<PAGE>
As filed with the Securities and Exchange Commission on June 30, 1999
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)
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<S> <C>
95-3551121 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial Classification Code Number)
701 Western Avenue HARVEY LENKIN
Glendale, California 91201-2397 Public Storage, Inc.
(818) 244-8080 701 Western Avenue
(Address, including zip code, and Glendale, California 91201-2397
telephone number, including area code, (818) 244-8080
of registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
</TABLE>
______________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
______________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
______________
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________
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CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Proposed Proposed
Amount Offering Maximum Maximum
to be Price Aggregate Amount of
Title of Each Class of Securities to be Registered Registered Per Share Offering Price Registration Fee
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value per share 1,200,000 shares(1) (1) $9,042,749(1) $2,513.89(1)(2)
===================================================================================================================================
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(1) This Registration Statement relates to the proposed acquisition by the
Registrant of all of the 50,140 units of limited partnership interest
("Units") in PS Partners III, Ltd. (the "Partnership") that are not
currently owned by the Registrant. The Registrant's acquisition of the
50,140 Units will be accomplished through a merger of a subsidiary of the
Registrant into the Partnership and the conversion of the 50,140 Units into
either cash or common stock of the Registrant. The book value of the Units
at March 31, 1999 was $180.35 per Unit. The maximum number of shares of
Registrant to be issued in the merger is 1,200,000. The exact number of
shares of common stock of the Registrant to be issued in the merger cannot
be determined at this time.
(2) Calculated in accordance with rule 457(f)(2) under the Securities Act of
1933. $1,809 of the registration fee was previously paid in connection
with the Partnership's preliminary information statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PS PARTNERS III, LTD.
701 Western Avenue
Glendale, California 91201-2397
July __, 1999
Dear Limited Partner:
We enclose an information statement, notice of action without a meeting and
prospectus and accompanying cash election form relating to the acquisition by
Public Storage of all of the units of limited partnership interest in the
Partnership not currently owned by Public Storage. Public Storage, a general
partner of the Partnership, owns 61% of the Partnership units. Public Storage
is acquiring the units through a merger in which each of your units will be
converted into the right to receive a value of $545 in Public Storage common
stock or, at your election, in cash.
The Partnership is not asking you to approve the merger or related
amendment to the partnership agreement. Public Storage, the holder of a
majority of the Partnership units, has executed a written consent approving the
merger and the related amendment to the partnership agreement.
We are not asking you for a proxy and you are requested not to send us a
proxy. If you want to receive cash in this transaction, you must make a cash
election by August 5, 1999, as described in the accompanying cash election form.
If you have any questions, please contact Public Storage's Investor
Services Department at (800) 807-3055, (800) 421-2856 or (818) 244-8080.
Very truly yours,
PUBLIC STORAGE, INC.
General Partner
By: Harvey Lenkin
President
<PAGE>
PUBLIC STORAGE, INC.
PS PARTNERS III, LTD.
INFORMATION STATEMENT, NOTICE OF ACTION WITHOUT A MEETING AND PROSPECTUS
We are furnishing this information statement, notice of action without a
meeting and prospectus to limited partners of PS Partners III, Ltd. (the
"Partnership") in connection with the acquisition by Public Storage, Inc. of all
of the units of limited partnership interest not currently owned by Public
Storage. Public Storage, a general partner of the Partnership, owns 61% of the
Partnership units. Public Storage is acquiring the units through a merger in
which each unit not currently owned by Public Storage will be converted into the
right to receive a value of $545 in Public Storage common stock or, at your
election, in cash.
See "Risk Factors" beginning on page 12 for certain factors that you should
consider, including the following:
. Public Storage owns sufficient Partnership units to approve the merger
without your vote and has done so.
. Public Storage and the Partnership have not (1) negotiated the merger
at arm's length, (2) hired independent persons to negotiate the terms
of the merger for you or (3) asked any person to make an offer to buy
the Partnership's assets.
. The merger will be taxable for most of you. This means that original
taxable limited partners who receive either cash or stock will
recognize a substantial taxable gain.
. After the merger, if you do not elect cash you will own an investment
in an ongoing fully-integrated real estate company instead of an
interest in a specified portfolio of properties for a fixed period.
. If you receive Public Storage common stock, your level of
distributions will be significantly lower after the merger than the
amount you received as a limited partner of the Partnership.
. The Partnership's assets might be worth more later. Public Storage
will realize the benefit of any increase in value.
. You will not be entitled to dissenters' rights of appraisal under
---
California law in the merger.
. Public Storage, which controls the Partnership, has significant
conflicts of interest in connection with, and will benefit from, the
merger. In the absence of these conflicts, the terms of the merger
may have been more favorable to you.
The Public Storage common stock is traded on the New York Stock Exchange
under the symbol "PSA". On July __, 1999, the closing price of the Public
Storage common stock on the NYSE was $_______. There is no active market for
the Partnership units.
The Partnership is not asking you to approve the merger or related
amendment to the partnership agreement. Public Storage, the holder of a
majority of the Partnership units, has executed a written consent approving the
merger and the related amendment to the partnership agreement. We are mailing
this statement on or about July 7, 1999 to limited partners of record at the
close of business on the date of this statement.
___________________
We are not asking you for a proxy and you are requested not to send us a
proxy. If you want to receive cash in this transaction, you must make a cash
election by August 5, 1999, as described in the accompanying cash election form.
Neither the Securities and Exchange Commission nor any state's securities
regulator has approved the common stock of Public Storage to be issued under
this Information Statement, Notice of Action Without a Meeting and Prospectus or
determined if this Information Statement, Notice of Action Without a Meeting and
Prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense.
July __, 1999
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TABLE OF CONTENTS
<TABLE>
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Page
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Summary.............................................................................................. 1
Overview of Merger................................................................................. 1
Summary Risk Factors............................................................................... 1
Vote by Public Storage.......................................................................... 1
No Arm's Length Negotiation or Independent Representatives...................................... 1
The Merger is Taxable........................................................................... 1
Change from Finite Life to Infinite Life........................................................ 1
Lower Level of Distributions After the Merger................................................... 2
Potential Loss of Future Appreciation........................................................... 2
No Dissenters' Rights of Appraisal.............................................................. 2
Conflicts of Interest........................................................................... 2
Control and Influence over Public Storage by the Hughes Family and Public Storage
Ownership Limitations.......................................................................... 2
Uncertainty Regarding Market Price of Public Storage Common Stock............................... 2
Tax Risks of Ownership of Public Storage Common Stock - Failure to Maintain REIT Status......... 2
Financing Risks................................................................................. 2
Possible Future Dilution........................................................................ 2
Merger Payments Based on Appraisal Instead of Arm's Length Negotiation.......................... 2
Benefits to Insiders............................................................................... 2
Potential Benefits of the Merger................................................................... 3
The Partnership.................................................................................... 3
Public Storage..................................................................................... 3
Address and Phone Number........................................................................... 3
Background and Reasons for the Merger.............................................................. 3
Detriments of the Merger........................................................................... 4
Determination of Amounts to be Received by Limited Partners in the Merger.......................... 4
Federal Income Tax Matters......................................................................... 5
Fairness Analysis; Opinion of Financial Advisor.................................................... 5
Comparison of Partnership Units with Public Storage Common Stock................................... 7
Summary Financial Information...................................................................... 9
Relationships...................................................................................... 11
Risk Factors.......................................................................................... 12
Public Storage has approved the merger without your vote........................................... 12
Public Storage and the Partnership have not hired anyone to represent you.......................... 12
The merger is taxable to you....................................................................... 12
The merger will change your investment from finite life to infinite life if you receive stock...... 12
Your level of distributions will be lower after the merger if you receive stock.................... 12
You will not benefit from any increase in value of the properties.................................. 12
You have no dissenters' rights of appraisal........................................................ 12
Public Storage has conflicts of interest in the merger............................................. 12
The Hughes family could control Public Storage..................................................... 13
Provisions in Public Storage's organizational documents may prevent changes in control............. 13
The number of shares of Public Storage common stock to be issued in the merger has not been
determined........................................................................................ 13
Public Storage would incur adverse tax consequences if it fails to qualify as a REIT............... 13
Public Storage would incur a corporate level tax if it sold certain assets......................... 14
Public Storage and its shareholders are subject to financing risks................................ 14
The merger payments are based on an appraisal instead of arm's length negotiation.................. 14
Public Storage is subject to real estate operating risks........................................... 14
The Hughes family receives the benefit of tenant reinsurance premiums.............................. 15
Public Storage has no interest in Canadian mini-warehouses......................................... 15
The Hughes family has an interest in the merchandise and portable self-storage operations.......... 15
</TABLE>
ii
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Page
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Benefits to Insiders.................................................................................. 16
About This Proxy Statement and Prospectus............................................................. 16
Where You Can Find More Information................................................................... 16
Cautionary Statement.................................................................................. 18
The Merger............................................................................................ 19
General............................................................................................ 19
Background and Reasons for the Merger.............................................................. 19
Fairness Analysis.................................................................................. 20
Alternatives to the Merger......................................................................... 20
Liquidation..................................................................................... 20
Continued Ownership of the Partnership.......................................................... 21
Determination of Amounts to be Received by Limited Partners in the Merger.......................... 22
Potential Benefits of the Merger................................................................... 23
Detriments of the Merger........................................................................... 23
Fairness Analysis.................................................................................. 23
Comparison of Consideration to be Received in the Merger to Other Alternatives..................... 24
Real Estate Portfolio Appraisal by TNG............................................................. 27
Fairness Opinion from Stanger...................................................................... 30
The Merger Agreement............................................................................... 33
Cash Election Procedure............................................................................ 35
Consequences to the Partnership if the Merger is Not Completed..................................... 35
Costs of the Merger................................................................................ 36
Accounting Treatment............................................................................... 36
Regulatory Requirements............................................................................ 36
Comparison of Partnership Units with Public Storage Common Stock................................... 36
Amendment to Partnership Agreement.................................................................... 42
Approval of the Merger and Partnership Agreement Amendment............................................ 43
General............................................................................................ 43
Security Ownership of Certain Beneficial Owners and Management..................................... 43
Certain Related Transactions.......................................................................... 49
Description of Partnership's Properties............................................................... 50
Description of Public Storage's Properties............................................................ 54
Distributions and Price Range of Public Storage Common Stock.......................................... 56
Distributions and Market Prices of Partnership Units.................................................. 57
Description of Public Storage Capital Stock........................................................... 60
Common Stock....................................................................................... 60
Ownership Limitations.............................................................................. 60
Class B Common Stock............................................................................... 61
Preferred Stock.................................................................................... 62
Equity Stock....................................................................................... 62
Effects of Issuance of Capital Stock............................................................... 63
Federal Income Tax Considerations..................................................................... 64
Opinion of Counsel................................................................................. 64
The Merger......................................................................................... 64
General Tax Treatment of Public Storage............................................................ 65
Taxation of U.S. Shareholders Owning Public Storage Common Stock................................... 71
Taxation of Non-U.S. Shareholders.................................................................. 74
Ownership Records.................................................................................. 76
Proposed Changes to REIT Qualification Requirements................................................ 76
State and Local Taxes................................................................................. 77
Legal Opinions........................................................................................ 77
Experts............................................................................................... 77
Glossary.............................................................................................. 78
</TABLE>
iii
<PAGE>
Appendix A - Agreement and Plan of Reorganization among Public Storage, PS
Partners III Merger Co., Inc. and the Partnership dated as of
June 10, 1999
Appendix B - Real Estate Appraisal Report by The Nicholson Group, Ltd. for the
Partnership dated June 9, 1999
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated June 30, 1999
Appendix D - Proposed Amendment to the Partnership Agreement
Appendix E - Financial Statements of the Partnership
Appendix F - Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Partnership
iv
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SUMMARY
The following summary is qualified by the detailed information appearing
elsewhere in this statement, including the appendices.
Overview of Merger
Public Storage is acquiring the Partnership units Public Storage does not
currently own in the merger under the Agreement and Plan of Reorganization
attached as Appendix A to this statement as follows:
. A wholly owned, second tier subsidiary of Public Storage will be
merged into the Partnership.
. Each Partnership unit (other than units owned by Public Storage) will
be converted into the right to receive a value of $545 in Public
Storage common stock or, at your election, in cash. To be effective
you must make a cash election by August 5, 1999, as described in the
accompanying cash election form.
. The Partnership will make distributions to holders of Partnership
units to cause the estimated net asset value per unit as of August 6,
1999, the Effective Date, to be substantially equivalent to $545.
. The market value of the Public Storage common stock issued in the
merger will be based on the average of the per share closing prices of
the Public Storage common stock on the NYSE during the 20 consecutive
trading days ending on the fifth trading day prior to the Effective
Date.
. Following the merger, Public Storage will own all Partnership units
(through a wholly owned entity).
. Public Storage (through a wholly owned entity) and Wayne Hughes (chief
executive officer of Public Storage) will retain their general
partnership interests in the Partnership, and the Partnership will
remain in existence.
See "The Merger - Determination of Amounts to be Received by Limited
Partners in the Merger." For a description of the terms of the merger, see "The
Merger - The Merger Agreement."
The Public Storage common stock is listed on the NYSE. On June ___, 1999,
the last full trading day prior to the date of this statement, the reported
closing price per share of Public Storage common stock was $_______. There is
no established trading market for the Partnership units. See "Distributions and
Price Range of Public Storage Common Stock" and "Distributions and Market Prices
of Partnership Units."
Summary Risk Factors
The merger involves certain risks and detriments that you should consider,
including the following:
. Vote by Public Storage. Public Storage owns sufficient Partnership
units to approve the merger without your vote and has done so.
. No Arm's Length Negotiation or Independent Representatives. Public
Storage and the Partnership have not (1) negotiated the merger at
arm's length or (2) hired independent persons to negotiate the terms
of the merger for you. If independent persons had been hired, the
terms of the merger may have been more favorable to you. In addition,
Public Storage and the Partnership have not asked any person to make
an offer to buy the Partnership's assets. Other offers could have
generated higher prices.
. The Merger Is Taxable. The merger will be taxable for most of you.
This means that original taxable limited partners who receive either
cash or stock will recognize a substantial taxable gain.
. Change from Finite Life to Infinite Life. After the merger, if you do
not elect cash you will own an investment in an ongoing integrated
real estate company instead of an interest in a specified portfolio of
properties for a fixed period. Public Storage
. 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.
1
<PAGE>
If you receive Public Storage common stock in the merger, you will be
able to liquidate your investment only by selling your shares. The
market value of your shares may or may not reflect the full fair
market value of Public Storage's assets and will fluctuate.
. Lower Level of Distributions After the Merger. If you receive Public
Storage common stock, your level of distributions is expected to be
significantly lower after the merger than the amount you received as a
limited partner of the Partnership.
. Potential Loss of Future Appreciation. The Partnership's assets may
be worth more later. Public Storage will realize the benefit of any
increase in value.
. No Dissenters' Rights of Appraisal. You will not be entitled to
---
dissenters' rights of appraisal under California law in the merger.
. Conflicts of Interest. Public Storage, which controls the
Partnership, has conflicts of interest in, and will benefit from, the
merger. Public Storage has an interest in acquiring Partnership units
at the lowest possible price, while you have an interest in selling
your units at the highest possible price. In the absence of these
conflicts, the terms of the merger may have been more favorable to
you.
. Control and Influence over Public Storage by the Hughes Family and
Public Storage Ownership Limitations. The public shareholders of
Public Storage are substantially limited in their ability to control
Public Storage. The Hughes family owns approximately 30% of the
Public Storage common stock (approximately 33% upon conversion of
convertible stock). Also, Public Storage's charter documents restrict
the number of Public Storage shares that may be owned by any other
person. These ownership factors should prevent any takeover of Public
Storage not approved by Mr. Hughes.
. Uncertainty Regarding Market Price of Public Storage Common Stock. The
market price of Public Storage common stock may fluctuate after the
date that the number of shares to be issued to you is determined, but
before those shares actually are issued. In addition, the market
price could decrease because of sales of shares issued in this merger
and in the merger with another REIT described under "Description of
Public Storage's Properties" and for other reasons.
. Tax Risks of Ownership of Public Storage Common Stock - Failure to
Maintain REIT Status. Public Storage is subject to tax risks,
including risks as to Public Storage's continued qualification for
income tax purposes as a "Real Estate Investment Trust" or "REIT."
. Financing Risks. Public Storage, unlike the Partnership, borrows
money ($181 million at March 31, 1999), which increases the risk of
loss.
. Possible Future Dilution. The issuance of additional stock by Public
Storage can reduce the interest of Public Storage shareholders.
Public Storage has outstanding preferred stock ($1.1 billion at March
31, 1999) and intends to issue additional preferred stock that
prevents payment of distributions on Public Storage common stock
unless distributions are paid quarterly on the preferred stock.
. Merger Payments Based on Appraisal Instead of Arm's Length
Negotiation. The amount you receive in the merger is based on a third
party appraisal of 40 of the Partnership's Properties. However,
appraisals are opinions as of the date specified and are subject to
certain assumptions. The true worth or realizable value of these
properties may be higher or lower than the appraised value.
Benefits to Insiders
The merger involves certain benefits to Public Storage, including the
following:
. Own All Partnership Units. As a result of the merger, Public Storage
will own all of the Partnership units without taxable gain to Public
Storage.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by Public
Storage as owner of 61% of the Partnership units.
2
<PAGE>
. Issue Capital Stock. The merger will enable Public Storage, which is
seeking to expand its capital base, to issue up to 1 million shares of
common stock.
. Eliminate Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the competition of the
Partnership's properties with other mini-warehouses owned by Public
Storage.
Potential Benefits of the Merger
The following are the principal potential benefits of the merger to you:
(1) If you elect to receive cash, you will liquidate your investment at
approximately 109% of your original investment and at an amount substantially
higher than the prices in the limited secondary transactions involving
Partnership interests. Also, you will simplify your tax reporting for years
after 1999.
(2) If you receive Public Storage common stock, the principal potential
benefits to you are:
. Ownership Interest in a Diversified Real Estate Company. Because the
Partnership is not authorized to issue new securities or to reinvest
sale or financing proceeds, the Partnership is less able to take
advantage of new real estate investment opportunities. In contrast,
Public Storage has a substantially larger, more diversified investment
portfolio that reduces the risks associated with any particular assets
or group of assets and increases Public Storage's ability to access
capital markets for new capital investments.
. Increased Liquidity. There is no active market for the Partnership
units. In comparison, Public Storage has approximately 129 million
shares of common stock listed on the NYSE with an average daily
trading volume during the 12 months ended March 31, 1999 of
approximately 128,000 shares. Given Public Storage's market
capitalization and trading volume, you are likely to enjoy a more
active trading market and increased liquidity for the Public Storage
common stock you receive.
. Simplified Tax Reporting. The merger also will simplify your tax
reporting for years after 1999.
The Partnership
The Partnership owns (1) seven mini-warehouses directly, (2) interests in
34 mini-warehouses (the "Properties") jointly with Public Storage and (3) a 1.3%
interest in PS Business Parks, L.P. ("PSBP") jointly with Public Storage. Public
Storage has a significant interest in PSBP, which owns and operates commercial
properties. Governmental agencies have condemned two of the Properties. See
"Description of Partnership's Properties."
The general partners of the Partnership are Public Storage and Mr. Hughes.
Public Storage manages and operates the Properties under the "Public Storage"
name. See "Description of Partnership Properties." There is no active market
for the Partnership units. See "Distributions and Market Prices of Partnership
Units."
Public Storage
Public Storage is a fully integrated, self-administered and self-managed
REIT that acquires, develops, owns and operates mini-warehouses. Public Storage
is the largest owner and operator of mini-warehouses in the United States. At
March 31, 1999, Public Storage had equity interests (through direct ownership,
as well as general and limited partnership interests) in 1,313 mini-warehouses
located in 37 states. Public Storage also has an interest in PSBP.
Address and Phone Number
The principal executive offices of the Partnership and Public Storage are
located at 701 Western Avenue, Glendale, California 91201-2397. The telephone
number is (818) 244-8080.
Background and Reasons for the Merger
Public Storage and the Partnership have not negotiated the merger at arm's
length. Public Storage has structured the merger. Public Storage controls the
Partnership and has significant conflicts of interest in connection with, and
will benefit from, the merger. Public Storage and Mr. Hughes, the general
partners of the Partnership, believe that the merger is fair to you. This is
based in significant part on a third party appraisal of the Properties and on
the opinion of a financial advisor, in which the general partners concur.
The general partners organized the Partnership in 1984 to acquire
properties jointly with Public Storage and alone. The Partnership is well
beyond its original anticipated term. The Partnership originally
3
<PAGE>
anticipated selling the Properties and liquidating from five to eight years
after acquisition, i.e., between 1990 and 1993.
Public Storage was organized in 1980 and has increased its asset and
capital base substantially since that time. Much of Public Storage's growth has
resulted from increasing its interest in affiliated entities, like the
Partnership.
After the merger, Public Storage will own all of the Partnership units, and
the merger will eliminate almost all Partnership administrative expenses,
including the cost of operating as a public entity.
The consideration you receive in the merger is based on the appraised value
of 40 of the Properties as determined by a third party appraiser, The Nicholson
Group, Ltd. ("TNG"), as of April 30, 1999. The general partners believe that the
merger is fair to you. This is based in significant part on the TNG appraisal
of the Properties and on the opinion of a financial advisor, Robert A. Stanger &
Co., Inc. ("Stanger"), in which the general partners concur.
The general partners considered liquidation and continued ownership by
limited and general partners as alternatives to the merger. Based on a
comparison of the potential benefits and detriments of the merger with these
alternatives, the general partners concluded that the merger would be more
attractive to you than the alternatives considered. The general partners did
not ask any person to buy the Partnership's assets.
In comparing the merger to other alternatives, the general partners noted
the following:
Liquidation. The general partners oppose a sale of the Properties because
they believe that the Properties may continue to appreciate in value. In the
merger, you may either (1) convert your investment into an investment in Public
Storage, which like the Partnership primarily owns mini-warehouses, or (2)
receive cash based on the appraised value of the Properties. However, if the
Partnership liquidated its assets through asset sales to unaffiliated third
parties, you would not need to rely upon a real estate portfolio appraisal to
estimate the fair market value of the Properties.
Continued Ownership. The Partnership is operating profitably. Continued
ownership by the limited and general partners should provide you with continued
distributions of net operating cash flow and participation in any future
potential appreciation of the Properties and would avoid many of the risks
described under "Risk Factors." However, continued ownership by the limited and
general partners would fail to secure the potential benefits of the merger to
you described under "The Merger - Potential Benefits of the Merger" or to Public
Storage described under "The Merger - Benefits to Insiders."
Detriments of the Merger
For a summary of certain risks and detriments of the merger, refer to
"- Summary Risk Factors" beginning on page 2.
Determination of Amounts to be Received by Limited Partners in the Merger
The general partners have determined the amount to be received by you in
the merger based on the estimated net asset value per Partnership unit computed
as follows:
<TABLE>
<S> <C>
Estimated value of Partnership's
interest in the Properties (1) $64,988,000
Plus:
Market value of Partnership's
interest in PSBP (2) 5,776,000
Partnership's interest in other
tangible net assets and
liabilities (3) (255,000)
-----------
Net proceeds available for
distribution 70,509,000
Distributions to general partners (4) (705,000)
-----------
Distributions to limited partners $69,804,000
===========
Amount per Partnership unit (5) $ 545
===========
</TABLE>
_______________
(1) Reflects appraised value of 40 Properties determined by TNG as of April 30,
1999 and the Partnership's share of a condemnation award with respect to a
property condemned in its entirety. Assumes a sale of these Properties at
the appraised value and an allocation of the proceeds between the
Partnership and Public Storage based on their joint venture agreement. TNG
did not appraise the Property that was condemned in its entirety. See
"Description of
4
<PAGE>
Partnership's Properties" and "The Merger - Real Estate Portfolio Appraisal
by TNG".
(2) Reflects closing price of shares of PS Business Parks, Inc. on The American
Stock Exchange, Inc. ("AMEX") as of June 1, 1999 (the PSBP partnership
interests are exchangeable for those shares on a one unit for one share
basis). Assumes a sale of the units at that price and an allocation of the
proceeds between the Partnership and Public Storage based on their joint
venture agreement. See note (7) to table in "The Merger - Determination of
Amounts to be Received by Limited Partners in the Merger."
(3) Reflects the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of March 31, 1999.
