIN
2. PROPOSED AMENDMENT TO BYLAWS. To consider and vote upon a related
amendment to PSP20's bylaws to authorize the merger in the form of Appendix
E to the accompanying Proxy Statement and Prospectus.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Other matters: In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the meeting.
The undersigned acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement and Prospectus dated April __, 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO
AMERICAN STOCK TRANSFER & TRUST COMPANY, 40 WALL STREET, 46TH FLOOR, NEW YORK,
NEW YORK 10005.
Dated: _____________________, 1998
____________________________________
Signature
____________________________________
Signature if held jointly
Please sign exactly as your name
appears. Joint owners should each
sign. Trustees and others acting in a
representative capacity should
indicate the capacity in which they
sign.
<PAGE>
Exhibit 99.2
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XX, INC.
Please read and follow carefully the instructions set forth below, which
set forth the requirements that need to be complied with in order to make an
effective election. Nominees, trustees or other persons who hold shares of
Public Storage Properties XX, Inc. ("PSP20") Common Stock Series A, par value
$.01 per share ("PSP20 Common Stock"), in a representative capacity are directed
to Instruction F(4).
TO BE EFFECTIVE, THIS CASH ELECTION FORM, PROPERLY COMPLETED AND SIGNED
IN ACCORDANCE WITH THE ACCOMPANYING INSTRUCTIONS, TOGETHER WITH CERTIFICATES FOR
THE PSP20 COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E
BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY AMERICAN STOCK
TRANSFER & TRUST COMPANY (THE "DEPOSITARY") NAMED BELOW, AT THE APPROPRIATE
ADDRESS SET FORTH BELOW, NO LATER THAN THE ELECTION DEADLINE (AS DEFINED IN
INSTRUCTION A). DELIVERIES MADE TO ADDRESSES OTHER THAN THE ADDRESS FOR THE
DEPOSITARY SET FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES AND THE DEPOSITARY
WILL NOT BE RESPONSIBLE THEREFOR.
HOLDERS OF PSP20 COMMON STOCK WHO INTEND TO RECEIVE PUBLIC STORAGE, INC.
("PSI") COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND
SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED
THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM BANKBOSTON N.A. (THE "EXCHANGE
AGENT") WHICH WILL BE MAILED AFTER THE CONSUMMATION OF THE MERGER.
This Cash Election Form is to be executed and returned to the Depositary
at the following address:
<TABLE>
<CAPTION>
<S> <C>
BY MAIL, HAND OR OVERNIGHT COURIER OR
FOR DUPLICATE COPIES OF MATERIAL FOR INFORMATION
American Stock Transfer & Trust Company Shareholder Communications Corporation
Attn: Reorganization Department (800) 733-8481, extension 406
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
(718) 921-8200
</TABLE>
Delivery of this instrument to an address other than as set forth above
will not constitute a valid delivery. The accompanying instructions should be
read carefully before this Cash Election Form is completed.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
This Cash Election Form is being delivered in connection with the merger
(the "Merger") of PSP20 with and into Public Storage, Inc. ("PSI"), pursuant to
the Agreement and Plan of Reorganization dated as of February 13, 1998, between
PSI and PSP20 (the "Merger Agreement").
The undersigned, subject to the Election and Allocation Procedures (as
defined below) and the other terms and conditions set forth in this Cash
Election Form, including the documents incorporated herein by reference, hereby
(a) surrenders the certificate(s) (the "Certificates") representing the shares
of PSP20 Common Stock listed in Box A (Certificate Information) and (b) elects
(an "Election"), as indicated below, upon consummation of the Merger to have
each of the shares of PSP20 Common Stock represented by the Certificates
converted into the right to receive $22.57 in cash (subject to adjustment as
described in the Merger Agreement), without interest (a "Cash Election").