(4) Represents subordinated incentive distributions payable to the general
partners and distributions attributable to general partners' 1% capital
interest in the Partnership. In accordance with the Partnership Agreement,
no subordinated incentive distributions are payable at this time.
(5) Based on 128,000 Partnership units.
Federal Income Tax Matters
The merger will be a taxable event and result in taxable gain or loss to
most of you whether you receive cash or stock. Taxable limited partners will
recognize gain or loss in an amount equal to the difference between the value of
what they receive in the merger (cash or stock) and their adjusted basis in
their Partnership units. It has been estimated that an original limited partner
will realize approximately $325 of capital gain per Partnership unit as a result
of the merger (assuming that the merger is effective as of the end of the second
quarter of 1999). The merger should not be a taxable event to Public Storage.
------ ---
See "Federal Income Tax Considerations - The Merger."
Fairness Analysis; Opinion of Financial Advisor
Public Storage and the Partnership have not negotiated the merger at arm's
length. Public Storage has structured the merger. Public Storage controls the
Partnership and has significant conflicts of interest in connection with, and
will benefit from, the merger. The general partners believe that the merger is
fair to you. This is based in significant part on the TNG appraisal and the
opinion of a financial advisor, in which the general partners concur.
The general partners base their conclusion on the following factors:
. The TNG appraisal of 40 of the 41 Properties.
. Stanger delivered a fairness opinion to the Partnership.
. Although the merger has been structured by Public Storage, the merger
provides you with a choice of converting your investment into an
investment in Public Storage or receiving cash for your investment.
. Based on certain significant assumptions, qualifications and
limitations, the consideration to be received by you compares
favorably with other alternatives.
The general partners believe that the consideration to be received by you
in the merger compares favorably with
. the prices of the limited secondary sales of Partnership units;
. a range of estimated going-concern values per unit;
. an estimated liquidation value per unit; and
. the book value per unit.
The general partners recognize that these comparisons are subject to
significant assumptions, qualifications and limitations. See "The Merger -
Comparison of Consideration to be Received in the Merger to Other Alternatives."
The Partnership engaged Stanger 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 you. The full text of the opinion is
set forth in Appendix C to this statement and should be read in its entirety.
Subject to the assumptions, qualifications and limitations contained in the
fairness opinion, the fairness opinion concludes that, as of the date of the
fairness opinion, the consideration to be received in the merger is fair to you,
from a financial point of view. In arriving at its opinion, Stanger considered,
among other things
. the independent appraised value of 40 of the Properties;
. the estimated liquidation value of the Partnership prepared by the
Partnership, based upon a sale of the Partnership's assets to a third
party for cash;
5
<PAGE>
. financial analyses and projections prepared by the general partners
concerning the going-concern value of the Partnership under its
current business plan; and
. a comparison of limited secondary sales prices of Partnership units
with the consideration being received by you in the merger.
The Partnership did not ask Stanger to
. select the method of determining the consideration being received by
you in the merger;
. make any recommendation to you whether to select cash or Public
Storage common stock in the merger; or
. express any opinion as to the business decision regarding the merger
or its alternatives or tax factors resulting from the merger or
relating to Public Storage's qualification as a REIT.
Stanger's opinion is based on business, economic, real estate and
securities markets and other conditions as of the date of its analysis. See "The
Merger - Fairness Opinion from Stanger."
The general partners believe that hiring TNG to appraise the Properties and
Stanger to deliver a fairness opinion helped the general partners fulfill their
duties to you. However, the Partnership is paying TNG and Stanger for their
services and Public Storage is expected to pay them for other assignments. See
"The Merger - Real Estate Portfolio Appraisal by TNG" and "- Fairness Opinion
from Stanger."
6
<PAGE>
Comparison of Partnership Units with Public Storage Common Stock
The information below summarizes certain principal differences between the
Partnership units and the Public Storage common stock. The effect of the merger
if you receive Public Storage common stock is set forth in italics below each
comparison. For an expanded discussion of these and other comparisons and
effects, see "The Merger - Comparison of Partnership Units with Public Storage
Common Stock."
<TABLE>
<CAPTION>
Partnership Public Storage
Investment Objectives and Policies
<S> <C>
To provide (1) quarterly cash distributions from To maximize funds from operations, or FFO, allocable to holders
operations and (2) long-term capital gains of Public Storage common stock and to increase shareholder value
through appreciation in the value of the through 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
Public Storage. Accordingly, FFO is not a substitute for Public
Storage's net cash provided by operating activities or net income
as a measure of Public Storage's liquidity or operating
performance. An increase in Public Storage's FFO will not
necessarily correspond with an increase in distributions to
holders of Public Storage common stock. See "- Liquidity,
Marketability and Distributions."
</TABLE>
If you receive Public Storage common stock in the merger, you will change
your investment from "finite-life" to "infinite life" and realize the value of
your investment only by selling your Public Storage common stock. If Public
Storage issues additional securities, including securities that would have
priority over Public Storage common stock as to cash flow, distributions and
liquidation proceeds, it will dilute the interest of Public Storage
shareholders. Public Storage intends to issue additional securities under a
currently effective registration statement. See "Risk Factors - Uncertainty
Regarding Market Price of Public Storage Common Stock" and "- Financing Risks -
Dilution and Subordination."
Borrowing Policies
<TABLE>
<S> <C>
No outstanding borrowings. Permitted to borrow in furtherance of its investment objectives,
subject to certain limitations.
</TABLE>
Public Storage has outstanding debt and reinvests proceeds from borrowings.
Incurring debt increases the risk of loss of investment. Public Storage does
not plan to finance the Properties.
Transactions with Affiliates
<TABLE>
<S> <C>
Limited partner approval required for a variety Restricted from acquiring properties from its affiliates or from
of business transactions with affiliates. See selling properties to them unless the transaction is approved by
"Amendment to Partnership Agreement." a majority of Public Storage's independent directors and is fair
to Public Storage based on an independent appraisal.
</TABLE>
Given Public Storage's control of all Partnership voting decisions, both
Public Storage and the Partnership can enter into transactions with affiliates
without the need for approval of either the public shareholders or public
limited partners. In the case of Public Storage, however, these transactions
require approval of Public Storage's independent directors.
7
<PAGE>
<TABLE>
<CAPTION>
Partnership Public Storage
Properties (As of March 31, 1999)
<S> <C>
Direct and indirect equity interests in 41 Direct and indirect equity interests in 1,313 mini-warehouses in
mini-warehouses in 15 states. One of the 37 states. Also owns interest in PSBP.
mini-warehouses has been condemned in its
entirety and another has been partially
condemned. Also owns interest in PSBP.
</TABLE>
Because Public Storage owns substantially more property interests in more
states than the Partnership, the operations of a single property have less
effect on Public Storage's results of operations than in the case of the
Partnership. Also, it would be more difficult to liquidate Public Storage than
the Partnership within a reasonable period of time.
Liquidity, Marketability and Distributions
<TABLE>
<S> <C>
No active trading market for Partnership units. Public Storage common stock is traded on the NYSE. During the 12
The Partnership may not issue securities having months ended March 31, 1999, the average daily trading volume of
priority over Partnership units. Public Storage common stock was approximately 128,000 shares.
Public Storage has issued, and may in the future issue,
securities that have priority over Public Storage common stock as
to cash flow, distributions and liquidation proceeds.
</TABLE>
The Partnership pays distributions to limited partners from cash available
for distribution. Tax laws require Public Storage to distribute at least 95%
of its ordinary REIT taxable income in order to maintain its qualification as a
REIT. Since Public Storage distributes less than its cash available for
distribution (recently distributing amounts approximately equal to its taxable
income), it is able to retain funds for additional investment and debt
reduction.
If you receive Public Storage common stock in the merger, the market for
your investment will be broader and more active than the market for Partnership
units. Distributions on Public Storage common stock are lower than the
distributions on the Partnership units. Distributions on Public Storage common
stock also are subject to priority of preferred stock.
Additional Issuances of Securities and Anti-Takeover Provisions
<TABLE>
<S> <C>
The partnership agreement does not provide for Subject to the rules of the NYSE and applicable provisions of
the issuance of additional Partnership units. California law, Public Storage can issue authorized capital stock
without shareholder approval.
</TABLE>
Both the Partnership and Public Storage can deter attempts to obtain
control in transactions not approved by management. In the case of the
Partnership, Public Storage owns a majority of the Partnership units. In the
case of Public Storage, the Hughes family effectively controls Public Storage
and Public Storage has the flexibility to issue capital stock, including senior
securities with special voting rights and priority over Public Storage common
stock.
8
<PAGE>
Summary Financial Information
The financial data in this section should be read in conjunction with the
financial statements included in this statement and in the documents to which
limited partners have been referred.
Public Storage
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------------------------------------ -----------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
($ In thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Total revenues $147,196 $ 212,550 $ 338,951 $ 470,844 $ 582,151 $ 142,566 $ 148,270
Depreciation and amortization 28,274 40,760 64,967 91,356 107,482 28,219 28,974
Interest expense 6,893 8,508 8,482 6,792 4,507 1,162 1,204
Minority interest in income 9,481 7,137 9,363 11,684 20,290 6,352 3,353
Net income $ 42,118 $ 70,386 $ 153,549 $ 178,649 $ 227,019 $ 48,364 $ 61,842
Balance Sheet Data (at end of
period):
Total cash and cash equivalents $ 20,151 $ 80,436 $ 26,856 $ 41,455 $ 51,225 $ 243,190 $ 102,575
Total assets 820,309 1,937,461 2,572,152 3,311,645 3,403,904 3,613,804 4,110,491
Total debt 77,235 158,052 108,443 103,558 81,426 108,024 180,845
Minority interest 141,227 112,373 116,805 288,479 139,325 365,243 156,941
Shareholders' equity $587,786 $1,634,503 $2,305,437 $2,848,960 $3,119,340 $3,072,071 $3,683,833
Per Share of Common Stock:
Net income-basic (1) $ 1.05 $ .96 $ 1.10 $ .92 $ 1.30 $ .26 $ .34
Net income-diluted (1) 1.05 .95 1.10 .91 1.30 .26 .34
Distributions (2) .85 .88 .88 .88 .88 .22 .22
Book value (at end of period)(3) $ 12.66 $ 13.99 $ 15.43 $ 17.19 $ 18.30 $ 17.98 $ 19.10
Weighted averagediluted shares of
common stock (in thousands) 24,077 41,171 77,358 98,961 114,357 110,036 119,014
</TABLE>
_______________
Footnotes on next page.
9
<PAGE>
<TABLE>
<CAPTION>
Partnership
Three Months
Years Ended December 31, Ended March 31,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Total revenues $ 4,401 $ 4,500 $ 4,648 $ 5,374 $ 6,471 $ 1,371 $ 2,075
Depreciation and amortization 529 563 595 655 680 165 180
Net income
Limited partners' share 2,325 2,029 2,286 2,993 4,006 804 1,145
General partners' share 463 720 523 430 441 108 431
Balance Sheet Data (at end of period)
Cash and cash equivalents 1,757 162 289 1,222 3,122 1,522 1,005
Total assets 32,819 28,601 26,379 25,857 26,337 25,693 23,852
Limited Partners' per Unit Data (4)
Net income 18.16 15.85 17.86 23.38 31.30 6.28 8.95
Cash distributions (5)(6) 30.60 48.72 34.80 27.84 27.84 6.96 29.23
Book value (limited partners' equity)
251.46 218.59 201.65 197.19 200.65 196.51 180.35
Partnership - Pro Forma
Per equivalent Partnership Unit (7):
Net income-diluted $ 6.39
Distributions paid on common stock $ 4.13
Book value (at March 31, 1999) $358.95
</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
Public Storage common stock outstanding-diluted. The diluted net income per
common share is computed using the weighted average common shares
outstanding (adjusted for stock options). The class B common stock is not
included in the determination of net income per common share because all
contingencies required for the conversion to Public Storage common stock
have not been satisfied as of March 31, 1999. In addition, the inclusion
of Public Storage's convertible preferred stock in the determination of net
income has been determined to be anti-dilutive.
(2) For federal income tax purposes, approximately $.03 of the common dividends
in 1998 was characterized as a long-term capital gain. Distributions for
all other periods were characterized as 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 Public
Storage common stock and Public Storage class B common stock outstanding.
(4) Limited partners' per unit data is based on the weighted average number of
Partnership units (128,000) outstanding during the year.
(5) A portion of the operating cash reserve of the Partnership was distributed
in 1995 (estimated at $6.26 per Partnership unit).
(6) A portion of the operating reserve of the Partnership was distributed in
the three months ended March 31, 1999 (estimated at $22.27 per Partnership
unit).
(7) Presents pro forma amounts of Public Storage per equivalent Partnership
unit. Net income, cash distributions and book value data are calculated by
multiplying Public Storage's historical results (before impact of the
merger, which is not expected to have a material impact on Public Storage's
per share amounts) by an assumed exchange ratio of approximately 18.8 (the
Partnership's merger value of $545 divided by an assumed issue price of
Public Storage common stock of $29).
10
<PAGE>
Relationships
The following charts show the relationships among Mr. Hughes, Public Storage
and the Partnership both before and after the merger (assuming maximum cash
elections). As reflected in the charts below, Mr. Hughes, Public Storage's
chairman of the board and chief executive officer, effectively controls Public
Storage. Public Storage and Mr. Hughes are the general partners of the
Partnership. Public Storage and the Partnership jointly own the Properties,
which are managed by Public Storage.
Before the Merger
-----------------
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the relationships among Hughes, Public Storage and the
Partnership before the merger: Hughes owns 30% of Public Storage and Public
Shareholders own 70% of Public Storage; Hughes is a general partner of the
Partnership; Public Storage is a general partner, joint venturer and the
property manager of the Partnership and Public Storage owns 61% of the units in
the Partnership and Public Limited Partners own 39% of the units in the
Partnership.
After the Merger
----------------
(Assuming Maximum Cash Elections)
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the relationships among Hughes, Public Storage and the
Partnership after the merger (assuming maximum cash elections): Hughes owns 30%
of Public Storage and Public Shareholders own 70% of Public Storage; Hughes is a
general partner of the Partnership; Public Storage is a general partner, joint
venturer and the property manager of the Partnership and Public Storage owns
100% of the units in the Partnership.
Solid lines indicate ownership interests and broken lines indicate other
------------------------------------------------------------------------
relationships.
--------------
Percentage of ownership of the Partnership by Public Storage represents
percentage of units of limited partnership interest owned by Public Storage.
Both before and after the merger, Public Storage's general and limited partner
interests are owned indirectly through wholly owned entities. Percentage of
stock ownership of Public Storage by Mr. Hughes represents percentage of
outstanding shares of Public Storage common stock owned by Hughes and members of
his immediate family.
11
<PAGE>
RISK FACTORS
The merger involves certain risks and detriments that you should consider,
including the following:
Public Storage has approved the merger without your vote.
Public Storage, as owner of 61% of the Partnership units, owns sufficient
units to approve the merger without your vote and has voted its units in favor
of the merger.
Public Storage and the Partnership have not hired anyone to represent you.
Public Storage and the Partnership have not (1) negotiated the merger at
arm's length or (2) hired independent persons to negotiate the terms of the
merger for you. If independent persons had been hired, the terms of the merger
may have been more favorable to you. In addition, Public Storage and the
Partnership have not asked any person to make an offer to buy the Partnership's
assets. Other offers could have generated higher prices.
The merger is taxable to you.
The merger will be taxable to most of you. This means that original
taxable limited partners who receive either cash or stock will recognize a
substantial taxable gain.
The merger will change your investment from finite life to infinite life if you
receive stock.
The Partnership is a limited partnership organized to hold interests in
properties for a fixed period. In contrast, Public Storage, which is engaged in
all aspects of the mini-warehouse industry, including property development and
management, intends to operate for an indefinite period. Therefore, if you
receive Public Storage common stock in the merger, you will be able to liquidate
your investment only by selling your shares on the NYSE or in private
transactions. The market value of Public Storage common stock may or may not
reflect the full fair market value of Public Storage's assets and will
fluctuate.
Your level of distributions will be lower after the merger if you receive stock.
If you receive Public Storage common stock in the merger, your level of
distributions will be significantly lower after the merger than the amount you
received as a limited partner of the Partnership.
You will not benefit from any increase in value of the properties.
The Partnership's properties may increase in value and might be able to be
sold for higher prices at a later date. Public Storage will realize the benefit
of any increase in value.
You have no dissenters' rights of appraisal.
Under California law, you will not be entitled to dissenters' rights of
---
appraisal in connection with the merger.
Public Storage has conflicts of interest in the merger.
Relationships among the parties create conflicts of interest. Because of
the relationships among Public Storage, the Partnership and Hughes, there are
significant conflicts of interest in connection with the merger. Public Storage
and Hughes are the general partners of the Partnership, and Public Storage owns
61% of the Partnership units. See "Summary - Relationships."
Insiders have structured the merger. Public Storage initiated and
structured the merger. Public Storage and the Partnership did not negotiate the
merger at arm's length. Public Storage has an interest in acquiring the
Partnership units at the lowest possible price, while you have an interest in
selling your units at the highest possible price. Public Storage and the
Partnership did not hire independent persons to negotiate the terms of the
merger for you. If independent persons had been hired, the terms of the merger
might have been more favorable to you.
The merger includes benefits to insiders. The merger involves certain
benefits to Public Storage, including the following:
. Ownership of All Partnership Units. As a result of the merger, Public
Storage will own all of the Partnership units without taxable gain to
Public Storage.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by Public
Storage as owner of 61% of the Partnership units.
. Issuance of Capital Stock. The merger will enable Public Storage,
which is seeking to
12
<PAGE>
expand its capital base, to issue up to 1 million
shares of common stock.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other mini-
warehouses owned by Public Storage.
The Hughes family could control Public Storage.
Public shareholders of Public Storage are substantially limited in their
ability to control Public Storage. The Hughes family owns approximately 30% of
the outstanding shares of Public Storage common stock (approximately 33% upon
conversion of the Public Storage class B common stock). Consequently, the
Hughes family could control matters submitted to a vote of Public Storage
shareholders, including electing directors, amending Public Storage's
organizational documents, dissolving and approving other extraordinary
transactions, such as a takeover attempt.
Provisions in Public Storage's organizational documents may prevent changes in
control.
Restrictions in Public Storage's organizational documents may further limit
changes in control of Public Storage securities. Unless Public Storage's board
of directors waives these limitations, no Public Storage shareholder may own
more than (A) 2.0% of the outstanding shares of all common stock of Public
Storage or (B) 9.9% of the outstanding shares of each class or series of
preferred or equity stock of Public Storage. The Public Storage organizational
documents in effect provide, however, that the Hughes family may continue to own
the shares of Public Storage common stock held at the time of a 1995
reorganization. These limitations are designed, to the extent possible, to
avoid a concentration of ownership that might jeopardize the ability of Public
Storage to qualify as a REIT. These limitations, however, also make a change of
control significantly more difficult (if not impossible) even if it would be
favorable to the interests of the public shareholders of Public Storage. These
provisions will prevent future takeover attempts not approved by the Public
Storage board of directors even if a majority of the public shareholders of
Public Storage deem it to be in their best interests because they would receive
a premium for their shares over the shares' then market value or for other
reasons. See "Description of Public Storage Capital Stock - Ownership
Limitations."
The number of shares of Public Storage common stock to be issued in the merger
has not been determined.
If you receive Public Storage common stock in the merger, the number of
shares will be based on the average market price of Public Storage common stock
for the 20 consecutive trading days ending on the fifth trading day prior to the
Effective Date. Since the market price of Public Storage common stock
fluctuates, the market value of Public Storage common stock that you may receive
in the merger may decrease after the date that the number of shares is
determined, but before those shares actually are issued. In addition, because
of possible increased selling activity following issuance of shares in this
merger and in the merger with another REIT described under "Description of
Public Storage's Properties" and other factors, such as changes in interest
rates and market conditions, the market value of Public Storage common stock
that you may receive in the merger may decrease following the merger.
Public Storage would incur adverse tax consequences if it fails to qualify as a
REIT.
If you receive Public Storage common stock in the merger, you will be
subject to the risk that Public Storage may not qualify as a REIT. As a REIT,
Public Storage must distribute at least 95% of its REIT taxable income to its
shareholders (which include not only holders of Public Storage common stock but
also holders of preferred stock). Failure to pay full dividends on the
preferred stock could jeopardize Public Storage's qualification as a REIT. See
"Federal Income Tax Considerations - General Tax Treatment of Public Storage,"
and "- Consequences of the PSMI Merger on Public Storage's Qualification as a
REIT."
For any taxable year that Public Storage fails to qualify as a REIT and the
relief provisions do not apply, Public Storage would be taxed at the regular
corporate rates on all of its taxable income, whether or not it makes any
distributions to its shareholders. Those taxes would reduce the amount of cash
available to Public Storage for distribution to its shareholders or for
reinvestment. As a result, failure of Public Storage to qualify during any
taxable year as a REIT could have a material adverse effect upon Public Storage
and its shareholders. Furthermore, unless certain relief provisions apply,
Public Storage would not be eligible to elect REIT status again until the fifth
taxable year that begins after the first year for which Public Storage fails to
qualify.
13
<PAGE>
Public Storage would incur a corporate level tax if it sold certain assets.
Public Storage will generally be subject to a corporate level tax if it
sold any of the assets it acquired in a November 1995 reorganization before
November 2005.
Public Storage and its shareholders are subject to financing risks.
Debt increases risk of loss. In making real estate investments, Public
Storage, unlike the Partnership, borrows money, which increases the risk of
loss. At March 31, 1999, Public Storage's debt of $180.8 million was
approximately 4.4% of its total assets.
Issuing additional shares reduces the interest of existing shareholders.
Issuing additional securities can dilute the interest of Public Storage
shareholders in Public Storage, including persons who receive shares in the
merger.
Public Storage intends to issue additional securities under a currently
effective registration statement. Issuing additional stock will dilute the
interest of Public Storage shareholders. See "Description of Public Storage
Capital Stock" for a discussion of the terms of the preferred stock, common
stock and equity stock.
If Public Storage is liquidated, holders of the preferred stock will be
entitled to receive, before any distribution of assets to holders of Public
Storage common stock, liquidating distributions (an aggregate of approximately
$1.1 billion with respect to preferred stock outstanding at March 31, 1999),
plus any accrued and unpaid dividends. Holders of preferred stock are entitled
to receive, when declared by the Public Storage board of directors, cash
dividends (an aggregate of approximately $95.2 million per year with respect to
preferred stock outstanding at March 31, 1999), in preference to holders of
Public Storage common stock.
The merger payments are based on an appraisal instead of arm's length
negotiation.
The payments you receive in the merger is based in significant part on a
third party appraised value of 40 of the Properties. However, appraisals are
opinions as of the date specified and are subject to certain assumptions and may
not represent the true worth or realizable value of 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.
Public Storage is subject to real estate operating risks.
Value of Public Storage's investment may be reduced by general risks of
real estate ownership. Like the Partnership, Public Storage 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.
There is significant competition among mini-warehouses. Like the
Partnership, most of Public Storage'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. Any increase in availability of funds
for investment in real estate may accelerate competition. Recent increases in
development of mini-warehouses are expected to further intensify competition
among mini-warehouse operators in certain market areas in which Public Storage
operates.
Public Storage may incur significant environmental costs and liabilities.
Under various federal, state and local environmental laws, an owner or operator
of real estate interests may have to clean up spills or other releases of
hazardous or toxic substances on or from a property. Certain environmental laws
impose liability whether or not the owner knew of, or was responsible for, the
presence of the hazardous or toxic substances. In some cases, liability may not
be limited to the value of the property. The presence of such substances, or
the failure to properly remediate any resulting contamination, also may
adversely affect the owner's or operator's ability to sell, lease or operate its
property or to borrow using its property as collateral.
Public Storage has conducted preliminary environmental assessments of most
of its properties (and intends to conduct such assessments in
14
<PAGE>
connection with property acquisitions) to evaluate the environmental condition
of, and potential environmental liabilities associated with, such properties.
These assessments generally consist of an investigation of environmental
conditions at the subject property (not including soil or groundwater sampling
or analysis), as well as a review of available information regarding the site
and publicly available data regarding conditions at other sites in the vicinity.