If the Depositary has not received your properly completed Cash Election
Form, accompanied by your stock Certificates, by the Election Deadline (as
defined in Instruction A) (unless Box E (Guaranty of Delivery) has been properly
completed and such Certificates are received by the Depositary by the Guaranteed
Delivery Deadline), you will receive PSI Common Stock in the Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PSP20 Common Stock registered in the name of the undersigned and
either (i) beneficially owned by the undersigned, or (ii) owned by the
undersigned in a representative or fiduciary capacity for a particular
beneficial owner or for one or more beneficial owners, except as otherwise
permitted pursuant to Instruction F(4). A PSP20 Shareholder may not make a cash
election as to less than all of the shares of PSP20 Common Stock beneficially
owned by such shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Proxy Statement and Prospectus, dated April ___, 1998
(the "Proxy Statement and Prospectus"), furnished to shareholders of PSP20, in
connection with the Merger, all of which are incorporated herein by reference.
Receipt of the Proxy Statement and Prospectus, including the Merger Agreement
attached as Appendix A thereto, is hereby acknowledged. Copies of the Proxy
Statement and Prospectus are available from the Depositary upon request (see
Instruction G(10)).
It is understood that because pursuant to the Merger Agreement the number
of shares of PSP20 Common Stock to be converted into the right to receive cash
in the Merger are subject to limitations, no assurance can be given that an
Election by any given shareholder, including this Election by the undersigned,
can be accommodated. Rather, the Election by each holder of PSP20 Common Stock,
including this Election by the undersigned, will be subject to the results of
the election and allocation procedures set forth in the Merger Agreement and
described in the Proxy Statement and Prospectus (the "Election and Allocation
Procedures").
1
<PAGE>
INSTRUCTIONS
The Execution Section of this Cash Election Form should be properly
filled in, dated and signed, torn off and delivered, together with all stock
Certificates representing PSP20 Common Stock currently held by you (unless
delivery is guaranteed in Box E in accordance with Instruction A), to the
Depositary at the appropriate address set forth on the front of this Cash
Election Form. Please read and follow carefully the instructions regarding
completion of this Cash Election Form set forth below. If you have any
questions concerning this Cash Election Form or require any information or
assistance, see Instruction G(1).
HOLDERS OF PSP20 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN
THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT THEIR
STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE MAILED AFTER
THE CONSUMMATION OF THE MERGER.
A. TIME IN WHICH TO ELECT
In order for an Election to be effective, the Depositary must receive a
properly completed Cash Election Form, accompanied by all stock Certificates
representing PSP20 Common Stock currently held by you, NO LATER THAN 5:00 P.M.,
NEW YORK CITY TIME, ON THE LAST BUSINESS DAY BEFORE THE DAY OF THE MEETING OF
SHAREHOLDERS OF PSP20 (the "Election Deadline"). If all other conditions set
forth in the Merger Agreement have been met or, if permissible, waived, the
effective time of the Merger (the "Effective Time") could occur on the same day
approval of the Merger by shareholders of PSP20 is obtained. THUS, SHAREHOLDERS
ARE URGED TO DELIVER A PROPERLY COMPLETED CASH ELECTION FORM, ACCOMPANIED BY
STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY, AS DESCRIBED BELOW), NO
LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON MAY ___, 1998, IN ORDER TO ASSURE
THAT THEIR CASH ELECTION FORM WILL BE RECEIVED BY THE ELECTION DEADLINE. As
soon as the date on which the effective time of the Merger is anticipated to
occur is determined, PSP20 and PSI will publicly announce such date, although no
assurance can be given that the Effective Time will occur on such date. Persons
whose stock Certificates are not immediately available may also make an Election
by completing this Cash Election Form and having Box E (Guaranty of Delivery)
properly completed and duly executed by a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (subject to the condition that the Certificates, the delivery of
which is thereby guaranteed, are in fact delivered to the Depositary no later
than 5:00 p.m., New York City Time, on the third business day after the Election
Deadline (the "Guaranteed Delivery Deadline")).
IF THE DEPOSITARY HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH ELECTION
FORM, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE ELECTION DEADLINE (UNLESS
BOX E (GUARANTY OF DELIVERY) HAS BEEN PROPERLY COMPLETED AND SUCH CERTIFICATES
ARE RECEIVED BY THE DEPOSITARY BY THE GUARANTEED DELIVERY DEADLINE), YOU WILL
RECEIVE PSI COMMON STOCK IN THE MERGER.