In connection with these recent property assessments, Public Storage's
operations and recent property acquisitions, Public Storage has become aware
that prior operations or activities at certain facilities or from nearby
locations have or may have resulted in contamination to the soil and/or
groundwater at such facilities. In this regard, certain such facilities are or
may be the subject of federal or state environmental investigations or remedial
actions. Public Storage has obtained, with respect to recent acquisitions and
intends to obtain with respect to pending or future acquisitions, appropriate
purchase price adjustments or indemnifications that it believes are sufficient
to cover any related potential liabilities. Although there can be no assurance,
based on the recent preliminary environmental assessments, Public Storage
believes it has funds available to cover any liability (estimated at $4 million)
from environmental contamination or potential contamination and Public Storage
is not aware of any environmental contamination of its facilities material to
its overall business, financial condition or results of operation.
The Hughes family receives the benefit of tenant reinsurance premiums.
A corporation owned by the Hughes family reinsures policies insuring
against losses to goods stored by tenants in the mini-warehouses operated by
Public Storage. Public Storage believes that the availability of insurance
reduces its potential liability to tenants for losses to their goods from theft
or destruction. This corporation will continue to receive the premiums and bear
the risks associated with the insurance. Public Storage 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 Public Storage has no interest in its
operations and no right to acquire the stock or assets of the corporation unless
the Hughes family decides to sell. If the reinsurance business were owned
directly by Public Storage, the insurance premiums would be nonqualifying income
to Public Storage. In the absence of a change in tax laws, REIT requirements
would likely preclude Public Storage from exercising its right of first refusal
to acquire the stock of the reinsurance corporation.
Public Storage has no interest in Canadian mini-warehouses.
The Hughes family owns and operates mini-warehouses in Canada. Public
Storage 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. However, Public Storage has no interest in the operations
of this corporation and no right to acquire this stock or assets unless the
Hughes family decides to sell.
The Hughes family has an interest in the merchandise and portable self-storage
operations.
At almost all of Public Storage's mini-warehouses, a related corporation
offers for sale to the general public, including mini-warehouse tenants, a
variety of items such as locks and boxes to assist in the moving and storage of
goods. Because the revenues received from the sale of these items would be
nonqualifying income to Public Storage, Public Storage owns the nonvoting
preferred stock of this corporation (representing 95% of the equity). The
Hughes family owns the voting common stock of this corporation (representing 5%
of the equity).
Public Storage organized Public Storage Pickup & Delivery in 1996 to
operate a portable self-storage business. Public Storage owns substantially all
of the economic interest of Pickup & Delivery. Since Pickup & Delivery will
operate profitably only if it can succeed in the relatively new field of
portable self-storage, there can be no assurance as to its profitability. As a
start-up enterprise, Pickup & Delivery incurred operating losses of $31,665,000
in 1997, $31,022,000 in 1998 and $3,936,000 for the first quarter of 1999. See
"Federal Income Tax Considerations - General Tax Treatment of Public Storage"
concerning the treatment of income from and investment in Pickup & Delivery for
purposes of the REIT income and asset tests.
15
<PAGE>
BENEFITS TO INSIDERS
The merger involves certain benefits to Public Storage, including the
following:
. Ownership of All Partnership Units. As a result of the merger, Public
Storage will own all of the Partnership units without taxable gain to
Public Storage.
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by Public
Storage as owner of 61% of the Partnership units.
. Issuance of Capital Stock. The merger will enable Public Storage,
which is seeking to expand its capital base, to issue up to 1 million
shares of common stock.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other mini-
warehouses owned by Public Storage.
ABOUT THIS PROXY STATEMENT AND PROSPECTUS
This statement is part of a registration statement that Public Storage
filed with the Securities and Exchange Commission (the "Commission") relating to
the registration of up to 1,200,000 shares of Public Storage common stock being
issued in connection with the merger. This statement provides you with a
general description of the securities Public Storage will offer. You should
read this statement together with the additional information described under the
heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
Public Storage and the Partnership are subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and
each files reports, proxy statements and other information with the Commission.
You may read and copy any materials Public Storage and the Partnership files
with the Commission at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Commission at 1-800-SEC-
0330. In addition, the Commission maintains an Internet site that contains
reports, proxies, information statements, and other information regarding
issuers that file electronically and the address of that site is
http://www.sec.gov. Public Storage's outstanding common stock is listed on the
New York Stock Exchange ("NYSE") and the Pacific Exchange ("PCX") under the
symbol PSA, and all reports, proxy statements and other information filed by
Public Storage with the NYSE may be inspected at the NYSE's offices at 20 Broad
Street, New York, New York 10005 and all those reports and other information
filed by Public Storage with the PCX may be inspected at the PCX's offices at
301 Pine Street, San Francisco, California 94104.
Public Storage has filed with the Commission a registration statement on
Form S-4 (together with all amendments and exhibits, the "Registration
Statement") under the Securities Act, with respect to the shares of Public
Storage common stock being offered in the merger. This statement, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement. Certain parts of the
Registration Statement are omitted from this statement in accordance with the
rules and regulations of the Commission. For further information, please refer
to the Registration Statement. Statements made in this statement concerning the
contents of any documents referred to in this document are not necessarily
complete, and in each case are qualified in all respects by reference to the
copy of such document filed with the Commission.
The Commission allows Public Storage and the Partnership to "incorporate by
reference" the information Public Storage and the Partnership file with the
Commission, which means that Public Storage and the Partnership can disclose
important information to you by referring you to those documents. The
information incorporated by
16
<PAGE>
reference is an important part of this statement, and information that Public
Storage files later with the Commission will automatically update and supersede
this information.
Public Storage incorporates by reference the documents listed below:
. Public Storage's Annual Report on Form 10-K for the year ended
December 31, 1998;
. Public Storage's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999;
. Public Storage's Current Reports on Form 8-K dated January 13, 1999
and March 4, 1999; and
. The description of Public Storage's common stock contained in Public
Storage's Registration Statement on Form 8-A, effective June 30, 1981,
as supplemented by the description of Public Storage's common stock
contained in this statement.
The Commission has assigned file number 1-8389 to the reports and other
information that Public Storage files with the Commission.
The Partnership incorporates by reference the documents listed below:
. The Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998;
. The Partnership's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999; and
. The Partnership's Current Report on Form 8-K dated June 10, 1999.
The Commission has assigned file number 0-13479 to the reports and other
information that the Partnership files with the Commission.
This statement also incorporates by reference any future filings made by
Public Storage with the Commission under Sections 13(a), 13(c), 14 and 15(d) of
the Exchange Act. You should be aware that any statement contained in this
statement or in a document incorporated by reference may be modified or
superseded by a document filed with the Commission at a later date. Any
statement which has been modified or superseded shall not be considered to
constitute a part of this statement.
You may request a copy of each of the filings of Public Storage or the
Partnership, at no cost, by writing or telephoning Public Storage at the
following address, telephone or facsimile number:
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Telephone: (800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
In order to ensure timely delivery of any documents, you must request the
information by July 26, 1999.
You may also find more information concerning Public Storage at the
following Internet address: http://www.publicstorage.com.
You should rely only on the information included in this statement or
incorporated in this statement. Public Storage has not authorized anyone else
to provide you with different information. Public Storage is not making an
offer of its shares of common stock in any state where the offer is not
permitted. You should not assume that the information in this statement is
accurate as of any date other than the date on the front of those documents.
17
<PAGE>
CAUTIONARY STATEMENT
Statements contained in this statement that are not based on historical
fact are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "continue" or similar terms, variations of those terms
or the negative of those terms. Cautionary statements set forth in "Risk
Factors" and elsewhere in this statement identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
18
<PAGE>
THE MERGER
General
The acquisition of the Partnership units not currently owned by Public
Storage will be accomplished in the merger as follows:
. A wholly-owned, second tier subsidiary of Public Storage will be merged
into the Partnership.
. Each Partnership unit (other than units owned by Public Storage) will be
converted into the right to receive a value of $545 in Public Storage
common stock or, at the election of a limited partner, in cash. To be
effective a cash election must be made by August 5, 1999, in accordance
with the accompanying cash election form.
. Distributions will be made to holders of Partnership units to cause the
estimated net asset value per Partnership unit as of the Effective Date
to be substantially equivalent to $545. In computing the estimated net
asset value per unit as of the Effective Date, the PSBP partnership
interests will be valued at the average of the per share closing price
on the AMEX of the shares of PS Business Parks, Inc. during the 20
consecutive trading days ending on the fifth trading day prior to the
Effective Date.
. For purposes of the merger, the market value of the Public Storage
common stock will be the average of the per share closing prices on the
NYSE of the Public Storage common stock during the 20 consecutive
trading days ending on the fifth trading day prior to the Effective
Date.
. Following the merger, Public Storage (through a wholly owned entity)
will own all Partnership units.
. Public Storage (through a wholly owned entity) and Hughes retain their
general partnership interests in the Partnership, and the Partnership
remains in existence.
It is estimated that the aggregate consideration (cash or Public Storage
common stock or a combination of the two) to be paid by Public Storage to
acquire in the merger the Partnership units owned by the public limited partners
will be approximately $27,500,000. See "- Determination of Amounts to be
Received by Limited Partners in the Merger" and "- Costs of the Merger."
Background and Reasons for the Merger
The merger has not been negotiated at arm's length. The merger has been
structured by Public Storage, which controls the Partnership and has significant
conflicts of interest in connection with, and will benefit from, the merger.
Based in significant part on a third party appraisal of the Properties and on
the opinion of a financial advisor, in which they concur, Public Storage and
Hughes, the general partners of the Partnership, believe that the merger is fair
to the public limited partners.
The Partnership was organized in 1984 and raised $64 million in a public
offering. All of the proceeds from the offering have been invested to acquire
properties, some of which were acquired jointly with Public Storage. A
predecessor of Public Storage sponsored the Partnership.
As indicated in the original prospectus, the Partnership originally
anticipated selling the Properties and liquidating from five to eight years
after acquisition, i.e., between 1990 and 1993. By 1990, significant changes
had taken place in the financial and real estate markets affecting the timing of
any proposed sale of the Properties, including (1) the increased construction of
mini-warehouses from 1984 to 1988, which had increased competition, (2) 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, (3) the
reduced sources of real estate financing (resulting from a variety of factors,
including adverse developments in the savings and loan industry) and (4) the
glut in the real estate market caused by overbuilding and sales of properties
acquired by financial institutions. Accordingly, the Properties were not
marketed during the originally anticipated liquidation period.
19
<PAGE>
In view of the events affecting the timing of the sale of the Properties,
PSMI concluded that the limited partners of the Partnership, as well as the
limited partners of other partnerships sponsored by PSMI, should be provided
with a more efficient method of realizing the value of their investment than the
secondary market for limited partnership interests. Accordingly, Public Storage
purchased Partnership units from those limited partners who desired to sell,
including through tender offers in 1994 and 1996. As a result of these
purchases, public limited partners now own only 39% of the units with the
balance owned by Public Storage. Since the Partnership is beyond its original
anticipated term and the public limited partners own only a minority of the
units, the general partners have decided to eliminate through the merger the
ongoing costs of a public structure and the conflicts of interest resulting from
the public limited partners' ownership of a minority interest in the
Partnership. The principal conflicts involve the competition of the Properties
with other mini-warehouses owned by Public Storage.
Public Storage, which was organized in 1980, has from time to time taken
actions to increase its asset and capital base and increase diversification,
such as by increasing its interest in affiliated entities, like the Partnership.
Public Storage's interest in the Partnership include (1) Public Storage and the
Partnership jointly own 34 of the Properties, (2) Public Storage (through a
wholly-owned entity) and Hughes are general partners of the Partnership, (3)
Public Storage (through a wholly owned entity) owns 61% of the Partnership units
and (4) the Properties are managed by Public Storage. As a result of the
merger, Public Storage will own all of the Partnership units and almost all
Partnership administrative expenses will be eliminated.
Fairness Analysis
The merger has not been negotiated at arm's length. The merger has been
structured by Public Storage, which controls the Partnership and has significant
conflicts of interest in connection with, and will benefit from, the merger.
However, based in significant part on a third party appraisal of 40 of the
Properties and on the opinion of Stanger, in which they concur, the general
partners believe that the merger is fair to public limited partners.
The general partners based their conclusions on the following factors: (1)
the consideration to be received by the limited partners in the merger is based
on the appraised value of 40 of the Properties as determined by TNG; (2) the
Partnership has received a fairness opinion from Stanger relating to the
consideration to be received by public limited partners; (3) although the merger
has been structured by Public Storage, the merger provides public limited
partners with a choice of converting their investment into an investment in
Public Storage or receiving cash for their investment; and (4) based on certain
significant assumptions, qualifications and limitations, the consideration to be
received by public limited partners compares favorably with other alternatives.
The general partners believe that the engagement of TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements
and may receive fees in the future. See "- Real Estate Portfolio Appraisal by
TNG" and "- Fairness Opinion from Stanger."
Alternatives to the Merger
The general partners considered liquidation and continued ownership by the
limited and general partners as alternatives to the merger. In order to
determine whether the merger or one of its alternatives would be more
advantageous to public limited partners, the general partners compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of the alternatives.
Liquidation
Benefits of Liquidation. An alternative to the merger would be to
liquidate the Partnership's assets, distribute the net liquidation proceeds to
the partners and thereafter dissolve the Partnership. Through such liquidation,
the Partnership would provide for a final disposition of its partners' interests
in the Partnership. Limited partners would receive cash liquidation proceeds
(as they will if they make cash elections). If the Partnership liquidated its
assets through asset sales to unaffiliated third parties, limited partners would
not need to rely upon a real
20
<PAGE>
estate portfolio appraisal of the fair market value of the Partnership. The
Partnership would be valued through arm's length negotiations between the
Partnership and prospective purchasers.
Disadvantages of Liquidation. Over the last several years, the
performance of the Properties has improved as described under "- Continued
Ownership of the Partnership - Benefits of Continued Ownership." The general
partners believe that the improvement may continue. The merger provides limited
partners with the opportunity either to convert their investment in the
Partnership into an investment in Public Storage, which like the Partnership
primarily owns mini-warehouses, or to receive cash based on the appraised value
of the Properties. In contrast to the merger, the Partnership would also be
expected to incur certain costs in a liquidation.
Limited partners should recognize that appraisals are opinion as of the
date specified and are subject to certain assumptions and may not represent the
true worth or realizable value of the Properties. There can be no assurance
that if the Properties were sold, they would be sold at the appraised value; the
sales price might be higher or lower than the appraised value.
Continued Ownership of the Partnership
Benefits of Continued Ownership. Another alternative to the merger
would be to continue the Partnership in accordance with its existing business
plan, with the Partnership continuing to be owned by the limited and general
partners. The Partnership is operating profitably.
There has been improvement in the mini-warehouse markets. As the pace
of new mini-warehouse development has slowed from the peak levels of 1984-88,
there has been a corresponding improvement in the financial performance of
existing properties. This improvement is evidenced by the performance of the
Properties. For example, realized rents per occupied square foot (excluding the
two condemned facilities) increased from 1996 to 1998 from $6.72 to $7.31,
although this was partially offset by a decrease in occupancies for the same
periods from 91% to 89%. Despite significant recent increases in the
development of new mini-warehouses, the general partners believe that the
financial performance of the Properties may continue to improve, although not
necessarily at the rate of improvement experienced in prior years. Should such
improvements continue, the value of the Properties could be expected to
increase. See "Description of Partnership Properties."
A number of advantages could be expected to arise from the continued
ownership of the Partnership by the limited and general partners. Limited
partners would continue to receive regular quarterly distributions of net cash
flow arising from operations and the sale or refinancing of the Partnership's
assets. Given the currently improving market conditions for mini-warehouses,
the general partners believe that the level of these distributions to limited
partners may increase. Continued ownership of the Partnership by the general
and limited partners affords limited partners with the opportunity to
participate in any future appreciation in the Partnership's assets. In
addition, this decision, if elected, would mean that there would be no change in
the nature of the investment of limited partners. This option avoids whatever
disadvantages might be deemed inherent in the merger. See "Risk Factors" for
discussion of various risks associated with the merger.
Disadvantages of Continued Ownership. Not only is the Partnership well
beyond its anticipated term, but continued ownership of the Partnership by the
limited and general partners fails to secure the benefits that the limited and
general partners expect to result from the merger. The benefits to limited
partners are highlighted under "- Potential Benefits of the Merger," and the
benefits to the general partners are highlighted under "Benefits to Insiders."
The merger affords limited partners increased liquidity. In addition, because
the Partnership is not authorized to issue new securities or to reinvest sale or
financing proceeds, the Partnership is less able to take advantage of new real
estate investment opportunities. In contrast, Public Storage has a
substantially larger, more diversified, investment portfolio that reduces the
risks associated with any particular assets or group of assets and increases
Public Storage's ability to access capital markets for new capital investments.
21
<PAGE>
Determination of Amounts to be Received by Limited Partners in the Merger
In connection with the merger, limited partners will receive a value of
$545 per Partnership unit in cash or Public Storage common stock. The general
partners have determined this amount based on the estimated net asset value per
unit computed as follows:
<TABLE>
<S> <C>
Estimated value of Partnership's interest in the $64,988,000
Properties (1)
Plus:
Market value of Partnership's
interest in PSBP (2) 5,776,000
Partnership's interest in other tangible
net assets and liabilities (3) (255,000)
-----------
Net proceeds available for distribution 70,509,000
Distributions to general partners (4) (705,000)
-----------
Distributions to limited partners $69,804,000
===========
Amount per Partnership unit (5)(6)(7)(8) $ 545
===========
</TABLE>
_______________
(1) Reflects appraised value of 40 Properties determined by TNG as of April
30, 1999, and the Partnership's share of a condemnation award with
respect to a property condemned in its entirety. Assumes proceeds from
a deemed sale of these Properties at the appraised value are allocated
between the Partnership and Public Storage based on the joint venture
agreement. TNG did not appraise the Property that was condemned in its
entirety. See "Description of Partnership's Properties" and "The
Merger - Real Estate Portfolio Appraisal by TNG".
(2) Reflects closing price of shares of PS Business Parks, Inc. on the AMEX
as of June 1, 1999 (the PSBP partnership interests are exchangeable for
those shares on a one unit for one share basis). Assumes proceeds from
a deemed sale of the units at that price are allocated between the
Partnership and Public Storage based on the joint venture agreement.
See note (7) below.
(3) Includes the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of March 31, 1999.
(4) Represents subordinated incentive distributions payable to the general
partners under the partnership agreement and distributions attributable
to general partners' 1% capital interest in the Partnership. In
accordance with the Partnership Agreement, no subordinated incentive
distributions are payable at this time.
(5) Based on 128,000 Partnership units.
(6) Upon completion of the merger, each Partnership unit would be converted
into Public Storage common stock with a value of $545 or, at the
election of a limited partner, in cash. The number of shares of Public
Storage common stock to be issued in the merger will be determined by
dividing $545 by the average of the closing prices of Public Storage
common stock during the 20 consecutive trading days ending on the fifth
trading day prior to the Effective Date. The market price of Public
Storage common stock may fluctuate after the date that the number of
shares to be issued to limited partners in the merger is determined and
before those shares actually are issued.
(7) Distributions will be made to limited partners to cause the estimated
net asset value per Partnership unit as of the Effective Date to be
substantially equivalent to $545 per unit. In computing the estimated
net asset value per unit as of the Effective Date, the PSBP partnership
interests will be
22
<PAGE>
valued at the average of the per share closing price on the AMEX of the
shares of PS Business Parks, Inc. during the 20 consecutive trading
days ending on the fifth trading day prior to the Effective Date.
(8) Original purchase price of a Partnership unit was $500.
Potential Benefits of the Merger
The general partners believe that the following are the principal potential
benefits to limited partners:
(1) Limited partners who elect to receive cash will have fully liquidated
their investment at approximately 109% of their original investment and at an
amount substantially higher than the prices in the limited secondary
transactions. Also, they will have simplified their tax reporting for years
after 1999.
(2) For limited partners who receive Public Storage common stock, the
principal potential benefits are:
. Ownership Interest in a Diversified Real Estate Company. Because the
Partnership is not authorized to issue new securities or to reinvest
sale or financing proceeds, the Partnership is less able to take
advantage of new real estate investment opportunities. In contrast,
Public Storage has a substantially larger, more diversified, investment
portfolio that reduces the risks associated with any particular assets
or group of assets and increases Public Storage's ability to access
capital markets for new capital investments.
. Increased Liquidity. There is no active market for the Partnership
units. In comparison, Public Storage has approximately 129 million
shares of Public Storage common stock listed on the NYSE with an
average daily trading volume during the 12 months ended March 31, 1999
of approximately 128,000 shares. Given Public Storage's market
capitalization and trading volume, limited partners who receive Public
Storage common stock are likely to enjoy a more active trading market
and increased liquidity for the Public Storage securities they receive.
. Simplified Tax Reporting. The merger also will simplify tax reporting
for years after 1999 for limited partners who receive Public Storage
common stock. Public Storage shareholders will receive Form 1099-DIV to
report their dividends from Public Storage. Form 1099-DIV is
substantially easier to understand than the Schedule K-1 prepared for
the reporting of the financial results of the Partnership.
Detriments of the Merger
For a discussion of certain risks and detriments of the merger, see "Risk
Factors" beginning on page 12.
Fairness Analysis
Conclusions. Based upon an analysis of the merger, the general partners
have concluded that (i) the terms of the merger are fair to public limited
partners and (ii) after comparing the potential benefits and detriments of the
merger with alternatives, the merger is more advantageous to public limited
partners than such alternatives.
Although the general partners reasonably believe the terms of the merger
are fair to public limited partners, the general partners have significant
conflicts of interest with respect to the merger. The merger has been initiated
and structured by Public Storage, one of the general partners. See "Summary -
Relationships" and "Risk Factors - Conflicts of Interest."
Material Factors Underlying Conclusions of General Partners. The following
is a discussion of the material factors underlying the conclusions of the
general partners. The general partners have not quantified the relative
importance of these factors.
23
<PAGE>
1. Consideration Offered. The general partners believe that (1) basing
the consideration to be paid to public limited partners in the merger on the
value of the Partnership's assets is reasonable and consistent with the
partnership agreement, (2) the Partnership's net asset value represents a fair
estimate of the value of its assets, net of liabilities, and constitutes a
reasonable basis for determining the consideration to be received by public
limited partners, (3) the allocation of the appraised value of 40 of the
Properties, and the net proceeds with respect to the Property that was condemned
in its entirety, between the Partnership and Public Storage is fair because it
reflects the amount each would receive upon the Partnership's liquidation under
the joint venture agreement and (4) the allocation of the Partnership's net
asset value between the limited and general partners is fair because it reflects
the amount they would receive upon the Partnership's liquidation under the
partnership agreement. There was no negotiation regarding the basis for
determining the consideration to be paid to public limited partners in the
merger. See "- Background and Reasons for the Merger."
2. Choice as to Form of Consideration. The merger provides public limited
partners with the choice of either (A) converting their investment into an
investment in Public Storage, which generally owns the same type of properties
as the Partnership and which has acquired, and is expected to continue to
acquire, additional properties or (B) receiving in cash the amounts they would
receive if the Properties were sold at their appraised values and the
Partnership's interest in PSBP were sold at its market value and the Partnership
were liquidated (without any reduction for commissions and other sales
expenses).
3. Independent Portfolio Appraisal and Fairness Opinion. The conclusions
of the general partners are based in significant part upon the portfolio
appraisal prepared by TNG and Stanger's fairness opinion. The general partners
attributed significant weight to these items, which they believe support their
position, and do not know of any factors that are reasonably likely to detract
from the conclusions in TNG's portfolio appraisal and Stanger's fairness
opinion. The general partners believe that the engagement of TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements by
Public Storage and its affiliates and may receive fees in the future. See
"- Real Estate Portfolio Appraisal by TNG" and "- Fairness Opinion from
Stanger."
4. Comparison of Payments to be Received in the Merger to Other
Alternatives. The payments to be received in the merger of $545 per Partnership
unit generally compares favorably with (A) the prices at which limited secondary
sales of units have been effectuated, (B) a range of estimated going-concern
value per unit ($504 to $523), (C) an estimated liquidation value per unit
($523) and (D) the book value per unit as of March 31, 1999 ($180). The general
partners recognize that this comparison is subject to significant assumptions,
qualifications and limitations. See "- Comparison of Consideration to be
Received in the Merger to Other Alternatives."
5. Lower Level of Distributions to Limited Partners After the Merger. The
level of distributions to limited partners who receive Public Storage common
stock in the merger will be significantly lower after the merger than before.