For instructions regarding changes or revocations of Elections and the
time in which such changes or revocations can be made, see Instructions F(1) and
F(2) below.
B. ELECTIONS
This Cash Election Form provides for your Election, subject to the
Election and Allocation Procedures and the other terms and conditions set forth
hereunder and in the documents incorporated herein by reference, upon
consummation of the Merger to have each of the shares of PSP20 Common Stock
covered by this Cash Election Form converted into the right to receive $22.57 in
cash (subject to adjustment as described in the Merger Agreement), without
interest (a "Cash Election").
You should understand that your Election is subject to certain terms and
conditions that are set forth in the Merger Agreement and described in the Proxy
Statement and Prospectus. The Merger Agreement is included as Appendix A to the
Proxy Statement and Prospectus. Copies of the Proxy Statement and Prospectus
may be requested from the Depositary at the address and telephone numbers set
forth on the first page of this Cash Election Form (see Instruction G(10)). The
delivery of this Cash Election Form to the Depositary constitutes
acknowledgement of the receipt of the Proxy Statement and Prospectus. EACH
HOLDER OF PSP20 COMMON STOCK IS STRONGLY ENCOURAGED TO READ THE PROXY STATEMENT
AND PROSPECTUS IN ITS ENTIRETY AND TO DISCUSS THE CONTENTS THEREOF, THE MERGER
AND THIS CASH ELECTION FORM WITH HIS OR HER PERSONAL FINANCIAL AND TAX ADVISORS
PRIOR TO DECIDING WHETHER TO ELECT CASH. THE TAX CONSEQUENCES TO A HOLDER OF
PSP20 COMMON STOCK WILL VARY DEPENDING UPON A NUMBER OF FACTORS. FOR CERTAIN
INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF AN ELECTION, SEE
"FEDERAL INCOME TAX CONSIDERATIONS -- THE MERGER" IN THE PROXY STATEMENT AND
PROSPECTUS.
C. CASH ELECTION
By completing and submitting the Cash Election Form, you are electing,
subject to the Election and Allocation Procedures and the other terms and
conditions set forth in this Cash Election Form, including the documents
incorporated herein by reference, to receive cash for all of the shares of PSP20
Common Stock covered by this Cash Election Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF PSP20 COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN
THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT THEIR
STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE MAILED AFTER
THE CONSUMMATION OF THE MERGER.
E. FAILURE TO MAKE EFFECTIVE CASH ELECTION
If you have failed to make an effective Cash Election, or if your
Election is deemed by the Depositary or PSI to be defective in any way, or if
your Cash Election Form is not accompanied by your Certificates (unless Box E
(Guaranty of Delivery) has been properly completed and such Certificates are
received by the Depositary by the Guaranteed Delivery Deadline), you will
receive PSI Common Stock in the Merger.
F. SPECIAL CONDITIONS
(1) REVOCATION OF ELECTION. An election may be revoked by the person or
persons making such election by a written notice signed and dated by such person
or persons and received by the Depositary prior to the Election Deadline,
identifying the name of the registered holder of the PSP20 Common Stock subject
to such Election and the serial numbers shown on the Certificates representing
such PSP20 Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written
2
<PAGE>
notice to the Depositary, request the return of the stock Certificates submitted
to the Depositary and such Certificates will be returned to such person or
persons (at the shareholder's risk) within five business days of receipt of such
request.
(2) NULLIFICATION OF ELECTION. All Cash Election Forms will be void and of
no effect if the Merger is not consummated, and Certificates submitted therewith
shall be promptly returned to the persons submitting the same.
(3) ELECTIONS SUBJECT TO ALLOCATION. All Elections are subject to the
Election and Allocation Procedures set forth in the Merger Agreement and
described in the Proxy Statement and Prospectus under the caption "The Merger --
General" and to the other terms and conditions set forth thereunder and
hereunder, including the documents incorporated herein by reference.