6. Conflicts of Interest. The merger has been initiated and structured by
Public Storage, one of the general partners. Independent representatives were
not engaged to negotiate these arrangements on behalf of public limited
partners, and the terms of the merger are not the result of arm's length
negotiations.
The general partners do not believe that the absence of independent
representatives to negotiate the merger undermines the fairness of the merger.
Based upon the use of an independent appraisal firm and the Stanger fairness
opinion, the general partners considered that the engagement of such independent
representatives was not necessary or cost effective.
Comparison of Consideration to be Received in the Merger to Other Alternatives
General. The general partners compared the consideration to be received in
the merger, i.e., a value of $545 per Partnership unit to: (1) the prices at
which limited secondary sales have been effectuated; (2) estimates of the value
of the Partnership on a liquidation basis assuming that its assets were sold at
their appraised fair market value and the net proceeds distributed between the
joint venture partners in accordance with the joint venture agreement and
24
<PAGE>
between the limited and general partners in accordance with the partnership
agreement; and (3) estimates of the value of the Partnership on a going-concern
basis assuming that it were to continue as a stand-alone entity and its assets
sold at the end of a five-year holding period. Due to the uncertainty in
establishing these values, the Partnership established a range of estimated
values for certain of the alternatives, representing a high and low estimated
value for the potential consideration. Since the value of the consideration for
alternatives to the merger is dependent upon varying market conditions, no
assurance can be given that the range of estimated values indicated establishes
the highest or lowest possible values. However, the general partners believe
that analyzing the alternatives in terms of ranges of estimated value, based on
currently available market data and, where appropriate, reasonable assumptions
made in good faith, establishes a reasonable framework for comparing
alternatives.
The results of these comparative analyses are summarized in the following
tables. Limited partners should bear in mind that the estimated values assigned
to the alternate forms of consideration are based on a variety of assumptions
that have been made by the Partnership. These assumptions relate, among other
things, to: projections as to the future income, expenses, cash flow and other
significant financial matters of the Partnership; the capitalization rates that
will be used by prospective buyers when the Partnership's assets are liquidated;
and, appropriate discount rates to apply to expected cash flows in computing the
present value of the cash flows that may be received with respect to Partnership
units. In addition, these estimates are based upon certain information
available to the Partnership at the time the estimates were computed, and no
assurance can be given that the same conditions analyzed by them in arriving at
the estimates of value would exist at the time of the merger. The assumptions
used have been determined by the Partnership in good faith, and, where
appropriate, are based upon current and historical information regarding the
Partnership and current real estate markets, and have been highlighted below to
the extent critical to the conclusions of the general partners.
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and limited partners should carefully
consider the following discussions to understand the assumptions, qualifications
and limitations inherent in the presented valuations. The estimated values
presented in the following table are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
estimated values are based upon certain assumptions that relate, among other
things, to (1) the price of Public Storage common stock and common stock of PS
Business Parks, Inc. as of the date of the merger being the same as during the
20 trading days ending on the fifth trading day prior to the Effective Date, (2)
projections as to the future revenues, expenses, cash flow and other significant
financial matters of the Partnership, (3) the capitalization rates that will be
used by prospective buyers when the Partnership's assets are liquidated, (4)
selling costs, (5) appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows and (6) the manner of sale of the
Properties. Actual results may vary from those set forth below based on
numerous factors, including interest rate fluctuations, tax law changes, supply
and demand for mini-warehouses, the manner in which the properties are sold and
changes in availability of capital to finance acquisitions of mini-warehouses.
Partnership Comparison of Alternatives
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Limited Secondary Estimated Going Concern Estimated Liquidation Value per
Payments in Merger Market Prices of Value per Partnership Unit at
per Partnership unit Partnership Units(2) Partnership Unit(3) Appraised Value (4)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$545(1) $284.50 $452.12 $504 $523 $523
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) Based on the Partnership's net asset value consisting of the independently
appraised market value of 40 of the Properties as of March 31, 1999, the
closing price of PS Business Parks, Inc. on the AMEX on June 1, 1999 and
estimated book value of its other net assets as of March 31, 1999 and the
Partnership's share of an award of a property condemned in its entirety.
The market price of Public Storage common stock may fluctuate following
establishment of the number of shares to be issued to limited partners in
the merger and prior to issuance and could decrease as a result of increased
selling activity following issuance of the shares in the merger and other
factors. See "- Determination of Amounts to be Received by Limited Partners
in the Merger."
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(2) There is no active market for the Partnership units. Based on the
information available to the Partnership, the prices at which limited
secondary sales have been effectuated ranged from $284.50 to $452.12 per
unit from January 1, 1997 through March 31, 1999. Included in this price
range are sales to Public Storage. See "Distributions and Market Prices of
Partnership Units."
(3) Reflects a range of values based upon a number of assumptions regarding the
future net operating income and distributions of the Partnership and the
date of its liquidation. See "- Going-Concern Value."
(4) Based upon TNG's real estate appraisal for 40 of the Properties and the
Partnership's share of an award for a property condemned in its entirety,
less estimated expenses of liquidation. See "- Liquidation Values."
Limited Secondary Market Prices of Units. There is no active market for
the Partnership units. Based on the information available to the Partnership,
the prices at which limited secondary sales have been effectuated ranged from
$284.50 to $452.12 per unit from January 1, 1997 through March 31, 1999.
Included in this price range are sales to Public Storage. See "Distributions
and Market Prices of Partnership Units."
Going-Concern Value. The Partnership has estimated the going-concern value
of the Partnership by analyzing projected cash flows and distributions assuming
that the Partnership was operated as an independent stand-alone entity and its
assets sold in a liquidation of the Partnership after a five-year holding
period. The going-concern value assumed that the proceeds from the condemned
facilities were received in the first year, at which time the facilities were
closed. The Partnership assumed sale of the remaining Properties at the
terminal value projected by capitalizing the net operating income in year six at
a capitalization rate equal to the midpoint of the capitalization rates used by
the appraiser in the direct capitalization method and the residual value
component of the discounted cash flow analysis (an average capitalization rate
of 9.68% for the remaining Properties). Under both scenarios, the Partnership
assumed that the Partnership's interest in PSBP was sold at an FFO multiple of
11.1. Real estate selling costs were assumed to be incurred at the same
percentage of sale proceeds (4.3%) as incurred in the liquidation alternative.
Distribution and sale proceeds per Partnership unit were discounted in the
projections at rates ranging from 12% to 13%.
Both scenarios of the going-concern analysis assume that the remaining
Properties are sold in a single transaction at the expiration of the holding
period. Should the assets be liquidated over time, even at prices equal to
those projected, distributions to limited partners out of the Partnership's cash
flow from operations might be reduced because relatively fixed costs, such as
general and administrative expenses, are not proportionately reduced with the
liquidation of assets. However, for simplification purposes, the sales are
assumed to occur concurrently.
The estimated value of the Partnership on a going-concern basis is not
intended to reflect the distributions payable to limited partners if its assets
were to be sold at their current fair market value.
Liquidation Values. Since one of the alternatives available to the general
partners is to proceed with a liquidation of the Partnership, and the
corresponding distribution of the net liquidation proceeds between the joint
venture partners and, within the Partnership, to the limited partners and the
general partners, the Partnership has estimated the liquidation value of the
Partnership assuming that the Properties are sold at their appraised value based
upon the TNG real estate portfolio appraisal, except for the Property that was
condemned in its entirety, which is assumed to be sold at the amount in the
condemnation award, net of estimated expenses. This alternative assumes that
the Partnership's interest in PSBP is sold at the June 1, 1999 trading price
(less a commission of $.06 per share), the Partnership incurs real estate
selling costs at the time of liquidation (state and local transfer taxes, real
estate commissions of 3% of sales proceeds and legal and other closing costs) of
approximately $4,169,000, and the remaining net liquidation proceeds are
distributed between the joint venture partners in accordance with the joint
venture agreement and between the limited and general partners in accordance
with the partnership agreement, according priority to limited partners.
The liquidation analysis assumes that the Properties are sold in a single
transaction at their appraised value, except for the Property that was condemned
in its entirety, which is assumed to be sold at the amount in the condemnation
award, net of estimated expenses. Should the assets be liquidated over time,
even at prices equal to those projected, distributions to limited partners from
cash flow from operations might be reduced because the Partnership's relatively
fixed costs, such as general and administrative expenses, are not
proportionately reduced with
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the liquidation of assets. However, for simplification purposes, the sales of
the Properties are assumed to occur concurrently.
Applying these procedures, the Partnership arrived at the liquidation value
set forth in the table. The real estate portfolio appraisal sets forth, subject
to the specified assumptions, limitations and qualifications, TNG's professional
opinion as to the market value of 40 of the Properties as of April 30, 1999.
While the portfolio appraisal is not necessarily indicative of the price at
which the assets would sell, market value generally seeks to estimate the price
at which the Properties would sell if disposed of in an arm's length transaction
between a willing buyer and a willing seller, each having access to relevant
information regarding the historical revenues and expenses. The real estate
portfolio appraisal assumes that these Properties are disposed of in an orderly
manner and are not sold in forced or distressed sales where sellers might be
expected to dispose of their interests at substantial discounts to their actual
fair market value. See "- Real Estate Portfolio Appraisal by TNG."
Distribution Comparison. The general partners have considered the
potential impact of the merger upon distributions that would be made to limited
partners who exchange their Partnership units for Public Storage common stock.
Based on a market price of Public Storage common stock of $29 and the current
regular quarterly distribution rate for Public Storage ($.22 per share) and the
Partnership ($8.70 per unit), limited partners would receive approximately $4.57
(52%) less in regular quarterly distributions per Partnership unit after the
merger from Public Storage than before the merger from the Partnership and
approximately $.033 less per unit in regular quarterly distributions for each
$1.00 (3.4%) increase in the market price of Public Storage common stock above
$29. These estimates are based upon the actual distributions made by Public
Storage and the Partnership (not upon the amounts that might have been
distributed by them based upon their cash flow from operations).
In evaluating this estimate, limited partners should bear in mind that this
comparison does not reflect the tax that a limited partner will have to pay in
connection with the merger. The merger will be a taxable event for the public
limited partners resulting in the recognition of gain to most taxable public
limited partners who receive either cash or Public Storage common stock. In
evaluating this estimate, limited partners should also bear in mind that a
number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, if any, capital expenditure levels (in excess of normal
expenditures for ongoing maintenance and repairs) and the corporate policy with
respect to cash distributions. A comparison of the current distribution levels
of Public Storage with those of the Partnership does not show how the merger
might affect a limited partner's distribution level over a number of years.
Real Estate Portfolio Appraisal by TNG
TNG was engaged by the Partnership to appraise 40 of the 41 Properties and
has delivered a written report of its analysis, based upon the review, analysis,
scope and limitations described therein, as to the market value of the 40
Properties as of April 30, 1999. The appraisal was limited in that TNG's
services have been conducted as an office service. TNG did not inspect any of
the Properties. The Partnership selected TNG to provide the appraisal because
of its experience and reputation in appraising mini-warehouses, including its
appraisal of other properties managed by Public Storage. The consideration to
be paid by Public Storage to the limited partners in the merger is based on the
appraisal. The appraisal, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
analysis, is set forth as Appendix B and should be read in its entirety.
Certain of the material assumptions, qualifications and limitations to the
appraisal are described below.
Governmental agencies have condemned two of the Properties: a condemnation
of an entire property in one case and a partial condemnation in the second case.
TNG did not appraise the property which has been condemned in its entirety and
appraised the entire property that has been partially condemned. See note (3)
to "The Merger - Determination of Amounts to be Received by Limited Partners in
the Merger" and "Description of Partnership's Properties."
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
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organizations, insurance companies and other financial institutions. During
1996, 1997 and 1998, TNG appraised over 350 properties.
Summary of Methodology. At the request of the Partnership, TNG evaluated
40 of the Properties. In valuing these Properties, TNG considered the
applicability of all three commonly recognized approaches to value: the cost
approach, the income approach and the sales comparison approach. The type and
age of a property, market conditions and the quantity and quality of data affect
the applicability of each approach in a specific appraisal situation. TNG did
not consider the cost approach to be applicable to the 40 Properties.
The income approach estimates a property's capacity to produce income
through an analysis of the rental market, operating expenses and net operating
income. Net operating income may then be processed into a value estimate
through either (or a combination) of two methods: direct capitalization or
yield capitalization, i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of substitution,
i.e., that an informed purchaser would pay no more for a property than the cost
of acquiring an existing property with the same utility. The sales comparison
approach establishes what typical investors in the marketplace are willing to
pay for comparable properties.
The cost approach is based on the estimated market value of the site as if
vacant plus the depreciated replacement cost of the existing improvements. The
cost approach was not considered appropriate in the case of the 40 Properties
since (a) today's investors generally do not rely upon the cost approach in
making investment decisions for older properties and (b) the necessity of
estimating total accrued depreciation in buildings of the type and age of the
Properties diminishes the validity of this approach.
While the appraisal was prepared for all of the 40 Properties as a whole,
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 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. TNG verified the competitive property rental rates via
telephone.
TNG also reviewed executive evaluations for each property and interviewed
management personnel responsible for the 40 Properties to ascertain competitive
conditions, area economic trends affecting the properties, historical operating
revenues and expenses and occupancy rates in competitive facilities.
TNG then estimated the value of each of the 40 Properties relying heavily
upon the income approach. To define the occupancy and rental rates and expense
escalators to be used in developing cash flow projections, TNG reviewed the
acquisition criteria and projection parameters in use in the marketplace by
major mini-warehouse investors, owners and operators, appraisers and financing
sources. In addition, TNG reviewed other published information concerning
acquisition criteria in use by property investors through the first quarter of
1999. Further, TNG interviewed various sources in local markets to identify
sales of mini-warehouses within the past 24 months in order to derive certain
valuation indicators. Sources for data concerning such transactions included
local appraisers, property owners, real estate brokers and others. 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 2009 with a terminal residual value computed at the end of
year 10. The first year's scheduled gross income was estimated taking into
consideration each property's current rent structure and the rental rates of
competitive facilities. Also included in the income estimate were trends in
ancillary income from late fees and rental concessions. TNG then made an
analysis of each subject's occupancy history, took into consideration the
occupancy level of competitive facilities and estimated a stabilized occupancy
level for each of the 40 Properties.
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Estimated expenses were based upon each of the 40 Properties' 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, and adjustments made, to reflect
replacement reserves. Income and expense growth rates were based on projection
parameters currently being used by property investors as well as upon local,
regional and historical trends.
For the self-storage properties, TNG used a growth rate of 3.0% for income
and expenses. TNG then used a terminal capitalization rate of 10.0% to
capitalize each of the 40 Properties' 11th year net income into a residual value
at the end of a 10-year holding period, and assumed a normal cost of disposing
of the Properties. The 10 yearly cash flows were then discounted to present
worth using a discount rate of 12.50%. In addition, TNG valued each of the 40
Properties using the direct capitalization method by applying a capitalization
rate of 9.75% to projected net operating income for the next 12 months.
The indicated value for the 40 Properties based upon the discounted cash
flow analysis is $96,000,000 and based upon the direct capitalization technique
is $98,700,000.
In applying the sales comparison approach to the Properties, TNG analyzed
approximately 100 mini-warehouse properties that were sold during 1997, 1998 and
1999. Using a regression analysis, a strong 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 transactions of properties similar to the Properties involving Public
Storage and others and has concluded that the 40 Properties are reasonably and
appropriately valued relative to these other portfolio transactions.
Conclusions as to Value. TNG reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. TNG gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the mini-
warehouse market.
Based on the valuation methodology described above, TNG assigned a market
value to the 40 Properties as of April 30, 1999 of $98,200,000. The resulting
effective implied capitalization rate for the 40 Properties (excluding the
partially condemned facility) based on reported property operations (before non-
recurring expenses and after certain property tax adjustments) during the 12
months ended April 30, 1999 averaged 9.36%.
TNG's conclusion as to value relates to 100% of the 40 Properties, which
includes the joint venture interests of both the Partnership and Public Storage.
TNG did not separately value the interest of the Partnership in the 40
Properties.
Assumptions, Limitations and Qualifications of the Appraisal. The
appraisal reflects TNG's valuation of the 40 Properties as of April 30, 1999 in
the context of the information available on such date. Events occurring after
April 30, 1999 and before the closing of the merger could affect the properties
or assumptions used in preparing the appraisal. TNG has no obligation to update
the appraisal on the basis of subsequent events; however, TNG has informed the
Partnership that, as of the date of this statement, TNG is not aware of any
event or change in conditions since April 30, 1999 that may have caused a
material change in the value of the 40 Properties since that date.
The appraisal is subject to certain general and specific assumptions and
limiting conditions and is in conformity with the Departure Provision of Uniform
Standards of Professional Appraisal Practice. Among other limitations, the
appraisal (1) did not consider the effect of easements, restrictions, deferred
maintenance, structural repairs and other similar items on the value of the
Properties, (2) assumed that the properties comply with local building codes and
zoning ordinances, (3) assumed that there are no new or planned facilities
except as noted in the appraisal and (4) did not involve the physical
inspections of the subject or 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 $36,900 for preparation of the appraisal, which fee includes
reimbursement for all of TNG's related out-of-pocket expenses. TNG is also
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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 Public Storage and its affiliates, including appraisals of the
properties of prior REITs in connection with their mergers with Public Storage,
and TNG is expected to continue to prepare appraisals for Public Storage.
During the past three years (1997 to the present), TNG (and its predecessor)
have received compensation aggregating approximately $300,000 for these services
(exclusive of amounts received in connection with the merger).
Fairness Opinion from Stanger
Stanger was engaged by the Partnership to deliver a written opinion of its
determination as to the fairness of the consideration to be received in the
merger, from a financial point of view, to the public limited partners. The
full text of the opinion, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
opinion, is set forth in Appendix C to this statement and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations
to the fairness opinion are set forth below. The summary set forth below does
not purport to be a complete description of the analyses used by Stanger in
rendering the fairness opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description.
Except for certain assumptions, described more fully below, which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
with respect to the methods and procedures to be followed in rendering the
fairness opinion. The Partnership has agreed to indemnify Stanger against
certain liabilities arising out of its engagement to prepare and deliver the
fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided information,
research, investment banking and consulting services to clients throughout the
United States, including major NYSE firms and insurance companies and over 70
companies engaged in the management and operation of partnerships and REITs.
The investment banking activities of Stanger include financial advisory
services, asset and securities valuations, industry and company research and
analysis, litigation support and expert witness services, and due diligence
investigations in connection with both publicly registered and privately placed
securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, reorganizations and for estate, tax, corporate and other purposes.
In particular, Stanger's valuation practice principally involves partnerships,
partnership securities and the assets typically owned through partnerships
including, but not limited to, oil and gas reserves, real estate, cable
television systems and equipment leasing assets.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the merger, Stanger: (1) reviewed this statement;
(2) reviewed the annual reports on Form 10-K of Public Storage and the
Partnership for the three fiscal years ending December 31, 1996, 1997 and 1998
and the quarterly report on Form 10-Q of Public Storage and the Partnership for
the quarter ended March 31, 1999; (3) reviewed the MAI certified appraised value
of the portfolio prepared by TNG; (4) reviewed information regarding purchases
and sales of self-storage properties by Public Storage or any affiliated
entities over the past three years, and other information available relating to
acquisition criteria for self-storage properties; (5) reviewed estimates
prepared by the Partnership, and based in part on the appraisal, of the current
net liquidation value per Partnership unit of the Partnership's assets and
projections of cash flow from operations, cash distributions and going-concern
values for the Partnership, and the calculation of the allocation of such values
between the joint venture partners and between the limited and general partners;
(6) discussed with certain members of management of Public Storage and the
Partnership conditions in self-storage property markets, conditions in the
market for sales/acquisitions of properties similar to those owned by the
Partnership, current and expected operations and performance, and the financial
condition and future prospects of Public Storage and the Partnership; (7)
reviewed historical market prices, trading volume and dividends for Public
Storage common stock and historical secondary market transactions for
Partnership units; and (8) conducted other studies, analyses, inquiries and
investigations as Stanger deemed appropriate.
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Summary of Analysis. The following is a summary of certain financial and
comparative analyses reviewed by Stanger in connection with and in support of
its fairness opinion. The summary of the opinion and analysis of Stanger set
forth in this statement is qualified in its entirety by reference to the full
text of such opinion.
Review of Appraised Value. In preparing its opinion, Stanger relied upon
the appraisal of the 40 Properties which was prepared as of April 30, 1999 by
TNG, an independent appraiser. Stanger reviewed the appraised value rendered by
TNG and discussed with TNG its experience and qualifications and the appraisal
conclusions.
Stanger observed that the appraisal was certified by a Member of the
Appraisal Institute and was conducted on a limited scope basis utilizing the
income approach to valuation, applying the direct capitalization and discounted
cash flow methods to establish a value for each individual property, and the
sales comparison approach.
Stanger observed that the effective capitalization rate utilized in the
appraisal, excluding the Property that was partially condemned, was
approximately 9.36%, based on net operating income (before non-recurring
expenses and after certain property tax adjustments) generated for the 12 months
ended April 30, 1999. Lower capitalization rates generally reflect higher sales
prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared by
the Partnership of the estimated value of the Partnership based upon liquidation
of its portfolio on a property-by-property basis utilizing estimates prepared by
the Partnership and information provided by TNG.
The property-by-property liquidation analysis assumed each property could
be sold within an estimated marketing period of six months at the appraised
value as reported in the appraisal, to an independent third-party buyer. The
wholly condemned facility was assumed to be sold at the condemnation award
amount, net of related expenses. Costs of such property sales by the
Partnership to independent third-parties were estimated by the Partnership to
total approximately $4,169,000 and were comprised of estimates of $285,000 in
state and local transfer taxes, $2,913,000 in commissions and $971,000 in legal
and other closing costs. Such amounts were based on prevailing transfer tax
rates in the locale of each property and on estimates of the Partnership based
on knowledge of real estate transactions. Stanger observed that the estimated
net proceeds from such liquidation, the sale of the Partnership's interest in
PSBP and the associated dissolution of the Partnership and distribution of all
remaining assets was $523 per Partnership unit, versus the consideration offered
in the merger of $545 cash per unit, or the equivalent of $545 of Public Storage
common stock per unit, based on the average closing price of Public Storage
common stock on the NYSE during the 20 consecutive trading days ending on the
fifth trading day prior to the Effective Date.
Stanger also reviewed information on multi-property purchases and sales of
self-storage properties transacted by Public Storage, Public Storage Management
or affiliates. Stanger observed that Public Storage, Public Storage Management
or affiliated entities have not acquired any third-party bulk portfolios during
1997 and 1998. During 1996, Public Storage, Public Storage Management and
affiliated entities completed 11 bulk purchases of property portfolios,
excluding the properties associated with the mergers of 18 affiliated REITs with
Public Storage. These transactions involved affiliated and unaffiliated
entities with an interest in 73 properties with an aggregate acquisition cost of
approximately $209 million. Capitalization rates ranged from 9.1% to 11.6% and
averaged 9.6%.
Stanger also reviewed information regarding the merger between Public
Storage and Storage Trust Realty ("Storage Trust") which was closed in March
1999. Stanger noted that in the merger Public Storage acquired a portfolio of
215 self-storage properties and certain other assets for aggregate consideration
of approximately $600 million, based on the price of Public Storage common stock
as of November 6, 1998. Stanger also noted that in the context of rendering a
fairness opinion, the financial advisor to Storage Trust performed a net asset
valuation of Storage Trust based on a real estate valuation utilizing property
specific financial projections for 1999 and a direct capitalization method. The
capitalization rates utilized in this analysis ranged from 9.5% to 10.5%.
Based on the total transaction value of the Storage Trust merger and other
information cited in the proxy statement relating to the merger, the implied
trailing and forward capitalization rates of the Storage Trust portfolio in the
merger were estimated by Stanger to be approximately 8.7% and 9.3%,
respectively. This capitalization rate does not reflect certain options and
benefits to be received by Public Storage as a result of the merger, including a
reduction in consolidated general and administrative expenses from the
elimination of certain duplicative
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administrative costs following the merger, estimated at over $2 million on a pro
forma basis for the nine months ending September 30, 1998.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and
projections prepared by the Partnership concerning estimated cash flows and
distributions from the Partnership's continued operation as an independent
stand-alone entity and estimated sales proceeds from the liquidation of the
Properties. The analyses incorporated estimates of revenues and operating
expenses for the Properties, capital expenditures, entity-level general and
administrative costs, and cash flow distributions and proceeds from sale of the
Properties during a projection period of five years. The analyses and
projections assumed, among other things, that (1) net operating income for the
Partnership would grow at a compound annual rate of approximately 3.0% over the
five-year projection period; (2) the Partnership would receive its share of
proceeds with respect to the two condemned facilities in the first year, upon
which operations for these facilities would cease; (3) general and
administrative expenses would increase at an average rate of 3.0% per annum over
the projection period; and (4) the sale of the remaining Properties would occur
at the terminal value projected by capitalizing the net operating income in year
six at a capitalization rate equal to the midpoint of the capitalization rates
used by the appraiser in the direct capitalization method and the residual value
component of the discounted cash flow analysis (an average capitalization rate
of 9.68% for the remaining Properties). Real estate selling costs were assumed
to be incurred at the same percentage of sale proceeds (4.3%) as incurred in the
liquidation alternative.
The projections evaluated the Partnership's going-concern value by
analyzing projected cash flow and distributions assuming that the Partnership
was operated as an independent stand-alone entity and its assets sold in a
liquidation of the Partnership after a five-year holding period. The
projections also assume that the Partnership's interest in PSBP is sold at an
FFO multiple of 11.1 (reduced by a commission of $.06 per share). Distributions
and sale proceeds per Partnership unit were discounted in the projections at
rates ranging from 12% to 13%.
Stanger observed that the estimated values per Partnership unit on a going-
concern basis resulting from the above analysis were $504 and $523, compared
with the consideration in the merger of $545 per Partnership unit.
The estimated values assigned to the alternative forms of consideration are
based on a variety of assumptions that have been made by the Partnership. While
the Partnership has advised Stanger that it believes that it has a reasonable
basis for these assumptions, these assumptions may not reflect the Partnership's
actual experience and such differences could be material. See "- Comparison of
Consideration to be Received in the Merger to Other Alternatives."
Review of Tender Offer and Secondary Market Prices. Stanger observed that
Partnership units have been purchased in recent months on the informal secondary
market for partnership securities and in 1994 and 1996 through tender offers by
Public Storage.
Stanger observed that, based on prices reported to Stanger by various firms
active in the informal secondary market for partnership interests, the highest
selling prices reported for Partnership units in the informal secondary market
between January 1, 1997 and March 31, 1999 were $452.12 per unit compared with
the consideration in the merger of $545 per unit.
Stanger also observed that the Partnership units had been the subject of
tender offers by Public Storage in 1994 and 1996 and the tender offer prices
ranged from $315 to $425 per unit.
Distribution/FFO Analysis. Stanger reviewed distributions per Partnership
unit and FFO per Partnership unit on an equivalent per unit basis. Stanger
noted that based on a closing price of $29 for Public Storage common stock and
the resulting exchange ratio of Partnership units for Public Storage common
stock and based on operating results for Public Storage, regular quarterly
distributions per share would decrease by approximately $4.57 (52.5%) for
limited partners receiving Public Storage common stock.
Stanger observed that, at the closing price of $29 for Public Storage
common stock and based on operating results for Public Storage, annual FFO per
Partnership unit on a fully-diluted basis on an equivalent per share basis
earned by limited partners would decrease by $1.72 (3.7%).
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Conclusions. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and as of the date of the fairness opinion, the
consideration to be received in the merger is fair to the public limited
partners, from a financial point of view.
Assumptions. In evaluating the merger, Stanger relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in this statement or that was furnished or
otherwise communicated to Stanger. Stanger did not perform an independent
appraisal of the assets and liabilities of Public Storage and the Partnership
and relied upon and assumed the accuracy of the restricted appraisal. Stanger
also relied on the assurances of Public Storage and the Partnership that any
projections, budgets, or value estimates contained in this statement or
otherwise provided to Stanger, were reasonably prepared on bases consistent with
actual historical experience and reflect the best currently available estimates
and good faith judgments; that the property values and the Partnership's net
asset value have been allocated between the joint venture partners and between
the limited and general partners in the same manner they would be allocated upon
the Partnership's liquidation; that no material changes have occurred in the
appraised value of the 40 Properties or the information reviewed between the
date of the appraisal or the date of the other information provided and the date
of the opinion; and that Public Storage and the Partnership are not aware of any
information or facts that would cause the information supplied to Stanger to be
incomplete or misleading in any material respect.
In connection with preparing the fairness opinion, Stanger was not engaged
to, and consequently did not, prepare any written report or compendium of its
analysis for internal or external use beyond the analysis set forth in Appendix
C. Stanger does not intend to deliver any additional written summary of the
analysis.
Compensation and Material Relationships. For preparing the fairness
opinion and related services in connection with the merger, Stanger is being
paid a fee of $60,000. In addition, Stanger will be reimbursed for certain out-
of-pocket expenses, including legal fees, up to a maximum of $9,000 and will be
indemnified against certain liabilities, including certain liabilities under the
federal securities laws. The fee was negotiated with Stanger. Payment of the
fee to Stanger is not dependent upon completion of the merger. Stanger has
rendered consulting and related services and provided products to Public Storage
and to PSMI and its affiliates, including fairness opinion to the public
shareholders of 18 REITs in connection with their mergers with Public Storage,
and may be engaged in the future. During the past four years (1995 to the
present), Stanger has received compensation aggregating approximately $1,130,000
for these services and products (exclusive of amounts received in connection
with the merger).
Limitations and Qualifications. Stanger was not requested to, and
therefore did not: (i) select the method of determining the consideration being
paid in the merger; (ii) make any recommendation to the public limited partners
with respect to whether to approve or reject the merger or whether to select the
cash or Public Storage common stock option in the merger; or (iii) express any
opinion as to the business decision to effect the merger, alternatives to the
merger or tax factors resulting from the merger, or relating to Public Storage's
continued qualification as a REIT. Stanger's opinion is based on business,
economic, real estate and securities markets, and other conditions as of the
date of its analysis. Events occurring after that date may materially affect
the assumptions used in preparing the opinion.
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of 18 affiliated REITs with Public
Storage and in connection with the merger of two similar Partnerships with
Public Storage, its expertise in real estate transactions and the fee quoted by
Stanger. No party other than Stanger was contacted to render an opinion as to
the fairness of the merger to public limited partners, and the Partnership has
neither requested nor received any views, preliminary or otherwise, from any
party other than Stanger regarding the fairness of the merger to the public
limited partners.
The Merger Agreement
If the conditions to the merger are satisfied or waived, the merger will be
consummated pursuant to the merger agreement which is set forth in Appendix A
to, and is incorporated by reference into, this statement. As a result of the
merger, all of the Partnership units will be held by a subsidiary of Public
Storage. The merger agreement
33
<PAGE>
contains representations and warranties of Public Storage and the Partnership
and certain other provisions relating to the merger. The representations and
warranties are extinguished by, and do not survive, the merger.
Conditions to Consummation of the Merger. Consummation of the merger is
contingent upon standard conditions, including the following: (1) the
Registration Statement shall have been declared effective by the Commission and
Public Storage shall have received all other authorizations necessary to issue
Public Storage common stock in exchange for Partnership units and to consummate
the merger; (2) the merger agreement and the merger shall have been approved and
adopted by the requisite vote of the limited partners (which condition has been
satisfied by Public Storage's vote of its Partnership units in favor of the
merger); (3) the shares of Public Storage common stock issued to limited
partners shall be listed on the NYSE; (4) the Partnership shall have received a
fairness opinion from Stanger (which opinion has been received); (5) the board
of directors of Public Storage shall have approved the merger; (6) no legal
action challenging the merger shall be pending; and (7) in the case of Public
Storage, the average of the per share closing prices on the NYSE of the Public
Storage common stock during the 20 consecutive trading days ending on the fifth
trading day prior to the Effective Date is not less than $25. The obligation of
Public Storage to effect the merger is also subject to Public Storage, in its
sole discretion, being satisfied as to title to, and the results of an
environmental audit of, the Properties. Any of these conditions may be waived
by the board of directors of Public Storage.
Amendment or Termination. The merger agreement provides for amendment or
modification thereof with respect to the merger by written agreement authorized
by the board of directors of Public Storage and the general partners. The
merger may be abandoned at any time before or after shareholder approval by
mutual written consent and may be abandoned by either party if, among other
things, the closing of the merger has not occurred on or before December 31,
1999.
Consummation. It is contemplated that the merger will be consummated by
filing a certificate of merger with the California Secretary of State.
Certificates for Public Storage Common Stock. After the merger, holders of
Partnership units that were converted into shares of Public Storage common
stock, without any further action, will be entitled to receive certificates
representing the number of whole shares of Public Storage common stock into
which Partnership units will have been converted and cash payment in lieu of
fractional share interests, if applicable. As soon as practicable after the
merger, the exchange agent, BankBoston, N.A., will send the certificates for the
Public Storage common stock to each holder of Partnership units whose
Partnership units have been converted into shares of Public Storage common
stock. HOLDERS OF PARTNERSHIP UNITS WHO INTEND TO RECEIVE PUBLIC STORAGE COMMON
STOCK IN THE MERGER DO NOT NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE
CERTIFICATES REPRESENTING THE PUBLIC STORAGE COMMON STOCK. IT IS IMPORTANT THAT
YOU MAKE SURE YOU RECEIVE YOUR CERTIFICATE FOR THE PUBLIC STORAGE COMMON STOCK
MAILED TO YOU BY BANKBOSTON, N.A. IF YOU DO NOT RECEIVE YOUR PUBLIC STORAGE
COMMON STOCK CERTIFICATE BY AUGUST 31, 1999, CALL BANKBOSTON, N.A. AT (781) 575-
3120 SO THAT AN AFFIDAVIT OF NON-RECEIPT CAN BE SENT TO YOU AND A CERTIFICATE
REISSUED AT NO COST TO YOU. ANY SHAREHOLDER WHO CONTACTS BANKBOSTON, N.A. AFTER
JANUARY 31, 2000 REQUESTING THAT A CERTIFICATE BE REISSUED MAY NEED TO EXECUTE
AN AFFIDAVIT OF LOSS AND PAY THE COST OF A BOND OF INDEMNITY BEFORE A
CERTIFICATE CAN BE REPLACED.
After the merger, there will be no further registration of transfers of
Partnership units on the Partnership's records.
Fractional Shares. No fractional shares of Public Storage common stock
will be issued in the merger. In lieu of any fractional share interests, each
holder of Partnership units who would otherwise be entitled to a fractional
share of Public Storage common stock will, upon surrender of the certificate
representing Public Storage common stock, receive a whole share of Public
Storage 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 Public Storage common stock such holder is
entitled to receive in the merger. In such event,
34
<PAGE>
the holder will be paid an amount in cash (without interest), rounded to the
nearest $.01, determined by multiplying (1) the per share closing price on the
NYSE of the Public Storage common stock at the time of effectiveness of the
merger by (2) the fractional interest.
Restrictions on Other Acquisitions. The Partnership has agreed not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a merger, consolidation, securities
exchange or similar transaction involving it, or any purchase of all or any
significant portion of its assets, or any equity interest in it, other than the
transactions contemplated by the merger agreement, or engage in any negotiations
concerning, or provide any confidential information or data to, or have
discussions with, any person relating to such a proposal, provided that the
general partners may furnish or cause to be furnished information and may
participate in such discussions and negotiations through its representatives
with persons who have sought the same if the failure to provide such information
or participation in the negotiations and discussions might cause the Partnership
to breach their fiduciary duty to limited partners under applicable law as
advised by counsel. The Partnership has agreed to notify Public Storage
immediately if inquiries or proposals are received by, any such information is
requested from, or negotiations or discussions are sought to be initiated or
continued with it, and to keep Public Storage informed of the status and terms
of any such proposals and any such negotiations or discussions.
Distributions. Pending the merger, the Partnership is precluded from
declaring or paying any distributions to the limited partners other than (1)
regular distributions at a quarterly rate not in excess of $8.70 per Partnership
unit and (2) distributions to the limited partners immediately prior to the
effectiveness of the merger equal to the amount by which the Partnership's
estimated net asset value allocable to limited partners as of the date of the
merger exceeds $545 per Partnership unit. See "- Determination of Payments to
be Received by Limited Partners in the Merger."
Cash Election Procedure
Each holder of record of Partnership units may make a cash election to have
his or her Partnership units converted into the right to receive cash in the
merger. All cash elections are to be made on a cash election form. A cash
election form is being sent to all holders of record of Partnership units on the
date of this statement. To be effective, a cash election form must be properly
completed and signed and must be received by the exchange agent, BankBoston,
N.A., no later than 5:00 p.m. New York City time on August 5, 1999. Holders of
record of units who hold units as nominees, trustees or in other representative
capacities may submit multiple cash election forms, provided that such
representative certifies that each such cash election form covers all the units
held by such representative for a particular beneficial owner. Any cash
election form may be revoked by written notice received by the exchange agent
prior to 5:00 p.m., New York City time, on August 5, 1999. In addition, all
cash election forms will automatically be revoked if the exchange agent is
notified in writing that the merger has been abandoned. The exchange agent may
determine whether or not elections to receive cash have been properly made or
revoked, and any such determination shall be conclusive and binding.
A holder of Partnership units may not make a cash election as to less than
all of the units owned by such holder. Any holder of units who does not submit
a properly completed and signed cash election form which is received by the
exchange agent prior to 5:00 p.m., New York City time, on August 5, 1999 will
receive Public Storage common stock in the merger. If Public Storage or the
exchange agent determines that any purported cash election was not properly
made, such purported cash election will be deemed to be of no force and effect
and the holder of units making such purported cash election will, for purposes
hereof, receive Public Storage common stock in the merger. None of Public
Storage, the Partnership or the exchange agent will be under any obligation to
notify any person of any defect in a cash election form.
The tax consequences of receiving cash or Public Storage common stock are
described under "Federal Income Tax Considerations - The Merger."
Consequences to the Partnership if the Merger is Not Completed
If the merger is not completed, the Partnership will remain as a separate
legal entity and will continue to operate its properties.
35
<PAGE>
Costs of the Merger
It is estimated that the total consideration (cash and Public Storage
common stock) to be paid by Public Storage to acquire all of Partnership units
owned by the public limited partners in the merger and to pay related costs and
expenses would be approximately $27,500,000. These amounts will be paid from
Public Storage's working capital or with funds borrowed under credit facilities
with a group of banks for which Wells Fargo Bank, National Association acts as
agent. These credit facilities aggregate $150,000,000 and bear interest at
LIBOR plus .40% to 1.10%. Public Storage intends to repay amounts borrowed
under these facilities from the public or private placement of securities or
from Public Storage's undistributed cash flow.
If the merger is completed, all costs incurred by Public Storage and the
Partnership in connection with the merger will be paid by Public Storage. 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 Public Storage will
pay one-half of the cost of any expenses incurred in connection with the
printing of this statement and related registration statement, the appraisal,
environmental and structural audits and filing fees and the Partnership will pay
the other one-half of such costs. The Partnership's share of such costs would
be paid from its working capital.
The following is a statement of certain fees and expenses estimated to be
incurred in connection with the merger (exclusive of amounts paid as a result of
cash elections).
<TABLE>
<S> <C>
Printing and mailing $ 20,000
Legal 50,000
Real estate appraisal and fairness opinion 90,000
Registration, listing and filing fees 10,000
Accounting 15,000
Other 15,000
--------
TOTAL $200,000
========
</TABLE>
Accounting Treatment
For accounting purposes, the merger will be treated as a purchase.
Accordingly, the cost of the assets and liabilities of the Partnership will be
allocated based on fair value.
Regulatory Requirements
The merger is subject to compliance with federal and state securities law
requirements.
Comparison of Partnership Units with Public Storage Common Stock
The information below compares certain attributes of Public Storage Common
Stock with the Partnership units. The effect of the merger on limited partners
who receive Public Storage common stock in the merger is set forth in italics
below each caption.
<TABLE>
<CAPTION>
Partnership Public Storage
Investment Objectives and Policies
<S> <C>
The principal investment objectives are to provide (i) The investment objectives of Public Storage are to maximize
quarterly cash distributions from its operations and FFO allocable to holders of Public Storage common stock and
(ii) long-term capital gains through appreciation in to increase shareholder value through internal growth and
the value of properties. acquisitions. FFO is a supplemental performance measure
for equity REITs used by industry analysts. FFO does not
Under its organizational documents, the Partnership take into consideration principal payments on debt, capital
is not permitted to raise new capital
</TABLE>
36
<PAGE>
<TABLE>
Partnership Public Storage
<S> <C>
or to reinvest operating cash flow or sale improvements, distributions and other obligations of Public
or financing proceeds. The Partnership will terminate Storage. Accordingly, FFO is not a substitute for Public
on December 31, 2020, unless earlier dissolved. Storage's net cash provided by operating activities or net
The Partnership anticipated selling or income as a measure of Public Storage's liquidity or
financing its properties within seven to ten years operating performance. An increase in Public Storage's FFO
from acquisition (i.e., between approximately will not necessarily correspond with an increase in
1992 and 1995). distributions to holders of Public Storage common stock.
See "- Liquidity, Marketability and Distributions."
Public Storage intends to continue its operations for an
indefinite period of time and is not precluded from raising
new capital, including senior securities that would have
priority over Public Storage common stock (including Public
Storage common stock issued in the merger) as to cash flow,
distributions and liquidation proceeds, or from reinvesting
cash flow or sale or financing proceeds in new properties,
except to the extent such reinvestment precludes Public
Storage from satisfying the REIT distribution requirements.
Therefore, Public Storage shareholders should expect to be
able to liquidate their investment only by selling their
shares in the market, and the market value of the Public
Storage common stock may not necessarily equal or exceed
the market value of Public Storage's assets or the net
proceeds which might be available for distribution upon
liquidation if Public Storage were to liquidate. Public
Storage has grown, and intends to continue to grow, as new
investments are made.
</TABLE>
Limited partners who receive Public Storage 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 Public
Storage common stock. The interest of Public Storage shareholders can be
diluted through the issuance of additional securities, including securities
that would have priority over Public Storage common stock as to cash flow,
distributions and liquidation proceeds. Public Storage 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 Public Storage Common
Stock" and "- Financing Risks - Dilution and Subordination."
Public Storage has no plans with respect to a sale or financing of any of
the Properties.
Borrowing Policies
<TABLE>
<S> <C>
The Partnership has no outstanding borrowings. It is Subject to certain limitations in Public Storage's bylaws,
fully invested and would distribute the proceeds from Public Storage has broad powers to borrow in furtherance of
a financing of properties. its investment objectives. Public Storage has incurred in
the past, and may incur in the future, both short-term and
long-term debt to increase its funds available for
investment in real estate, capital expenditures and
distributions. As of March 31, 1999, Public Storage's
ratio of "Debt" (liabilities other than "accrued and other
liabilities" and "minority interest"
</TABLE>
37
<PAGE>
<TABLE>
Partnership Public Storage
<S> <C>
that should, in accordance with GAAP, be reflected
on Public Storage's balance sheet) to "Assets"
(Public Storage's total assets that should, in accordance
with GAAP, be reflected on Public Storage's balance sheet)
was approximately 4%.
</TABLE>
Public Storage has outstanding debt and reinvests proceeds from borrowings.
The incurrence of debt increases the risk of loss of investment.
Transactions with Affiliates
<TABLE>
<S> <C>
The partnership agreement restricts a variety of Public Storage's bylaws restrict Public Storage from
business transactions with affiliates. The acquiring properties from its affiliates or from selling
partnership agreement may be amended by a majority properties to them unless the transaction (i) is approved
vote of limited partners. See "Amendment to by a majority of Public Storage's independent directors and
Partnership Agreement." (ii) is fair to Public Storage based on an independent
appraisal.
</TABLE>
Given Public Storage's control of all voting decisions with respect to the
Partnership, both Public Storage and the Partnership can enter into
transactions with affiliates without the need for approval of the public
shareholders and public limited partners, respectively. In the case of Public
Storage, however, these transactions require approval of Public Storage's
independent directors.
Properties (As of March 31, 1999)
<TABLE>
<S> <C>
The Partnership owns equity interests in 41 Public Storage owns equity interests (directly, as well as
mini-warehouses in 15 states. One of the through general and limited partnership interests) in 1,313
mini-warehouses has been condemned in its entirety mini-warehouses in 37 states, including 628 wholly owned
and another has been partially condemned. Also owns properties. Also owns interest in PSBP. See "Description
an interest in PSBP. For the three months ended of Public Storage's Properties."
March 31, 1999, the weighted average occupancy level
and realized annual rent per square foot of the
Properties (excluding the two condemned properties
discussed in "Description of Partnership's
Properties") were 87% and $7.40, respectively. See
"Description of Partnership Properties."
</TABLE>
Because Public Storage owns substantially more property interests in more
states than the Partnership, Public Storage's results of operations are less
affected by the profitability or lack of profitability of a single property
than are those of the Partnership and it would be more difficult to liquidate
Public Storage than the Partnership within a reasonable period of time.
Liquidity, Marketability and Distributions
<TABLE>
<S> <C>
There is no active trading market for Partnership Public Storage common stock is traded on the NYSE. During
units. The Partnership has not issued any securities the 12 months ended March 31, 1999, the average daily
that have priority over its Partnership units. trading volume of Public Storage common stock was
approximately 128,000 shares. Public Storage has issued,
and may in the future issue, securities that have priority
over Public Storage common stock as to cash flow,
distributions and liquidation proceeds.
</TABLE>
38
<PAGE>
Partnership Public Storage
Distributions are paid to limited partners from cash available for
distribution. Public Storage is required to distribute at least 95% of its
ordinary REIT taxable income in order to maintain its qualification as a REIT.
Public Storage distributes less than its cash available for distribution
(recently distributing amounts approximately equal to its taxable income),
permitting it to retain funds for additional investment and debt reduction.
A limited partner who receives Public Storage common stock in the merger
will have an investment for which the market is broader and more active than
the market for Partnership units. Distributions on Public Storage common stock
are lower than the distributions on the Partnership units. Distributions on
Public Storage common stock also are subject to priority of preferred stock.
See "Distributions and Price Range of Public Storage Common Stock" and
"Distributions and Market Prices of Partnership Units" for information on
market prices of Partnership units and Public Storage Common Stock.
Taxation
<TABLE>
<S> <C>
Income or loss earned by the Partnership is not taxed Public Storage was organized to qualify for taxation as a
at the partnership level. Limited partners are REIT and intends to continue to so qualify. REITs generally
required to report their allocable share of are permitted to deduct distributions to their
Partnership income and loss on their respective tax shareholders, which, to the extent of such deductions,
returns. Income and loss from the Partnership effectively eliminates the "double taxation" (at the
generally constitute "passive" income and loss, which corporate and shareholder levels) that typically results
can generally offset "passive" income and loss from when a corporation earns income and distributes that income
other investments. Due to depreciation and other to shareholders in the form of dividends. Distributions
noncash items, cash distributions are not generally received by Public Storage shareholders generally
equivalent to the income and loss allocated to constitute portfolio income, which cannot offset "passive"
limited partners. During operations, cash loss from other investments. Losses and credits generated
distributions have been partially sheltered, but, if within Public Storage do not pass through to shareholders.
the Properties retain their value or appreciate, gain After the end of Public Storage's calendar year,
upon liquidation of the asset will exceed the cash shareholders receive the less complicated Form 1099-DIV
distributions available to limited partners. After used by corporations to report their dividend income. See
the end of each fiscal year, limited partners receive "Federal Income Tax Considerations."
annual schedule K-1 forms showing their allocable
share of Partnership income and loss for inclusion on
their federal income tax returns. Limited partners
are also required to file state income tax returns
and/or pay state income taxes in California and in
certain other states in which the Properties are
located.
</TABLE>
The Partnership is a pass-through entity, whose income and loss is not
taxed at the entity level but instead allocated directly to the limited and
general partners. Limited partners are taxed on income or loss allocated to
them, whether or not cash distributions are made to them. In contrast, Public
Storage qualifies as a REIT, allowing it to deduct dividends paid to its
shareholders. To the extent Public Storage has net income (after taking into
account the dividends paid deduction), such income will be taxed at the
corporate level at the standard corporate tax rates. Dividends paid to Public
Storage shareholders will constitute portfolio income and not passive income.