(4) SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of
record of shares of PSP20 Common Stock who hold such shares as nominees,
trustees or in other representative or fiduciary capacities (a "Representative")
may submit one or more Cash Election Forms covering the aggregate number of
shares of PSP20 Common Stock held by such Representative for the beneficial
owners for whom the Representative is making an Election, provided, that such
Representative certifies that each such Cash Election Form covers all the shares
of PSP20 Common Stock held by such Representative for a particular beneficial
owner. Any Representative who makes an Election or a Non-Election may be
required to provide the Depositary with such documents and/or additional
certifications, if requested, in order to satisfy the Depositary that such
Representative holds such shares of PSP20 Common Stock for a particular
beneficial owner of such shares. If any shares held by a Representative are not
covered by an effective Cash Election Form, they will be exchanged for PSI
Common Stock.
G. GENERAL
(1) EXECUTION AND DELIVERY. In order to make an effective Election, you must
correctly fill in the Execution Section of this Cash Election Form. After
dating and signing it, you are responsible for its delivery, accompanied by all
stock Certificates representing PSP20 Common Stock currently held by you or a
proper Guaranty of Delivery of such stock Certificates pursuant to Instruction
A, to the Depositary at the address set forth on the front of this Cash Election
Form by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS CASH
ELECTION FORM; HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF YOU CHOOSE TO
USE THE MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT
REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES. DELIVERY OF
STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH RESPECT TO
SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY RECEIVED
BY THE DEPOSITARY.
(2) SIGNATURES. Except as otherwise permitted below, you must sign this Cash
Election Form exactly the way your name appears on the face of your
Certificates. If the shares are owned by two or more persons, each must sign
exactly as his or her name appears on the face of the Certificates. If shares
of PSP20 Common Stock have been assigned by the registered owner, this Cash
Election Form should be signed in exactly the same way as the name of the
assignee appearing on the Certificates or transfer documents. See Instructions
G(5)(a) and G(5)(b).
(3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. None of PSP20, PSI and the
Depositary will be under any obligation to notify you or anyone else that the
Depositary has not received a properly completed Cash Election Form or that any
Cash Election Form submitted is defective in any way.
Any and all disputes with respect to Cash Election Forms or to Elections
made in respect of PSP20 Common Stock (including but not limited to matters
relating to the Election Deadline, time limits, defects or irregularities in the
surrender of any stock Certificate, effectiveness of any Elections and
computations of allocations) will be resolved by PSI and its decision will be
conclusive and binding on all concerned. PSI may delegate this function to the
Depositary in whole or in part. PSI or the Depositary shall have the absolute
right in its sole discretion to reject any and all Cash Election Forms and
surrenders of stock Certificates which are deemed by either of them to be not in
proper form or to waive any immaterial irregularities in any Cash Election Form
or in the surrender of any stock Certificate. Surrenders of stock Certificates
will not be deemed to have been made until all defects or irregularities that
have not been waived have been cured.
(4) ISSUANCE OF PAYMENT CHECK(S). If the Payment Check(s) are to be issued
in the name of the registered holder(s) as inscribed on the surrendered
Certificate(s), no guarantee of the signature on the Cash Election Form is
required. For corrections in name and change in name not involving changes in
ownership, see Instruction G(5)(c).
(5) ISSUANCE OF PAYMENT CHECK(S) IN DIFFERENT NAMES. If the Payment Check(s)
are to be issued in the name of someone other than the registered holder(s) of
the surrendered Certificate(s), you must follow the guidelines below. Note that
in each circumstance listed below, shareholder(s) must have signature(s)
guaranteed in Box C and complete Box F.
(a) ENDORSEMENT AND GUARANTEE. The Certificate(s) surrendered must be
properly endorsed (or accompanied by appropriate stock powers properly
executed) by the registered holder(s) of such Certificate(s) to the person
who is to receive the Payment Check(s). The signature(s) of the registered
holder(s) on the endorsement or stock powers must correspond with the name(s)
written upon the face of the Certificate(s) in every particular and must be
medallion guaranteed by an eligible guarantor institution as defined below.
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally an eligible guarantor institution, as defined in Rule 17Ad-
15 of the regulations of the Securities and Exchange Commission, means:
(i) Banks (as that term is defined in Section 3(a) of the Federal
Deposit Insurance Act);
(ii) Brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, and government
securities brokers, as those terms are defined under the Securities
Exchange Act of 1934;
(iii) Credit unions (as that term is defined in Section 19(b)(1)(A) of
the Federal Reserve Act);
(iv) National securities exchanges, registered securities
associations, clearing agencies, as those terms are used under the
Securities Exchange Act of 1934; and
(v) Savings associations (as that term is defined in Section 3(b) of
the Federal Deposit Insurance Act).
3
<PAGE>
(b) TRANSFEREE'S SIGNATURE. The Cash Election Form must be signed by the
transferee or assignee or his or her agent, and should not be signed by the
transferor or assignor. See Box B (Sign Here). The signature of such
transferee or assignee must be medallion guaranteed by an eligible guarantor
institution as provided in Instruction G(5)(a).
(c) CORRECTION OF OR CHANGE IN NAME. For a correction of name or for a
change in name which does not involve a change in ownership, proceed as
follows. For a change in name by marriage, etc., the Cash Election Form
should be signed, e.g., "Mary Doe, now by marriage Mary Jones." For a
correction in name, the Cash Election Form should be signed, e.g., "James E.
Brown, incorrectly inscribed as J.E. Brown." The signature in each case
should be guaranteed in the manner described in Instruction G(5)(a) above and
Box F should be completed.
You should consult your own tax advisor as to any possible tax
consequences resulting from the issuance of Payment Check(s) in a name
different from that of the registered holder(s) of the surrendered
Certificate(s).
(6) SUPPORTING EVIDENCE. In case any Cash Election Form, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or any person in any other fiduciary or
representative capacity, or by an officer of a corporation on behalf of the
corporation, there must be submitted (with the Cash Election Form, surrendered
Certificate(s), and/or stock powers) documentary evidence of appointment and
authority to act in such capacity (including court orders and corporate
resolutions when necessary), as well as evidence of the authority of the person
making such execution to assign, sell or transfer the Certificate(s). Such
documentary evidence of authority must be in form satisfactory to the
Depositary.
(7) SPECIAL MAILING INSTRUCTIONS. The Payment Check(s) will be mailed to the
address of the registered holder(s) as indicated in Box A (Certificate
Information), unless instructions to the contrary are given in Box G (Special
Mailing Instructions).
(8) LOST CERTIFICATES. If you are not able to locate your Certificate(s)
representing PSP20 Common Stock, you should contact American Stock Transfer &
Trust Company, PSP20's transfer agent, at (800) 937-5449 or (718) 921-8200. In
such event, the transfer agent will forward additional documentation which the
shareholder must complete in order to effectively surrender such lost or
destroyed Certificate(s). There will be a cost to replace lost Certificates.
(9) FEDERAL INCOME TAX WITHHOLDING. Under Federal income tax law, the
Depositary is required to file a report with the Internal Revenue Service
disclosing any payments of cash being made to each holder of Certificates
formerly representing shares of PSP20 Common Stock pursuant to the Merger
Agreement. In order to avoid backup withholding of Federal income tax on any
cash received upon the surrender of Certificate(s), a holder thereof must,
unless an exemption applies, provide the Depositary with his or her correct
taxpayer identification number ("TIN") on Substitute Form W-9, which is part of
this Cash Election Form (Box D), and certify, under penalties of perjury, that
such number is correct and that such holder is not otherwise subject to backup
withholding. If the correct TIN and certifications are not provided, a $50
penalty may be imposed by the Internal Revenue Service and payments made for
surrender of Certificate(s) may be subject to backup withholding of 31%. In
addition, if a holder makes a false statement that results in no imposition of
backup withholding, and there was no reasonable basis for making such a
statement, a $500 penalty may also be imposed by the Internal Revenue Service.
Backup withholding is not an additional Federal income tax. Rather, the
Federal income tax liability of a person subject to backup withholding will be
reduced by the amount of such tax withheld. If backup withholding results in an
overpayment of income taxes, a refund may be obtained from the Internal Revenue
Service.
The TIN that must be provided on the Substitute Form W-9 is that of the
registered holder(s) of the Certificate(s) at the effective time of the Merger.