Voting Rights
<TABLE>
<S> <C>
Limited partners by a majority vote may, without the Public Storage holds annual meetings, with each such
concurrence of the general partners, amend the meeting on a date within 15 months of the prior annual
partnership agreement, dissolve the partnership, meeting, at which the shareholders elect the directors,
remove and/or elect a general partner, and approve or with each shareholder entitled to cast as many votes as
disapprove the sale of all there are directors to be elected,
</TABLE>
39
<PAGE>
<TABLE>
Partnership Public Storage
<S> <C>
or substantially all of the Partnership's assets. multiplied by the number of shares registered in his or
As owner of more than 50% of the Partnership units, her name. Under California law, a majority vote of shareholders
Public Storage controls all voting decisions is required for (i) the removal of directors, (ii) the
with respect to the Partnership. dissolution of the company, (iii) the amendment of
certain provisions of the organizational documents and
(iv) the sale of all or substantially all of the company's
assets. The public shareholders of Public Storage are
substantially limited in their ability to control Public
Storage in view of the significant ownership of Public
Storage Common Stock by the Hughes family.
</TABLE>
Shareholders have different voting rights, including the right to elect
directors annually, than the voting rights afforded to limited partners.
Management and Duties
<TABLE>
<S> <C>
As a matter of state law, the general partners have Public Storage is managed by its board of directors and
liability for the payment of Partnership obligations executive officers. A majority of the directors of Public
and debts, unless limitations upon such liability are Storage are independent directors. Under California law,
expressly stated in the obligation. The partnership directors are accountable to a corporation and its
agreement provides that the general partners are not shareholders as fiduciaries and are required to perform
liable to the Partnership or the limited partners for their duties in good faith, in a manner believed to be in
any act or omission performed in good faith pursuant the best interests of a corporation and its shareholders
to authority granted by the partnership agreement, and with such care, including reasonable inquiry, as an
and in a manner reasonably believed to be within the ordinarily prudent person in a like position would use
scope of authority granted and in the best interests under similar circumstances. The liability of the
of the Partnership, provided that such act or directors of Public Storage and the Partnership is limited
omission did not constitute fraud, misconduct, bad pursuant to the provisions of California law and their
faith or negligence. In addition, the partnership organizational documents, which limit a director's
agreement indemnifies the general partners for liability for monetary damages to the respective
liability, loss, damage, costs and expenses, corporation or its shareholders for breach of the
including attorneys' fees, incurred by them in director's duty of care, where a director fails to exercise
conducting the Partnership's business, except in the sufficient care in carrying out the responsibilities of
case of fraud, misconduct, bad faith or negligence. office. Those provisions would not protect a director who
knowingly did something wrong, or otherwise acted in bad
faith, nor would they foreclose any other remedy which
might be available to the respective corporation or its
shareholders, such as the availability of non-monetary
relief. In addition, Public Storage's organizational
documents provide Public Storage 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. Public Storage has 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
</TABLE>
40
<PAGE>
<TABLE>
Partnership Public Storage
<S> <C>
indemnification apply to actions arising under the Securities
Act, Public Storage has been advised that, in the opinion of
the Commission, such provisions are contrary to public policy
and therefore are not enforceable.
</TABLE>
The general partners have, under most circumstances, no liability to the
Partnership for acts or omissions it undertakes when performed in good faith,
in a manner reasonably believed to be within the scope of their authority and
in the best interests of the Partnership. The general partners also have,
under specified circumstances, a right to be reimbursed by the Partnership for
liability, loss, damage, costs and expenses they incur by virtue of serving as
general partners. Although the standards are expressed somewhat differently,
there are similar protections from liability available to directors and
officers of Public Storage when acting on behalf of Public Storage and rights
of directors and officers to seek indemnification from Public Storage. Public
Storage believes that the scope of the liability and indemnification provisions
in Public Storage's governing documents provides protection against claims for
personal liability against Public Storage's directors and officers which is
comparable to, though not identical with, the protections afforded to the
general partners under the partnership agreement.
Additional Issuances of Securities and Anti-Takeover Provisions
<TABLE>
<S> <C>
The Partnership Agreement does not provide for Subject to the rules of the NYSE and applicable provisions of
the issuance of additional Partnership units. California law, Public Storage has issued and intends to continue
to issue authorized capital stock without shareholder approval.
</TABLE>
Given the ownership level of Public Storage common stock by the Hughes
family and Public Storage's flexibility to issue capital stock, including senior
securities with special voting rights and priority over Public Storage common
stock, and control of all Partnership voting decisions by Public Storage, both
Public Storage and the Partnership are in a position to deter attempts to obtain
control in transactions not approved by management.
Limited Liability of Investors
<TABLE>
<S> <C>
Under the partnership agreement and California law, Under California law, shareholders are not generally liable
the liability of limited partners for the Partnership for corporate debts or obligations. The Public Storage
debts and obligations is limited to the amount of common stock is nonassessable.
their investments in the Partnership, together with
an interest in undistributed income, if any. The
Partnership units are fully paid and nonassessable.
</TABLE>
The limitation on personal liability of Public Storage shareholders is
substantially the same as that of the limited partners.
Review of Investor Lists
<TABLE>
<S> <C>
A limited partner is entitled to request copies of Under applicable law, a Public Storage shareholder is
investor lists showing the names and addresses of all entitled, upon written demand, to inspect and copy the
limited partners. The right to receive such investor record of shareholders, at any time during usual business
lists is conditioned upon payment of the cost of hours, for a purpose reasonably related to his or her
duplication and mailing. interest as a shareholder.
</TABLE>
Limited Partners and shareholders are entitled to access to investor lists
and to share records, respectively, subject to certain requirements.
41
<PAGE>
AMENDMENT TO PARTNERSHIP AGREEMENT
While the general partners do not believe that the partnership agreement
prohibits the merger, the partnership agreement is being amended to expressly
authorize the merger. Appendix D contains a complete text of the amendment.
42
<PAGE>
APPROVAL OF THE MERGER AND PARTNERSHIP AGREEMENT AMENDMENT
General
This statement is first being mailed on or about July 7, 1999 to limited
partners in connection with the merger and the amendment to the partnership
agreement. The general partners are not soliciting proxies in connection with
these matters.
Holders of record at the close of business on the date of this statement
will be entitled to receive notice of the merger and the amendment to the
partnership agreement. On such date, there were outstanding 128,000 Partnership
units. As of the record date, Public Storage beneficially owned 77,860 units
(approximately 61% of the units).
The affirmative vote of a majority of the Partnership units is required to
approve the merger and the amendment. As indicated above, the general partners
are not soliciting proxies from the limited partners in connection with these
matters. Public Storage owns sufficient units to approve the merger and the
amendment without the vote of any other limited partner and has approved these
matters by written consent in accordance with California law and the partnership
agreement. The merger and the amendment will become effective upon the signing
of the amendment and the filing of a certificate of merger with the California
Secretary of State, which pursuant to Rule 14c-2 under the Exchange Act will not
take place until at least 20 business days following the date on which this
statement is mailed to limited partners.
Security Ownership of Certain Beneficial Owners and Management
Partnership. The Partnership is not aware of any beneficial owner of more
than 5% of the Partnership units other than Public Storage which owns 77,860
units (61% of the units).
Public Storage. The following table sets forth information with respect to
persons known to Public Storage to be the beneficial owners of more than 5% of
the outstanding shares of Public Storage common stock:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned
-------------------------------
Number Percent
of Shares of Class
Name and Address --------- --------
- ----------------
<S> <C> <C>
B. Wayne Hughes, B. Wayne Hughes, Jr., Tamara Hughes Gustavson, PS 38,071,191 29.5%
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. 11,931,345 9.2%
82 Devonshire Street
Boston, Massachusetts 02109 (2)
</TABLE>
________________
(1) This information is as of May 31, 1999. The reporting persons listed above
(the "Reporting Persons") have filed a joint Schedule 13D, amended as of
June 24, 1997. The common stock of PSOI (representing approximately 5% of
the equity) is owned one-third each by B. Wayne Hughes, Tamara Hughes
Gustavson (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 Public
Storage. The stock of PSIC is owned approximately 45% by B. Wayne Hughes,
47% by Tamara Hughes Gustavson and 8% by B. Wayne Hughes, Jr. Each of the
Reporting Persons disclaims the existence of a group
43
<PAGE>
within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934. B. Wayne Hughes has voting and dispositive power with respect to the
30,777 shares owned by PSOI, and B. Wayne Hughes and Tamara Hughes Gustavson
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. and Tamara Hughes Gustavson (Tamara Hughes Gustavson
beneficially owns an aggregate of 16,741,256 shares (exclusive of the shares
owned by PSIC) or approximately 13.0% of the shares of Common Stock
outstanding as of May 31, 1999). 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 Public Storage's
Class B Common Stock which are owned by B. Wayne Hughes, Jr. and Tamara
Hughes Gustavson. 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, 1998 and is based on a Schedule 13G
(Amendment No. 5) filed by FMR Corp. (except that the percent shown in the
table is based on the shares of Common Stock outstanding at May 31, 1999).
As of December 31, 1998, FMR Corp. beneficially owned 11,931,345 shares of
Common Stock. This number includes 10,404,890 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 1,526,455 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 1,455,855 shares and sole dispositive power
with respect to 11,931,345 shares.
The following table sets forth information as of May 31, 1999 concerning
the beneficial ownership of Public Storage common stock of each director of
Public Storage, the chief executive officer of Public Storage, the four most
highly compensated persons who were executive officers of Public Storage on
December 31, 1998, and all directors and executive officers of Public Storage as
a group:
44
<PAGE>
<TABLE>
<CAPTION>
Shares of Public Storage Common Stock:
Beneficially Owned(1)
Shares Subject to Options(2)
-------------------------------------------------
Name Positions Number of Shares Percent
---- --------- ---------------- -------
<S> <C> <C> <C>
B. Wayne Hughes Chairman of the Board and 20,286,032(1)(3) 15.7%
Chief Executive Officer
Harvey Lenkin President and Director 600,125(1)(4) 0.5%
108,333(2) *
------- -----
708,458 0.5%
Marvin M. Lotz Senior Vice President 70,939(1)(5) *
and Director 155,833(2) 0.1%
------- -----
226,772 0.2%
B. Wayne Hughes, Jr. Vice President and Director 1,043,903(1)(6) 0.8%
Robert J. Abernethy Director 63,234(1) *
10,833(2) *
------- -----
74,067 *
Dann V. Angeloff Director 81,500(1)(7) *
7,499(2) *
------- -----
88,999 *
William C. Baker Director 14,000(1) *
7,499(2) *
------- -----
21,499 *
Thomas J. Barrack, Jr. Director 2,619,893(1)(8) 2.0%
5,000(2) *
------- -----
2,624,893 2.0%
Uri P. Harkham Director 406,470(1)(9) 0.3%
2,500(2) *
------- -----
408,970 0.3%
Daniel C. Staton Director 1,458(1) *
7,740(2) *
------- -----
9,198 *
David Goldberg Senior Vice President 97,880(1)(10) *
and General Counsel 140,834(2) 0.1%
------- -----
238,714 0.2%
Carl B. Phelps Senior Vice President 8,282(1)(11) *
25,000(2) *
------- -----
33,282 *
All Directors and Executive Officers 25,425,446(1)(3)(4)(5)(6)(7)
as a Group (17 persons) (8)(9)(10)(11)(12) 19.7%
695,501(2) 0.5%
---------- -----
26,120,947 20.1%
</TABLE>
_______________
* Less than 0.1%
(1) Shares of Common Stock beneficially owned as of May 31, 1999. 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.
45
<PAGE>
(2) Represents vested portion as of May 31, 1999, and portion of which will be
vested within 60 days of May 31, 1999, of shares of Common Stock subject to
options granted to the named individuals or the group pursuant to Public
Storage's stock option and incentive plans.
(3) Includes 19,945,983 shares held of record by the B. W. Hughes Living Trust
as to which Mr. Hughes has voting and investment power, 1,428 and 1,423
shares, held by custodians of IRAs for Mr. Hughes and Mrs. Kathleen Hughes
as to which each has investment power and 5,389 shares held by Mrs. Hughes
as to which she has investment power. Also includes 30,777 shares held of
record by PSOI as to which Mr. Hughes has voting and dispositive power and
301,032 shares held of record by PSIC as to which Mr. Hughes and Tamara
Hughes Gustavson share voting and dispositive power.
(4) Includes 1,249 and 734 shares, held by custodians of IRAs for Mr. Lenkin
and Mrs. Lenkin as to which each has investment power, 468 shares held by
Mrs. Lenkin, 1,079 and 150 shares, held by Mrs. Lenkin as custodian for two
sons and 100 shares held by a custodian of an IRA for a son. Also includes
540,000 shares held of record by the Public Storage, Inc. Profit Sharing
Plan and Trust (the "Public Storage Plan") as to which Mr. Lenkin, as a
member of the Public Storage Plan's Advisory Committee, shares the power to
direct voting and disposition and as to which Mr. Lenkin expressly
disclaims beneficial ownership.
(5) Includes 12,326 and 1,126 shares held by custodians of IRAs for Mr. Lotz.
(6) Includes 1,231 and 233 shares, held by custodians of IRAs for Mr. Hughes,
Jr. and Mrs. Hughes, Jr. as to which each has investment power, 344 shares
held by Mrs. Hughes, Jr., 6,556 and 2,960 shares, held by Mr. Hughes, Jr.
as custodian for a daughter and a son, 23,792 and 17,890 shares held by
Mrs. Hughes, Jr. as custodian for a daughter and a son and 1,348 shares
held by Mr. Hughes, Jr. and Tamara Hughes Gustavson - Separate Property.
(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 341,140 shares held by Harkham Industries, Inc. (dba Jonathan
Martin, Inc.), a corporation wholly owned by Mr. Harkham, 41,631 shares
held by Mr. Harkham as trustee of Uri Harkham Trust, 1,440 shares held by a
custodian of an IRA for Mr. Harkham as to which he has investment power,
3,768, 4,419, 4,343, 4,616 and 4,716 shares, held by Mr. Harkham as
custodian for five of his children and 97 shares held by a custodian of an
IRA for a son.
(10) Includes 7,199 shares held by a custodian of an IRA for Mr. Goldberg and
4,260 shares held by David Goldberg Profit Sharing Plan. Excludes 540,000
shares held of record by the Public Storage Plan as to which Mr. Goldberg,
as a member of the Public Storage Plan's Advisory Committee, shares the
power to direct voting and disposition; such shares are included under Mr.
Lenkin above (see footnote 4).
(11) Includes 5,986 shares held by Mr. and Mrs. Phelps as trustee of Phelps
Family Trust and 296, 1,000 and 1,000 shares held by custodians of IRAs for
Mr. Phelps.
(12) Includes shares held of record or beneficially by members of the immediate
family of executive officers of Public Storage and shares held by
custodians of IRAs for the benefit of executive officers of Public Storage.
46
<PAGE>
The following tables set forth information as of May 31, 1999 concerning
the remaining security ownership of each director of Public Storage, the chief
executive officer of Public Storage, the four most highly compensated persons
who were executive officers of Public Storage on December 31, 1998, and all
directors and executive officers of Public Storage as a group:
<TABLE>
<CAPTION>
Shares of 9.20% Shares of Adjustable Rate
Shares of 10% Cumulative Cumulative Preferred Cumulative Preferred
Preferred Stock, Series A Stock, Series B Stock, Series C
Beneficially Owned (1) Beneficially Owned (1) Beneficially Owned (1)
------------------------- ----------------------- --------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
----------- --------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin 1,000 (1) * 1,600 (1) * - -
Marvin M. Lotz - - - - - -
B. Wayne Hughes, Jr. - - 400 (1)(3) * - -
Robert J. Abernethy - - 225 * - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
Daniel C. Staton - - - - - -
David Goldberg - - - - 600 (1)(4) *
Carl B. Phelps - - - - - -
All Directors and 5,060 (1)(2) 0.3% 6,225 (1)(2)(3) 0.3% 600 (1)(4) *
Executive Officers as a
Group (17 persons)
</TABLE>
<TABLE>
<CAPTION>
Shares of 9.50% Shares of 10% Shares of 9.75%
Cumulative Preferred Cumulative Preferred Cumulative Preferred
Stock, Series D Stock, Series E Stock, Series F
Beneficially Owned(1) Beneficially Owned (1) Beneficially Owned (1)
------------------------ ----------------------- -------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
----------- --------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - 893 (1) * - -
Marvin M. Lotz - - - - - -
B. Wayne Hughes, Jr. - - - - - -
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
Daniel C. Staton - - - - - -
David Goldberg - - - - - -
Carl B. Phelps - - - - - -
All Directors and 6,800 (1)(2) 0.6% 13,993 (1)(2) 0.6% 8,600 (1)(2) 0.4%
Executive Officers as a
Group (17 persons)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Depositary Shares, Depositary Shares,
Each Representing 1/1,000 Each Representing 1/1,000
of a Share of 8-7/8% of a Share of 8.45%
Cumulative Preferred Cumulative Preferred
Stock, Series G Stock, Series H Class B Common Stock
Beneficially Owned (1) Beneficially Owned(1) Beneficially Owned(1)
---------------------- --------------------- ---------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
Marvin M. Lotz - - - - - -
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 - - - - - -
Daniel C. Staton - - - - - -
David Goldberg - - - - - -
Carl B. Phelps - - - - - -
All Directors and 8,600 (1)(2) 0.1% 8,000 (1)(2) 0.1% 3,204,758 (1) 45.8%
Executive Officers as a
Group (17 persons)
</TABLE>
_________________
* Less than 0.1%
(1) Shares of 10% Cumulative Preferred Stock, Series A, 9.20% Cumulative
Preferred Stock, Series B, Adjustable Rate Cumulative Preferred Stock,
Series C, 9.50% Cumulative Preferred Stock, Series D, 10% Cumulative
Preferred Stock, Series E, 9.75% Cumulative Preferred Stock, Series F,
Depositary Shares, each representing 1/1,000 of a Share of 8-7/8%
Cumulative Preferred Stock, Series G, Depositary Shares, each representing
1/1,000 of Share of 8.45% Cumulative Preferred Stock, Series H, or Class B
Common Stock, as applicable, beneficially owned as of May 31, 1999. Except
as otherwise indicated and subject to applicable community property and
similar statutes, the persons listed as beneficial owners of the shares
have sole voting and investment power with respect to such shares.
(2) Includes shares held of record or beneficially by members of the immediate
family of executive officers of Public Storage and shares held by
custodians of IRAs for the benefit of executive officers of Public Storage.
(3) Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson - Separate
Property.
(4) Includes 500 shares held by a custodian of an IRA for Mr. Goldberg and 100
shares held by David Goldberg Profit Sharing Plan.
As of May 31, 1999, the directors and executive officers of Public Storage
did not own any shares of Public Storage'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, Depositary Shares, each representing 1/1,000 of a Share of 8 1/4%
Cumulative Preferred Stock, Series K, Depositary Shares, each representing
1/1,000 of a Share of 8 1/4% Cumulative Preferred Stock, Series L or Equity
Stock, Series A.
48
<PAGE>
CERTAIN RELATED TRANSACTIONS
The following are the principal relationships between Public Storage and
the Partnership:
Joint Venture Interests. Public Storage owns a joint venture interest
(ranging from approximately 11% to 51%) in all of the Properties and in the
interest in PSBP. Under the joint ventures, certain special allocation rules
apply and Public Storage has the right to compel the sale of the Properties.
See Note (1) to the Notes to Consolidated Financial Statements of the
Partnership. (Appendix E).
General Partners' Interest. Public Storage and Hughes are general partners
of the Partnership. Public Storage receives incentive distributions equal to 10%
of the Partnership's cash flow and has a subordinated interest in proceeds from
sales or financings of the Properties (15% of such proceeds so long as limited
partners have received sale or financing distributions equal to their capital
contributions plus any deficiency in a simple 8% annual return). In 1996, 1997
and 1998, the general partners received from the Partnership $500,000, $400,000
and $400,000, respectively, in respect of their incentive distributions. The
general partners also have a 1% interest in the Partnership in respect of their
capital contributions and participate in Partnership distributions in proportion
to their interest in the Partnership.
Property Management. The Properties are managed by Public Storage and PSBP
pursuant to management agreements under which the property managers receive 6%
and 5% of gross revenues from operations of the mini-warehouse and commercial
space (prior to the contribution of the commercial space to PSBP), respectively.
In 1996, 1997 and 1998, the property managers received $941,000, $920,000 and
$949,000, respectively, for managing the Properties.
Limited Partner Interests. Of the 128,000 outstanding Partnership units,
77,860 units (approximately 61%) are beneficially owned by Public Storage.
Public Storage participates in Partnership distributions on the same terms as
other holders of units in respect of units owned by Public Storage.
PSBP. The Partnership owns a .9% interest in PSBP. Public Storage has a
significant ownership interest in PSBP.
49
<PAGE>
DESCRIPTION OF PARTNERSHIP'S PROPERTIES
The Partnership and Public Storage jointly own 34 of the 41 Properties and
the remaining seven are owned by the Partnership alone. All of the Properties
are 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 March 31, 1999 about the
Properties.
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------------------- ----------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
California
Laguna Hills 72,900 676 04/10/85 50.0%
E. Pacifico
Simi Valley 50,700 521 02/01/85 50.9
First St.
Florida
Fern Park 37,400 405 03/19/85 50.0
U.S. Highway
Hialeah 62,400 730 11/29/84 50.0
Red Road - W 4th Ave.
Longwood 62,800 600 05/03/85 50.3
U.S. Highway
Medley 48,800 518 08/31/84 100.0
N.W. S. River
Orlando 34,500 357 06/22/84 74.6
45th - Orange Blossom
Pompano Beach 43,700 338 12/19/84 100.0
S.W. 2nd St.
Georgia
Lilburn 35,600 297 07/10/85 50.0
Indian Trail Rd.
Kentucky
Florence 39,900 314 06/27/84 100.0
Industrial Hwy
Louisiana
Bossier City 77,900 751 01/07/85 50.0
Gould Dr.
Nebraska
Omaha 46,300 392 11/19/84 69.5
South 86th St.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- ----------------------------------------- ---------------------- -------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
New Hampshire
Manchester 61,100 507 11/30/84 49.2
South Willow St. (1)(2)
New Jersey
Delran 63,100 594 06/20/84 71.2
Route 130
Ohio
Arlington 62,900 463 05/31/85 55.0
Arlington Center
Cincinnati 70,300 645 06/27/84 100.0
Mt. Carmel
Columbus 63,600 547 05/31/85 55.0
Busch Blvd.
Columbus 61,300 591 07/11/85 55.0
Kenny Road
Columbus 80,800 612 05/31/85 55.0
Kinnear Road
Columbus 63,900 539 07/11/85 55.0
Morse
Dayton 65,700 568 07/11/85 55.0
Executive Blvd.
Dayton 61,100 403 07/11/85 55.0
Needmore Road
Fairfield 52,000 380 03/14/85 50.0
Dixie Highway II
Grove City 52,000 509 06/07/85 55.0
Marlane Drive
Reynoldsburg 65,500 573 06/07/85 55.0
Gender
Springfield 40,400 350 07/11/85 55.0
W. Leffel
Westerville 64,200 578 07/11/85 55.0
Westerville Road
Worthington 74,400 557 05/31/85 55.0
Billingsley
Oklahoma
Oklahoma 83,500 576 08/31/84 100.0
West Reno II
Oregon
Portland 44,300 495 03/01/85 75.0
N.E. 92nd St.
Pennsylvania
Montgomeryville 63,400 532 12/13/84 50.0
Route 309
Tennessee
Chattanooga 82,100 507 03/06/85 70.3
Pryor Drive
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- ------------------------------- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Texas
Austin (3) 33,300 232 12/11/84 75.0
E. Ben White Blvd.
Austin 56,200 529 12/11/84 75.0
N. Lamar Blvd.
Dallas (4) 63,900 513 09/28/84 50.5
Cockrell Hill Rd.
Dallas 114,900 1,047 08/31/84 100.0
Walnut Hill Lane
Fort Worth 42,000 338 12/12/84 50.0
Hemphill St.
Garland 37,400 365 05/16/84 86.3
W. Kingsley II
Hurst 49,500 390 02/05/85 50.0
Hurst Blvd.
Irving 69,900 553 08/31/84 100.0
E. Airport Fwy.
Virginia
Newport News Jefferson Dr. 79,600 663 08/17/84 88.5
- ---------------------
</TABLE>
(1) Represents a leasehold interest.
(2) In June 1999, the Partnership and Public Storage jointly received net
proceeds totaling approximately $2,010,000 in connection with the
condemnation of this Property in its entirety.
(3) In January 1999, the Partnership and Public Storage jointly received net
proceeds totaling approximately $771,000 in connection with the
condemnation of approximately 16,000 net rentable square feet of this
property.
(4) Includes Dallas/Cockrell Hill II located in Brassway, Texas which was
purchased on 12/5/85 and is 50% owned by the Partnership.
The weighted average occupancy level for the Properties (excluding the two
condemned properties) was 87% in the three months ended March 31, 1999, as
compared to 89% in the same period in 1998. The annual average realized rent
per square foot for these Properties was $7.40 in the three months ended March
31, 1999, as compared to $7.13 in the same period in 1998.
As of the date of this statement, each of the Properties is generating
sufficient revenues to cover its operating expenses. None of the Properties is
subject to any material mortgage, lien, or any encumbrance other than liens for
taxes and assessments not yet due or payable, utility easements or other
immaterial liens or encumbrances. Each of the Properties (except for the two
condemned facilities) will continue to be used for its current purpose. At
present, the Partnership has no plans for any material renovation or improvement
of its properties. However, the Partnership budgets for regular maintenance,
repair and upgrade to its properties. The Partnership believes each of its
properties is adequately covered by insurance.
Competition exists in all of the market areas in which the Properties are
located, and the barriers to entry are relatively low for competitors with the
necessary capital. However, the Partnership believes that the current overall
demand for mini-warehouse space is strong, and as reflected in the table below
the overall performance of the Properties has generally improved. The
Properties are, and will continue after the merger to be, operated as part of
the "Public Storage" system by Public Storage, the largest operator of mini-
warehouses in the United States.
52
<PAGE>
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the Properties (excluding the two condemned properties) for
the periods indicated:
<TABLE>
<CAPTION>
Years ended Three months ended
December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 91% 90% 89% 89% 87%
Annual realized rent per occupied
square foot (1) $6.72 $7.00 $7.31 $7.13 $7.40
</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.
None of the Properties has a book value of at least 10% of the
Partnership's total assets or has accounted for at least 10% of its gross
revenues.
53
<PAGE>
DESCRIPTION OF PUBLIC STORAGE'S PROPERTIES
At March 31, 1999, Public Storage had equity interests (through direct
ownership, as well as general and limited partnership interests in 1,313 mini-
warehouses (628 of which were wholly-owned) located in 37 states Public Storage
also has an interest in PS Business Parks, Inc., a REIT that owns and operates
commercial properties. None of Public Storage's properties involves 10% or more
of Public Storage's total assets or gross revenues.
For a general description of mini-warehouses, see "Description of
Partnership Properties."
The following table reflects the geographic diversification of Public
Storage's mini-warehouses:
<TABLE>
<CAPTION>
At March 31, 1999
---------------------------------------------------
Net Rentable Square Feet
Number of Facilities(1) (in thousands)(1)
------------------------ -------------------------
<S> <C> <C>
California:
Northern 131 7,304
Southern 151 9,562
Texas 156 10,125
Florida 131 7,396
Illinois 90 5,404
Colorado 50 3,137
Washington 38 2,360
Georgia 61 3,525
New Jersey 35 2,018
Maryland 35 1,989
Virginia 37 2,241
New York 30 1,751
Ohio 31 1,899
Oregon 25 1,171
Nevada 22 1,409
Pennsylvania 18 1,224
Missouri 41 2,212
Other states (21 states) 231 12,787
----- -------
Totals 1,313 77,514
===== =======
</TABLE>
------------------
(1) Includes properties that combine mini-warehouse and business park space.
As of the date of this statement, each of Public Storage's properties is
generating sufficient revenues to cover its operating expenses other than
properties in the initial lease-up stage. As of March 31, 1999, only 25 of
Public Storage's properties were 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 25
properties were encumbered by mortgages in the aggregate amount of $34,845,000,
bearing interest at rates ranging from 7.134% to 11.0% per year and maturing
between May 1999 and September 2028. Each of Public Storage's properties will
continue to be used for its current purpose. At present, Public Storage has no
plans for any material renovation or improvement of its properties. However,
Public Storage budgets for regular maintenance, repair and upgrade to its
properties. Public Storage believes each of its properties is adequately
covered by insurance.
Competition exists in substantially all of the market areas in which Public
Storage's mini-warehouses and commercial properties are located, and the
barriers to entry are relatively low for competitors with the necessary capital.
However, Public Storage believes that the current overall demand for mini-
warehouse and commercial space is strong, and as reflected in the table below
the overall performance of Public Storage's mini-warehouses and commercial
properties has generally improved. More than 10% of Public Storage's net
rentable square feet of space are located in each of the Southern California,
Northern California and Texas market areas. The economy of each of
54
<PAGE>
those markets has been strengthening. Public Storage's mini-warehouses are
operated as part of the "Public Storage" system. Public Storage is the largest
operator of mini-warehouses in the United States.
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the 984 of the 1,313 mini-warehouses that Public Storage had
an interest in at March 31, 1999. These 984 facilities reflect a consistent
pool of properties that have been operated under the Public Storage name at a
stabilized level since January 1, 1994.
<TABLE>
<CAPTION>
Years ended Three months ended
December 31, March 31,
--------------------- --------------------
1996 1997 1998 1998 1999
------ ------------ ------ -------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level (1) 91.1% 91.7% 92.5% 91.5% 91.3%
Annual realized rent per occupied
square foot (1)(2) $8.71 $9.21 $9.84 $9.44 $10.04
- ---------------
</TABLE>
(1) Properties owned throughout the periods.
(2) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. Public Storage believes this is a more relevant
measure than the posted rental rates, since posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
55
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PUBLIC STORAGE COMMON STOCK
The Public Storage common stock has been listed on the NYSE since October
19, 1984. The following table sets forth the distributions paid per share on
the Public Storage 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>
1997:
First quarter $30 7/8 $26 1/2 $.22
Second quarter 29 1/4 25 7/8 .22
Third quarter 30 7/8 27 .22
Fourth quarter 30 5/8 26 1/8 .22
1998:
First quarter 33 5/8 28 11/16 .22
Second quarter 32 3/4 26 5/16 .22
Third quarter 29 1/4 22 5/8 .22
Fourth quarter 28 1/16 24 1/4 .22
1999:
First quarter 27 7/8 24 1/4 .22
Second quarter ______ ______ .22
</TABLE>
_______________
(1) For GAAP purposes, all distributions were from investment income.
As of March 15, 1999, there were approximately 22,942 record holders of
Public Storage common stock. On June ___, 1999, the last full trading day prior
to the date of this statement, the closing price of the Public Storage common
stock was $_______.
Holders of Public Storage 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. Public Storage, 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, Public
Storage 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 Public Storage."
Public Storage's revolving credit facility with a commercial bank restricts
Public Storage'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 Public
Storage's preferred stock have been paid for all past dividend periods, no
dividends may be paid on Public Storage common stock, except in certain
instances.
56
<PAGE>
DISTRIBUTIONS AND MARKET PRICES OF PARTNERSHIP UNITS
Partnership Distributions. The following table sets forth the
distributions paid per Partnership unit (original purchase price $500) in the
periods indicated below:
<TABLE>
<CAPTION>
Distribution
------------
<S> <C>
1997:
First Quarter $6.96
Second Quarter 6.96
Third Quarter 6.96
Fourth Quarter 6.96
1998:
First Quarter 6.96
Second Quarter 6.96
Third Quarter 6.96
Fourth Quarter 6.96
1999:
First Quarter 29.24(a)
Second Quarter 8.70
</TABLE>
_______________
(a) Includes a special distribution of approximately $22.28 per unit. See
note (6) under "Summary - Summary Financial Information."
Holders of Partnership Units. As of March 31, 1999, there were
approximately 2,359 record holders of Partnership units.
Sales of Partnership Units. The Partnership units are not listed on any
national securities exchange or quoted in the over the counter market, and there
is no established public trading market for the units. Secondary sales activity
for the units has been limited and sporadic. The general partners monitor
transfers of the units (i) because the admission of the transferee as a
substitute limited partner requires the consent of the general partners under
the partnership agreement, (ii) in order to track compliance with safe harbor
provisions to avoid treatment as a "publicly traded partnership" for tax
purposes and (iii) because Public Storage has purchased units. However, the
general partners do not have information regarding the prices at which all
secondary sales transactions in the units have been effectuated. Various
organizations offer to purchase and sell limited partnership interests (such as
the units) in secondary sales transactions. Various publications such as The
Stanger Report summarize and report information (on a monthly, bimonthly or less
frequent basis) regarding secondary sales transactions in limited partnership
interests (including the units), including the prices at which such secondary
sales transactions are effectuated.
The general partners estimate, based solely on the transfer records of the
Partnership and the Partnership's transfer agent, that the number of Partnership
units transferred in sales transactions (i.e., excluding transactions believed
to be between related parties, family members or the same beneficial owner) was
as follows:
<TABLE>
<CAPTION>
Number of Total Percentage of Number of
Year Units Transferred(1) Units Outstanding Transactions(1)
- ------------- -------------------- ----------------- ---------------
<S> <C> <C> <C>
1996 1,824(2) 1.43% 50(2)
1997 13,995(3)(4) 10.93% 659(3)(4)
1998 554(5) .43% 35(5)
1999 (through March 31) 942(6) .74% 36(6)
</TABLE>
_______________
(1) Transfers are recorded quarterly on the Partnership's records, as of the
first day following each calendar quarter.
57
<PAGE>
(2) In 1996, the Company purchased 323 Units in 12 transactions: 31 Units at
$315.00 per Unit (January 1), 30 Units at $346.00 per Unit (April 1), 10
Units at $340.00 per Unit (July 1), 72 Units at $346.00 per Unit (July 1),
140 Units at $346.00 per Unit (October 1) and 40 Units at $350.00 per Unit
(October 1).
(3) In 1997, the Company purchased 463 Units in 26 transactions: 185 Units at
$425.00 per Unit (April 1), 133 Units at $425.00 per Unit (July 1) and 145
Units at $425.00 per Unit (October 1).
(4) In 1997, the Company accepted for purchase 12,881 Units tendered in response
to the Company's cash tender offer at $425.00 per Unit.
(5) In 1998, the Company purchased 140 Units in 14 transactions: 15 Units at
$425.00 per Unit (January 1), 51 Units at $425.00 per Unit (April 1),
50 Units at $425.00 per Unit (July 1) and 24 Units at $425.00 per Unit
(October 1).
(6) On January 1, 1999, the Company purchased 380 Units in 14 transactions at
$425.00 per Unit.
On April 1, 1999, the Company purchased 80 Units in five transactions at
$425.00 per Unit.
All of the purchases of Partnership units described in notes (2), (3), (5)
and (6) above were acquired directly from limited partners or through secondary
firms of the type described below under "Information From The Stanger Report
Regarding Sales Transactions."
Information Obtained from Dean Witter Regarding Sales Transactions. Dean
Witter Reynolds Inc. ("Dean Witter") was the dealer-manager for the
Partnership's initial offering of Units. Set forth below is information
obtained from Dean Witter on the high and low sale price per Unit for sale
transactions during each quarter of 1997, 1998 and 1999 (through March 31):
<TABLE>
<CAPTION>
Per Unit Transaction Price (1)(2)
--------------------------------- Number Number of
High Low of Sales(2) Units Sold(2)
-------- --------- ----------- -------------
<S> <C> <C> <C> <C>
1997
First Quarter $328.19 $328.19 2 70
Second Quarter - - - -
Third Quarter - - - -
Fourth Quarter 416.50 416.50 1 50
1998
First Quarter 385.00 385.00 1 10
Second Quarter - - - -
Third Quarter 412.10 412.10 2 57
Fourth Quarter 461.54 461.54 1 57
1999
First Quarter - - - -
</TABLE>
_______________
(1) The original purchase price was $500 per Unit.
(2) This information was compiled by Dean Witter in the ordinary course based
upon reports made of negotiated sales. The price information represents the
prices reported to have been paid by the buyers to the sellers net of
commissions.
Information From The Stanger Report Regarding Sales Transactions. The
information set forth below is extracted from sections of the Spring 1997,
Summer 1997, Fall 1997, Winter 1997, Spring 1998, Summer 1998, Fall 1998, Winter
1998 and Spring 1999 issues of The Stanger Report captioned "Limited Partnership
Secondary-Market Prices" and additional information provided to the General
Partners by Robert A. Stanger & Co., Inc. ("Stanger"). Those publications (the
"Stanger Publications") and the additional information provided by Stanger
summarized secondary market prices for public limited partnerships based on
actual transactions during the reporting periods listed on the tables below.
The following secondary-market firms provided high and low price data to The
Stanger Report for some or all of the reporting periods: A-1 Partnership
Service Network - (800) 483-0776,
58
<PAGE>
(727) 596-9898; American Partnership Board (800) 736-9797, (480) 368-6400;
Bigelow Management, Inc. (800) 431-7811, (212) 697-5880; Chicago Partnership
Board (800) 272-6273, (312) 332-4100; Cuyler & Associates (800) 274-9991, (602)
596-0120; DCC Securities Corp. (800) 945-0440, (212) 370-1090; Empire Securities
(805) 723-5530; Equity Line Properties (800) 327-9990, (305) 670-9700; Equity
Resources Group (671) 876-4800; Fox & Henry, Inc. (630) 325-4445; Frain Asset
Management (800) 654-6110; MacKenzie-Patterson Securities (800) 854-8357, (510)
631-9100; National Partnership Exchange (800) 356-2739, (813) 636-9299;
Nationwide Partnership Marketplace (800) 969-8996, (415) 382-3555; New York
Partnership Exchange (800) 444-7357, (813) 955-8816; Northcoast Securities (561)
496-5387; Pacific Partnership Group (800) 727-7244, (602) 957-3050; Partnership
Service Network (800) 483-0776, (813) 588-0776; Raymond James & Associates (800)
248-8863; and The Partnership Marketing Company (888) 824-8600, (707) 824-8600.
The information regarding sale transactions in Partnership units from the
Stanger Publications and Stanger is as follows:
<TABLE>
<CAPTION>
Per Unit Transaction Price(1)
-----------------------------
Reporting period High Low No. of Units(2)
- ---------------- ---- --- ---------------
<S> <C> <C> <C>
1997
- ----
January 1 - March 31 - - -
April 1 - June 30 $410.01 $410.01 70
July 1 - September 30 425.00 315.00 120
October 1 - December 31 361.00 284.50 20
1998
- ----
January 1 - March 31 - - -
April 1 - June 30 412.10 412.10 57
July 1 - September 30 451.11 451.11 16
October 1 - December 31 447.63 447.63 40
1999
- ----
January 1 - March 31 452.12 400.00 160
</TABLE>
_______________
(1) The original purchase price was $500 per Unit. The General Partners do
not know whether the transaction prices shown are before or after
commissions.
(2) The General Partners do not know the number of transactions.
The information from The Stanger Report contained above is provided without
verification by the General Partners and is subject to the following
qualifications in The Stanger Report: "Limited partnerships are designed as
illiquid, long-term investments. Secondary-market prices generally do not
reflect the current value of partnership assets, nor are they indicative of
total return since prior cash distribution and tax benefits received by the
original investor are not reflected in the price. Transaction prices are not
verified by Robert A. Stanger & Co."
59
<PAGE>
DESCRIPTION OF PUBLIC STORAGE CAPITAL STOCK
Public Storage is authorized to issue 200,000,000 shares of Public Storage
common stock, par value $.10 per share, 7,000,000 shares of Public Storage class
B common stock, par value $.10 per share, 50,000,000 shares of preferred stock,
par value $.01 per share and 200,000,000 shares of equity stock, par value $.01
per share. At May 31, 1999, Public Storage had outstanding 129,253,891 shares
of Public Storage common stock (exclusive of shares issuable upon conversion of
Public Storage's convertible capital stock, shares issuable upon conversion of
units in Storage Trust's operating partnership and shares subject to options),
7,000,000 shares of Class B Common Stock, 11,138,850 shares of preferred stock
and 225,000 shares of equity stock.
Common Stock
The following description of Public Storage common stock sets forth certain
general terms and provisions of Public Storage common stock. The statements
below describing Public Storage common stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Public Storage's articles of incorporation and bylaws.
Public Storage shareholders will be entitled to receive dividends when, as
and if declared by Public Storage's Board of Directors, out of funds legally
available therefor. Payment and declaration of dividends on Public Storage
common stock and purchases of shares thereof by Public Storage will be subject
to certain restrictions if Public Storage fails to pay dividends on outstanding
preferred stock. See "- Preferred Stock." Upon any liquidation, dissolution or
winding up of Public Storage, holders of Public Storage common stock will be
entitled to share equally and ratably in any assets available for distribution
to them, after payment or provision for payment of the debts and other
liabilities of Public Storage and the preferential amounts owing with respect to
any outstanding preferred stock. Holders of Public Storage common stock have no
preemptive rights, which means they have no right to acquire any additional
shares of Public Storage common stock that may be issued by Public Storage at a
subsequent date.
Each outstanding share of Public Storage common stock entitles the holder
to one vote on all matters presented to Public Storage shareholders for a vote,
with the exception that Public Storage shareholders have cumulative voting
rights with respect to the election of the Board of Directors, in accordance
with California law. Cumulative voting entitles each Public Storage shareholder
to cast as many votes as there are directors to be elected multiplied by the
number of shares registered in his or her name. A Public Storage shareholder
may cumulate the votes for directors by casting all of the votes for one
candidate or by distributing the votes among as many candidates as the Public
Storage shareholder chooses. Public Storage shareholders have no preemptive or
other rights to subscribe for or purchase additional shares of Public Storage
common stock. All outstanding shares of Public Storage common stock are fully
paid and nonassessable.
Ownership Limitations
In a series of transactions among Public Storage Management, Inc. and its
affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger
of PSMI into Storage Equities, Inc. ("SEI") (the "PSMI Merger"), SEI became
self-administered and self-managed, acquired substantially all of PSMI's United
States real estate interests and was renamed "Public Storage, Inc."
For Public Storage 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, Public Storage's articles of incorporation and bylaws provide certain
restrictions on the shares of capital stock that any Public Storage shareholder
may own.
Public Storage'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 Public Storage, or (B) 9.9% of the outstanding shares of
each class or series of shares of preferred stock or equity stock of Public
Storage. The 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
60
<PAGE>
the Hughes family) at the time of the PSMI Merger. This ownership limitation was
established in order to assist in preserving Public Storage's REIT status in
view of the Hughes family's substantial ownership interest in Public Storage.
See "Federal Income Tax Considerations General Tax Treatment of Public Storage."
Public Storage'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 Public Storage permitted as
a result of the exception to be granted and (y) assuming that the four other
persons who would be treated as "individuals" for the purposes of Section
542(a)(2) of the Code and who would beneficially own the largest amounts of
stock of Public Storage (determined by value) beneficially own the maximum
amount of capital stock of Public Storage permitted under the ownership limits
(or any waivers of the ownership limits granted with respect to such persons),
Public Storage would not be "closely held" within the meaning of Section 856(h)
of the Code and would not otherwise fail to qualify as a REIT, and (B) such
person provides to Public Storage's Board of Directors such representations and
undertakings as the Board of Directors may require. Notwithstanding any of the
foregoing ownership limits, no holder may own or acquire, either directly,
indirectly or constructively under the applicable attribution rules of the Code,
any shares of any class of Public Storage's capital stock if such ownership or
acquisition (i) would cause more than 50% in value of Public Storage's
outstanding capital stock to be owned, either directly or constructively, under
the applicable attribution rules of the 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 Public
Storage's stock being beneficially owned by less than 100 persons (determined
without reference to any rules of attribution), or (iii) would otherwise result
in Public Storage's failing to qualify as a REIT.
Public Storage's articles of incorporation and bylaws provide that, if any
holder of Public Storage's capital stock purports to transfer shares to a person
or there is a change in the capital structure of Public Storage and either the
transfer or the change in capital structure would result in Public Storage
failing to qualify as a REIT, or such transfer or the change in capital
structure would cause the transferee to hold shares in excess of the applicable
ownership limit, then the stock being transferred (or in the case of an event
other than a transfer, the stock beneficially owned) which would cause one or
more of the restrictions on ownership or transfer to be violated shall be
automatically transferred to a trust for the benefit of a designated charitable
beneficiary. The purported transferee of such shares shall have no right to
receive dividends or other distributions with respect to such shares and shall
have no right to vote such shares. Any dividends or other distributions paid to
such purported transferee prior to the discovery by Public Storage that the
shares have been transferred to a trust shall be paid to the trustee of the
trust for the benefit of the charitable beneficiary upon demand. The trustee of
the trust will have all rights to dividends with respect to shares of stock held
in trust, which rights will be exercised for the exclusive benefit of the
charitable beneficiary. Any dividends or distributions paid over to the trustee
will be held in trust for the charitable beneficiary. The trustee shall
designate a transferee of such stock so long as such shares of stock would not
violate the restrictions on ownership or transfer in the Public Storage articles
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 Public Storage 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 Public Storage) aggregating $1.80 during any
period of four consecutive calendar quarters, or January 1, 2000; thereafter,
the Public Storage class B common stock will participate in distributions (other
than liquidating distributions), at the rate of 97% of the per share
distributions on the Public Storage common stock, provided that cumulative
distributions of at least $.22 per quarter per share have been paid on the
Public Storage common stock, (ii) does not participate in liquidating
distributions, (iii) is not entitled to vote (except as expressly required by
California law) and (iv) will automatically convert into Public Storage common
stock, on a share for share basis, upon the later to occur of FFO per Common
Share aggregating $3.00 during any period of four consecutive calendar quarters
or January 1, 2003.
61
<PAGE>
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 Public Storage's pro-rata
share of depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the PSMI Merger, including property
management agreements and goodwill), and (ii) less FFO attributable to minority
interest. FFO is a supplemental performance measure for equity REITs as defined
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT").
The NAREIT definition does not specifically address the treatment of minority
interest in the determination of FFO or the treatment of the amortization of
property management agreements and goodwill. In the case of Public Storage, 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 Public Storage. Accordingly, FFO is not
a substitute for Public Storage's cash flow or net income as a measure of its
liquidity or operating performance or ability to pay distributions.
(2) 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 Public Storage common stock assuming conversion of
all outstanding convertible securities and the Public Storage class B common
stock.
Preferred Stock
Public Storage is authorized to issue 50,000,000 shares of preferred stock,
$.01 par value per share. Public Storage'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 May 31, 1999, Public Storage had 12 series of senior preferred stock
outstanding. In all respects, each of the series of senior preferred stock
ranks on a parity with each other. Each of the series of senior preferred stock
(i) has a stated value of $25.00 per share, (ii) in preference to the holders of
shares of the common stock and any other capital stock ranking junior to the
senior preferred stock as to payment of dividends, provides for cumulative
quarterly dividends calculated as a percentage of the stated value (ranging from
8% to 10% per year in the case of the 11 series of fixed rate senior preferred
stock and a rate adjustable quarterly ranging from 6.75% to 10.75% per year in
the case of a series of adjustable rate senior preferred stock) and (iii) is
subject to redemption, in whole or in part, at the option of Public Storage at a
cash redemption price of $25.00 per share, plus accrued and unpaid dividends (on
and after June 30, 1999 in the case of the adjustable rate senior preferred
stock and on or after various dates between December 31, 2000 and April 30, 2005
in the case of the series of fixed rate senior preferred stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of Public Storage, the holders of each of the series of senior
preferred stock will be entitled to receive out of Public Storage's assets
available for distribution to stockholders, before any distribution of assets is
made to holders of Public Storage common stock or any other shares of capital
stock ranking as to such distributions junior to the senior preferred stock,
liquidating distributions in the amount or equivalent amount of $25.00 per
share, plus all accrued and unpaid dividends.
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% of the outstanding shares of the
senior preferred stock (and any other series of preferred stock ranking on a
parity therewith), voting as a single class, is required to authorize another
class of shares senior to such preferred stock.
Equity Stock
Public Storage is authorized to issue 200,000,000 shares of equity stock,
$.01 par value per share. At May 31, 1999, Public Storage had 225,000
outstanding shares of equity stock which rank on a parity with the Public
Storage common stock. Public Storage's articles of incorporation provide that
the equity stock may be issued from
62
<PAGE>
time to time in one or more series and give the Board of Directors broad
authority to fix the dividend and distribution rights, conversion and voting
rights, redemption provisions and liquidation rights of each series of equity
stock. Holders of equity stock have no preemptive rights. The shares of equity
stock will be, when issued, fully paid and nonassessable.