The TIN for an individual is his or her social security number. The box in Part
II of the Substitute Form W-9 may be checked if the person surrendering the
Certificates has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part II has been checked, the
person surrendering the Certificate(s) must also complete the Certificate of
Awaiting Taxpayer Identification Number below in order to avoid backup
withholding. Notwithstanding that the box in Part II is checked (and the
Certificate of Awaiting Taxpayer Identification Number is completed), the
Depositary will withhold 31% on all cash payments with respect to surrendered
Certificate(s) made prior to the time it is provided with a properly certified
TIN.
Exempt persons (including, among others, corporations) are not subject to
backup withholding. A foreign individual may qualify as an exempt person by
submitting Form W-8 or a substitute Form W-8, signed under penalties of perjury,
certifying to such person's exempt status. A form of such statement can be
obtained from the Depositary. A Certificate holder should consult his or her
tax advisor as to such holder's qualification for an exemption from backup
withholding and the procedure for obtaining such exemption.
The signature and date provided on the Substitute Form W-9 will serve to
certify that the TIN and withholding information provided in this Cash Election
Form are true, correct and complete.
(10) QUESTIONS AND REQUESTS FOR INFORMATION OR ASSISTANCE. If you have any
questions or need assistance to complete this Cash Election Form, please contact
Shareholder Communications Corporation at (800) 733-8481, extension 406
(individual holders), or (212) 805-7000 (banks and brokers). You may also
obtain additional copies of the Cash Election Form and the Proxy Statement and
Prospectus from the Depositary at the addresses and telephone numbers set forth
on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the Merger becomes effective, the Depositary
will make the allocations of cash to be received by holders of PSP20 Common
Stock or their designees in accordance with the Election and Allocation
Procedures. The Depositary will thereafter issue and mail to you a check for
any cash to which you are entitled, provided you have delivered the required
Certificates for your PSP20 Common Stock in accordance with the terms and
conditions hereof, including the documents incorporated herein by reference.
If you do not submit an effective Cash Election Form, the Exchange Agent
will forward to you, as soon as practicable after the Merger becomes effective,
a Letter of Transmittal for you to use to send in your stock Certificates for
shares of PSP20 Common Stock, containing appropriate instructions for
surrendering such Certificates at that time. After the Exchange Agent receives
your stock Certificates with a properly completed Letter of Transmittal, it will
issue and mail to you a certificate or certificates for PSI Common Stock to
which you are entitled (and, if applicable, a check in lieu of a fractional
share), provided you have delivered the required Certificates for your PSP20
Common Stock in accordance with the terms and conditions of the Letter of
Transmittal, including the documents incorporated therein by reference.
DO NOT ENCLOSE YOUR PROXY CARD RELATING TO THE SPECIAL MEETING WITH
THIS CASH ELECTION FORM, YOUR PROXY CARD SHOULD BE RETURNED IN THE POSTAGE-PAID
ENVELOPE ENCLOSED WITH THE PROXY STATEMENT AND PROSPECTUS FOR THAT PURPOSE.
4
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XX, INC.
EXECUTION SECTION
BOX A
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.)
<S> <C> <C>
Number of Shares
Name and Address of Registered Holder(s) as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- ---------------------------------------------------------------------- ------------------ -----------------
__________________ _________________
__________________ _________________
__________________ _________________
__________________ _________________
Total Shares:
=================
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATE HOLDER(S) SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Cash Election Form and to
deliver for surrender and cancellation the above-described Certificate(s)
delivered herewith and that the rights represented by the Certificate(s) are
free and clear of all liens, restrictions, charges and encumbrances and are not
subject to any adverse claim. The undersigned will, upon request, execute any
additional documents necessary or desirable to complete the surrender of the
Certificate(s) surrendered herewith. All authority herein conferred shall
survive the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Delivery of the Certificate(s) for
surrender and cancellation may be revoked only in accordance with Instruction
F(2).
BOX B
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________________
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this Cash Election Form.
<S> <C>
Signature(s): ___________________________________________________________________________________________________
___________________________________________________________________________________________________
Date: ________________________________ Telephone Number: ______________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock Certificate(s) or by person(s) authorized to become
registered holders by documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or in any other fiduciary or representative capacity, please provide the following
information. (See Instruction G(6)).
Name(s): ___________________________________________________________________________________________________
___________________________________________________________________________________________________
Capacity (Full Title): ___________________________________________________________________________________________________
Address: ___________________________________________________________________________________________________
___________________________________________________________________________________________________
__________________________________________________________________________________________________________________________________
</TABLE>
BOX C
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________________
SIGNATURE GUARANTEE
<S> <C>
To be completed only if required by Instruction G(5). Your signature must be MEDALLION GUARANTEED by an eligible financial
institution. Note: a notarization by a notary public is not acceptable.
FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW.
__________________________________________________________________________________________________________________________________
</TABLE>
E-1
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XX, INC.
EXECUTION SECTION (CONTINUED)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF
AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED.
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BOX D
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SUBSTITUTE SIGNING AND DATING BELOW. _______________________________
___________________________________________________________________________________________________
Form W-9 PART 2 - Check the box if you are not subject to backup withholding because
(1) you have not been notified that you are subject to backup withholding as a
Department of the Treasury result of failure to report all interest or dividends or (2) the Internal Revenue
Internal Revenue Service Service has notified you that you are no longer subject to backup withholding. [ ]
___________________________________________________________________________________________________
Payer's Request for Taxpayer Certification - Under penalties of perjury, I certify PART 3 -
Identification Number (TIN) that the information provided on this form is true,
correct and complete. Awaiting TIN [ ]
_________________
Signature: Date:
------------------------------------------- -------------------------------------------------------
___________________________________________________________________________________________________________________________________
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___________________________________________________________________________________________________________________________________
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed
or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or
Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I
do not provide a taxpayer identification number by the time of payment, 31% of any cash payment made to me will be withheld, but
that such amount will be refunded to me if I then provide a Taxpayer Identification Number within sixty (60) days.
<S> <C>
Signature: Date:
----------------------------------------------------------------- ------------------------------------------------
___________________________________________________________________________________________________________________________________
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BOX E
___________________________________________________________________________________________________________________________________
GUARANTY OF DELIVERY
To be used only if Certificates are not surrendered herewith. (See instruction A.) The undersigned (check appropriate boxes below)
guarantees to deliver to the Depositary at the appropriate address set forth above the Certificates for shares of PSP20 Common
Stock submitted with this Cash Election Form no later than 5:00 p.m., New York City Time, on the third business day after the
Election Deadline (as defined in Instruction A).
<S> <C> <C>
[ ] A member of a registered national Firm: _______________________________________________________
securities exchange
Authorized Signature: _______________________________________________________
[ ] A member of the National Association Address: _______________________________________________________
of Securities Dealers, Inc.
_______________________________________________________
[ ] A commercial bank or trust company Telephone Number: _______________________________________________________
in the United States
___________________________________________________________________________________________________________________________________
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SPECIAL PAYMENT AND MAILING INSTRUCTIONS
The undersigned understands that the check issued as payment in cash (such
checks being referred to herein as "Payment Checks") with respect to the PSP20
Common Stock surrendered will be issued in the same name(s) as the
Certificate(s) surrendered and will be mailed to the address of the registered
holder(s) indicated above, unless otherwise indicated in Box F or Box G below.
If Box F is completed, the signature of the undersigned must be guaranteed as
set forth in Instruction G(5).
BOX F
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___________________________________________________________________________________________________________________________________
SPECIAL PAYMENT INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued in the name(s) of someone other than the registered holder(s) set
forth above. Signature must be guaranteed. (See Instruction G(5).)
<S> <C>
Name: ______________________________________________________________________________________
Address: ______________________________________________________________________________________
______________________________________________________________________________________
Social Security Number or
Employer Identification Number: ______________________________________________________________________________________
___________________________________________________________________________________________________________________________________
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BOX G
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___________________________________________________________________________________________________________________________________
SPECIAL MAILING INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued to the registered holder(s) and mailed to an address other than
that of the registered holder(s) set forth above. (See Instruction G(7).)
<S> <C>
Address: __________________________________________________________________________________________________
__________________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
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E-2
<PAGE>
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- -----------------------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
<S> <C>
-- [Graphics for Execution Section Page E-1,
left margin.] [Graphics for Execution Section Page E-2,
right margin.] --
- -----------------------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
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