Effects of Issuance of Capital Stock
The issuance of Public Storage common stock and the issuance of preferred
stock or equity stock with special voting rights could be used to deter attempts
by a single shareholder or group of shareholders to obtain control of Public
Storage in transactions not approved by Public Storage's Board of Directors.
Public Storage has no intention to issue Public Storage common stock or the
preferred stock or equity stock for such purposes.
63
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations that are generally applicable to the public limited partners as a
result of the merger and as a result of the subsequent ownership and disposition
of shares of Public Storage common stock for limited partners that do not make a
cash election. This discussion is not exhaustive of all possible tax
considerations and does not give a detailed description of any state, local, or
foreign tax considerations. Nor does it discuss all of the aspects of federal
income taxation that may be relevant to a limited partner in light of his or her
particular circumstances or to certain types of limited partners who are subject
to special treatment under federal income tax laws (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States).
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations, judicial decisions, and Internal
Revenue Service ("IRS") rulings, certain factual assumptions related to the
ownership and operation of Public Storage and the Partnership and certain
representations made by Public Storage and the Partnership. There can be no
assurance that the legal authorities on which this discussion is based will not
change, perhaps retroactively, that the factual assumptions underlying this
discussion will be accurate, or that there will not be a change in the
circumstances of Public Storage or the Partnership that would affect this
discussion. Neither the Partnership nor Public Storage plans to obtain any
rulings from the IRS concerning tax issues with respect to the merger or the
continued qualification of Public Storage as a REIT. Thus, no assurance can be
provided that the statements set forth in this discussion (which do not bind the
IRS or the courts) will not be challenged by the IRS or will be sustained if so
challenged.
Because this discussion does not deal with all aspects of federal taxation,
and the tax consequences will not be the same for all public limited partners,
public limited partners are urged to consult their own tax advisors with
specific reference to their own tax situations, including the application and
effect of federal, state, local, and foreign tax laws.
Opinion of Counsel
A. Timothy Scott, tax counsel and senior vice president of Public Storage,
has reviewed the following discussion and is of the opinion that this discussion
fairly summarizes the material federal income tax considerations to the public
limited partners as a result of the merger and as a result of the subsequent
ownership of Public Storage common stock for limited partners that do not make a
cash election, and that Public Storage is organized and operated so as to meet
the requirements for qualification as a REIT. As is noted below, Public
Storage's qualification and taxation as a REIT depends upon both Public
Storage's satisfaction in the past, and Public Storage's ability to meet on a
continuing basis in the future, through actual annual operating and other
results, the various requirements under the Code with regard to, among other
things, the sources of its gross income, the lack of "C" corporation earnings
and profits, the composition of its assets, the levels of distributions to
shareholders, and the diversity of its stock ownership. Tax counsel has relied
upon representations of management with respect to these matters and has not
reviewed or audited, and will not review or audit, compliance with these
requirements and does not express an opinion about those representations.
Accordingly, no assurance can be given that Public Storage has satisfied or will
satisfy the requirements under the Code for qualification and taxation as a REIT
for any given taxable year. The opinion is not binding upon the IRS or the
courts, and there can be no assurance that the IRS would not seek to assert a
contrary position. Also, there cannot be any assurance that future legislative,
judicial or administrative changes (which could be retroactive in effect) will
not adversely affect the conclusions reached in the opinion or the discussion
set forth below. Finally, the opinion is expressly limited to the specific
conclusions described in the first sentence of this section and does not purport
to address any other federal, state, local or foreign tax consequences that may
result from the merger or any other transaction.
The Merger
The merger will be treated for federal income tax purposes as a taxable
sale of the Partnership Units held by public limited partners, both for limited
partners electing to receive cash and for those electing to receive Public
Storage common stock. Taxable public limited partners will be taxed on the
difference between the adjusted basis of
64
<PAGE>
their units and the amount of cash received or the fair market value of the
Public Storage common stock received. Public Storage estimates that taxable
public limited partners who acquired their units in the original offering will
recognize a capital gain of approximately $325 per unit as a result of the
merger (assuming that the merger is effective as of the end of the second
quarter of 1999). The particular tax consequences of the merger for a public
limited partner will depend upon a number of factors related to his or her tax
situation, including the tax basis of the limited partner's units, and the tax
impact could be quite different for public limited partners who acquired their
units after the original offering.
To the extent that a taxable public limited partner recognizes a capital
loss as a result of the merger, the loss generally can be applied to offset
capital gain from other sources. Individuals may use capital losses in excess
of capital gains to offset up to $3,000 of ordinary income in any single year
($1,500 for a married individual filing a separate return). Any capital losses
that are not used currently can be carried forward for use in subsequent years.
A corporation's capital losses in excess of current capital gains generally may
be carried back three years, with any remaining unused portion available to be
carried forward for five years.
The merger is not expected to be a taxable event for Public Storage, which
will retain its existing interests in the Partnership and will be treated as
having purchased the interests of the public limited partners.
General Tax Treatment of Public Storage
If certain detailed conditions imposed by the Code and the related Treasury
Regulations are met, an entity, such as Public Storage, that invests principally
in real estate and that otherwise would be taxed as a corporation may elect to
be treated as a REIT. The most important consequence to Public Storage of being
treated as a REIT for federal income tax purposes is that this enables Public
Storage to deduct dividend distributions to its shareholders, thus effectively
eliminating the "double taxation" (at the corporate and shareholder levels) that
typically results when a corporation earns income and distributes that income to
shareholders in the form of dividends.
Public Storage elected to be taxed as a REIT beginning with its fiscal year
ending December 31, 1981. That election continues in effect until it is revoked
or terminated. Public Storage believes that it has qualified since its
election, and currently qualifies, as a REIT, and Public Storage expects to
continue to be taxed as a REIT for federal income tax purposes. While Public
Storage intends to operate so that it will continue to qualify as a REIT, given
the highly complex nature of the rules governing REITs, the ongoing importance
of factual determinations, and the possibility of future changes in the
circumstances of Public Storage, no assurance can be given that Public Storage
will so qualify for any particular year.
Technical Requirements for Taxation as a REIT. The following is a very
brief overview of certain of the technical requirements that Public Storage must
meet on an ongoing basis in order to continue to qualify as a REIT. This
summary is qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations of those
provisions.
The Code defines a REIT as a corporation, trust or association: (1) that
is managed by one or more trustees or directors, (2) the beneficial ownership of
which is evidenced by transferable shares of stock, or by transferable
certificates of beneficial interest, (3) that would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Code, (4) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code, (5) the beneficial ownership of which is held by 100 or more persons,
(6) that during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities and
applying certain ownership attribution rules) (the "5/50 Test"), (7) that makes
an election to be taxable as a REIT, or has made such election for a previous
taxable year which has not been revoked or terminated, and satisfies all
relevant filing and other administrative requirements established by the IRS
that must be met in order to elect and maintain REIT status; (8) that uses a
calendar year for federal income tax purposes and complies with recordkeeping
requirements of the Code and regulations and (9) that meets certain other tests,
described below, regarding the nature of its income and assets and the amount of
its distributions. For purposes of determining stock ownership under condition
(6), a supplemental unemployment compensation benefits plan, a private
foundation or a portion of a trust permanently set aside or used exclusively for
charitable purposes generally is considered an individual. However, a trust
that is a qualified trust under Code section
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401(a) generally is not considered an individual and beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of condition (6).
In connection with condition (6), a REIT is required to send annual letters
to its shareholders requesting information regarding the actual ownership of
shares. For Public Storage's taxable years commencing on or after January 1,
1998, if Public Storage complies with the annual letters requirement and Public
Storage does not know, or exercising reasonable diligence would not have known,
whether it failed to meet requirement (6) above, Public Storage will be treated
as having met the requirement. Public Storage's articles of incorporation and
bylaws contain restrictions regarding the transfer of its capital stock that are
intended to assist Public Storage in continuing to satisfy the stock ownership
requirements described in conditions (5) and (6). The ownership restrictions in
Public Storage's articles of incorporation and bylaws generally prohibit the
actual or constructive ownership of more than 2% of the outstanding shares of
common stock (excluding the interest held by the Hughes family) or more than
9.9% of the outstanding shares of each class or series of shares of preferred
stock or equity stock, unless an exception is established by the Board of
Directors. The restrictions provide that if, at any time, for any reason, those
ownership limitations are violated or more than 50% in value of Public Storage's
outstanding stock otherwise would be considered owned by five or fewer
individuals, then a number of shares of stock necessary to cure the violation
will automatically and irrevocably be transferred from the person causing the
violation to a designated charitable beneficiary. See "Description of Public
Storage Capital Stock Ownership Limitations." At the time of the PSMI Merger,
to further assist Public Storage in meeting the ownership restrictions, the
Hughes family entered into an agreement with Public Storage for the benefit of
Public Storage and certain designated charitable beneficiaries providing that
if, at any time, for any reason, more than 50% in value of Public Storage's
outstanding stock otherwise would be considered owned by five or fewer
individuals, then a number of shares of Public Storage common stock owned by
Wayne Hughes necessary to cure such violation would automatically and
irrevocably be transferred to a designated charitable beneficiary.
The ownership restrictions in the articles and the agreement with the
Hughes family are modeled after certain arrangements that the IRS has ruled in
private letter rulings will preclude a REIT from being considered to violate the
REIT ownership tests so long as the arrangements are enforceable as a matter of
state law and the REIT seeks to enforce them as and when necessary. There can
be no assurance, however, that the IRS might not seek to take a different
position with respect to Public Storage (a private letter ruling is legally
binding only with respect to the taxpayer to whom it was issued and Public
Storage has not obtained and will not seek a private ruling on this issue) or
contend that Public Storage failed to enforce these arrangements. Public
Storage believes that it has issued and outstanding sufficient shares with
sufficient diversity of ownership to allow it to satisfy the REIT ownership
requirements.
A REIT is not allowed to have at the end of any taxable year any
undistributed earnings and profits that are attributable to a "C corporation"
taxable year. As a result of the 1995 merger with Public Storage Management and
the 1999 merger with Storage Trust Realty, Inc., Public Storage succeeded to
various tax attributes of those entities and their predecessors, including any
undistributed C corporation earnings and profits. However, neither of those
entities nor Public Storage has sought an opinion of counsel or outside
accountants to the effect that Public Storage did not acquire any C corporation
earnings and profits. There can be no assurance that the IRS would not contend
otherwise on a subsequent audit. It appears that Public Storage could keep from
being disqualified as a REIT by using "deficiency dividend" procedures to
distribute any such acquired C corporation earnings and profits. In order to
use that procedure, an affected REIT would have to make an additional
distribution to its shareholders (in addition to distributions made for purposes
of satisfying the normal REIT distribution requirements), within 90 days of the
IRS determination. In addition, the REIT would have to pay to the IRS an
interest charge on 50% of the acquired C corporation earnings and profits that
were not distributed prior to the end of the REIT's taxable year in which they
were acquired. If C corporation earnings and profits were deemed to have been
acquired by Public Storage, there can be no assurance that the IRS would not
take the position either that the procedure is not available at all (in which
case Public Storage would fail to qualify as a REIT) or, alternatively, that
even if the procedure is available, Public Storage cannot qualify as a REIT for
its taxable year in which the C corporation earnings and profits were acquired,
but it could so qualify for subsequent taxable years.
Income Tests. In order to maintain qualification as a REIT, Public Storage
must satisfy certain gross income requirements, which are applied on an annual
basis. For purposes of applying these income tests, a REIT is considered to
earn a proportionate share of the income of any partnership in which it holds a
partnership interest.
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First, at least 75% of Public Storage's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of Public Storage's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from the same items which
qualify under the 75% income test, and from dividends, interest and gain from
the sale or disposition of stock or securities, or from any combination of the
foregoing.
Rents received by Public Storage will qualify as "rents from real property"
in satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
of sales. Public Storage anticipates that none of its gross annual income will
be attributable to rents that are based in whole or in part on the income of any
person (excluding rents based on a percentage of receipts or sales, which, as
described above, are permitted). Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if Public Storage,
or an owner of 10% or more of Public Storage, directly or constructively owns
10% or more of such tenant. Public Storage does not anticipate that it will
receive material amounts of income from such related party tenants. Third, if
rent attributable to personal property, leased in connection with a lease of
real property, is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to the personal property will not qualify
as "rents from real property." Public Storage does not anticipate deriving rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents. Finally, for rents received to qualify as
"rents from real property," Public Storage generally must not operate or manage
the property or furnish or render services to tenants, other than through an
"independent contractor" which is adequately compensated and from whom Public
Storage derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by Public Storage are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant." Any
services with respect to certain properties that Public Storage believes may not
be provided by Public Storage directly without jeopardizing the qualification of
rent as "rents from real property" will be performed by "independent
contractors."
For Public Storage's taxable years commencing on or after January 1, 1998,
rents received generally will qualify as rents from real property even if Public
Storage were to provide services that are not permissible services, so long as
the amount received for such services meets a de minimis standard. The amount
received for "impermissible services" with respect to a property will be de
minimis so long as it does not exceed one percent of all amounts received,
directly or indirectly, by Public Storage with respect to such property. In
computing any such amounts, the amount that Public Storage would be deemed to
have received for performing impermissible services will be the greater of the
actual amount so received or 150% of the direct cost to Public Storage of
providing the impermissible services. If the impermissible service income
exceeds 1% of Public Storage's total income from a property, then all of the
income from that property will fail to qualify as rents from real property.
In connection with the PSMI Merger, Public Storage and the various other
owners of mini-warehouses and business parks for which Public Storage performs
management activities entered into an agreement with PS Clearing Company, Inc.
("PSCC") pursuant to which PSCC provides the owners and Public Storage certain
administrative and cost-sharing services in connection with the operation of the
properties and the performance of certain administrative functions. The
services include the provision of corporate office space and certain equipment,
personnel required for the operation and maintenance of the properties, and
corporate or partnership administration. Each of the owners and Public Storage
pay PSCC directly for services rendered by PSCC in connection with the
administrative and cost sharing agreement. That payment is separate from and in
addition to the compensation paid to Public Storage under the management
agreement for the management of the properties owned by the owners. At the time
of the PSMI Merger, Public Storage received a private letter ruling from the IRS
to the effect that the reimbursements and other payments made to PSCC by the
owners will not be treated as revenues of Public Storage for purposes of the 95%
test.
Public Storage owns substantially all of the economic interest in PSPUD
(the portable self-storage business). The income from that business would be
nonqualifying income to Public Storage and the business is conducted by a
limited partnership between Public Storage and a subsidiary of PS Orangeco, Inc.
(the "Lock/Box Company"). The share of gross income of that business
attributable to Public Storage's partnership interest, when combined with other
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nonqualifying income of Public Storage, must be less than 5% of Public Storage's
total gross revenues. Public Storage anticipates that it will be able to
continue to satisfy both the 95% and 75% gross income tests.
If Public Storage fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code. It
is not possible, however, to state whether in all circumstances Public Storage
would be entitled to the benefit of the relief provisions. Even if the relief
provisions were to apply, Public Storage would be subject to a 100% excise tax
on the amount of the excess nonqualifying income multiplied by a fraction, the
numerator of which would be Public Storage's taxable income (computed without
its distribution deduction) and the denominator of which would be Public
Storage's gross income from all sources. This excise tax would have the general
effect of causing Public Storage to pay all net profits generated from this
excess nonqualifying income to the IRS.
Asset Tests. Generally, to maintain REIT qualification, 75% of the value
of Public Storage's total assets must be represented by real estate, mortgages
secured by real estate, cash, or government securities. Not more than 25% of
Public Storage's total assets may be represented by securities other than those
in the 75% asset class. Of the investments included in the 25% asset class, the
value of any one issuer's securities owned by Public Storage may not exceed 5%
of the value of Public Storage's total assets, and Public Storage may not own
more than 10% of any one issuer's outstanding voting securities. The 5% test
generally must be met for any quarter in which Public Storage acquires
securities of an issuer. For purposes of applying these asset tests, a REIT is
considered to own a proportionate share of the assets of any partnership in
which it holds a partnership interest. Public Storage believes that it
satisfies these tests. In this regard, however, the value of Public Storage's
interest in the Lock/Box Company (including the Lock/Box Company's interest in
PSPUD) may not exceed 5% of the value of Public Storage's total assets and the
10% voting stock prohibition precludes Public Storage from controlling the
operations of the Lock/Box Company (in which Public Storage owns 95% of the
equity in the form of non-voting stock and the Hughes family owns 5% of the
equity but 100% of the voting stock), PSPUD (a subsidiary of the Lock/Box
Company) or PSCC (in which Public Storage owns a less than 10% voting interest)
and may preclude Public Storage from exercising its rights of first refusal with
respect to the corporations owning the Canadian operations and the reinsurance
business. See "- Proposed Changes to REIT Qualification Requirements" for a
discussion of proposals that, if enacted, might affect Public Storage's ability
to derive economic benefits from the activities of the Lock/Box Company and
PSPUD.
Certain Partnership Interests. In the PSMI Merger and in subsequent
transactions, Public Storage has acquired interests in various partnerships that
own and operate properties. For purposes of satisfying the REIT asset and gross
income tests, Public Storage will be treated as if it directly owned a
proportionate share of each of the assets of these partnerships. For these
purposes, under current Treasury Regulations, Public Storage's interest in each
of the partnerships must be determined in accordance with Public Storage's
"capital interest" in such partnership.
The ownership of these partnership interests creates several issues
regarding Public Storage's satisfaction of the 95% gross income test. First,
Public Storage earns property management fees from these partnerships. Existing
Treasury Regulations do not address the treatment of management fees derived by
a REIT from a partnership in which the REIT holds a partnership interest, but
the IRS has issued a number of private letter rulings holding that the portion
of the management fee that corresponds to the REIT's interest in the partnership
in effect is disregarded in applying the 95% gross income test where the REIT
holds a "substantial" interest in the partnership. In determining the amount of
Public Storage's nonqualifying income, Public Storage disregards the portion of
management fees derived from partnerships in which Public Storage is a partner
that corresponds to its interest in these partnerships. There can be no
assurance, however, that the IRS would not take a contrary position with respect
to Public Storage , either rejecting the approach set forth in the private
letter rulings mentioned above or contending that Public Storage's situation is
distinguishable from those addressed in the private letter rulings (for example,
arguing that Public Storage does not have a "substantial" interest in the
partnerships).
Second, Public Storage acquired interests in certain of these partnerships
that entitle Public Storage to a percentage of profits (either from operations,
or upon a sale, or both) in excess of the percentage of total capital originally
contributed to the partnership with respect to such interest. Existing Treasury
Regulations do not specifically address how Public Storage's "capital interest"
in partnerships of this type should be determined. This determination is
relevant because it affects both the percentage of the gross rental income of
the partnership that is considered gross rental income (or qualifying income) to
Public Storage and the percentage of the management fees paid to Public Storage
that is disregarded in determining Public Storage's nonqualifying income. For
example, if
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Public Storage takes the position that Public Storage has a 25% "capital
interest" in a partnership (because Public Storage would receive 25% of the
partnership's assets upon a sale and liquidation) but the IRS determines that
Public Storage only has a 1% "capital interest" (because the original holder of
Public Storage's interest only contributed 1% of the total capital contributed
to the partnership), Public Storage's share of the qualifying income from the
partnership would be reduced and the portion of the management fee from the
partnership that would be treated as nonqualifying income would be increased,
thereby adversely affecting Public Storage's ability to satisfy the 95% gross
income test. In determining Public Storage's "capital interest" in the various
partnerships, Public Storage determines the percentage of the partnership's
assets that would be distributed to Public Storage if those assets were sold and
distributed among the partners in accordance with the applicable provisions of
the partnership agreements. There can be no assurance, however, that the IRS
will agree with this methodology and not contend that another, perhaps less
favorable, method must be used for purposes of determining Public Storage's
"capital interests," which could adversely affect Public Storage's ability to
satisfy the 95% gross income test.
Annual Distribution Requirements. In order to qualify as a REIT, Public
Storage generally must distribute to its shareholders in each taxable year an
amount at least equal to 95% of Public Storage's "REIT taxable income" (which is
generally equivalent to net taxable ordinary income). In addition, under the
"Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, if Public Storage
disposes of any "Built-in Gain Assets" during the 10-year period beginning on
the date of the acquisition of those assets (the "Restriction Period"), Public
Storage will be required, pursuant to Treasury Regulations that have not yet
been issued, to distribute at least 95% of any Built-in Gain (after tax)
recognized on the disposition of those assets. "Built-in Gain Assets" are the
assets acquired from a C corporation (i.e., a corporation generally subject to
full corporate level tax) in a transaction in which the basis of the asset in
Public Storage's hands is determined by reference to the basis of the asset (or
any other asset) in the hands of the C corporation, if an election to have these
rules apply has been made by Public Storage. "Built-in Gain" represents the
excess of (i) the lesser of (a) the fair market value at the time of the
acquisition of the assets disposed of and (b) the selling price of such assets
over (ii) Public Storage's adjusted basis in such assets at the time of the
acquisition by Public Storage. Public Storage made an election pursuant to IRS
Notice 88-19 with respect to the PSMI Merger. Public Storage 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.
To the extent that Public Storage does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax at regular ordinary and
capital gain corporate tax rates. Public Storage may elect to require the
shareholders to include Public Storage's undistributed net capital gains in
their income by designating, in a written notice to shareholders, those amounts
as undistributed capital gains in respect of its shareholders' shares. If
Public Storage makes such an election, the shareholders will (i) include in
their income as capital gains their proportionate share of such undistributed
capital gains and (ii) be deemed to have paid their proportionate share of the
tax paid by Public Storage on such undistributed capital gains and thereby
receive a credit or refund for such amount. A shareholder will increase the
basis in its shares by the difference between the amount of capital gain
included in its income and the amount of the tax that Public Storage is deemed
to have paid on the shareholder's behalf. The earnings and profits of Public
Storage will be adjusted appropriately. For a more detailed description of the
tax consequences to a shareholder of such a designation, see "- Taxation of U.S.
Shareholders Owning Public Storage Common Stock."
In addition, if Public Storage should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
calendar year, (ii) 95% of its REIT capital gain net income for such calendar
year, and (iii) any undistributed taxable income from prior periods, Public
Storage would be subject to a 4% excise tax on the excess of such required
distribution over the sum of amounts actually distributed during the calendar
year by Public Storage and the amount, if any, on which Public Storage paid
income tax for such year.
In years prior to 1990, Public Storage made distributions in excess of its
REIT taxable income. During 1990, Public Storage reduced its distributions to
its shareholders. As a result, distributions paid by Public Storage in 1990
were less than 95% of Public Storage's REIT taxable income for 1990. Public
Storage has satisfied the REIT distribution requirements for 1990 through 1997
by attributing distributions in 1991 through 1998 to the prior year's taxable
income, and Public Storage expects to satisfy the distribution requirement for
1998 by attributing distributions in 1999 to its 1998 taxable income. Public
Storage may be required, over each of the next several years, to make
distributions after the close of a taxable year and to attribute those
distributions to the prior year, but Public Storage shareholders will be treated
for federal income tax purposes as having received such distributions in the
taxable years
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in which they were actually made except for under certain circumstances as
described below under the heading "Taxation of Taxable Domestic Holders of
Public Storage Common Stock Distributions by Public Storage." The extent to
which Public Storage will be required to attribute distributions to the prior
year will depend on Public Storage's operating results and the level of
distributions as determined by Public Storage's Board of Directors.
Public Storage intends to make timely distributions sufficient to satisfy
its annual distribution requirements. It is expected that Public Storage's REIT
taxable income will be less than its cash flow due to the allowance of
depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, Public Storage anticipates that it will generally have sufficient
cash or liquid assets to enable it to satisfy the distribution requirements
described above. It is possible, however, that Public Storage, from time to
time, may not have sufficient cash or other liquid assets to meet these
distribution requirements perhaps due to timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at taxable
income of Public Storage. In such circumstances, in order to meet the
distribution requirements, Public Storage may find it necessary to arrange for
short-term, or possibly long-term, borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, Public Storage may be able to rectify a
failure to meet the 95% distribution requirement for a year by paying
"deficiency dividends" to shareholders in a later year, which may be included in
Public Storage's deduction for dividends paid for the earlier year. Thus,
Public Storage may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, Public Storage will be required to pay interest
to the IRS based upon the amount of any deduction taken for deficiency
dividends.
Applicable Federal Income Tax. If Public Storage qualifies for taxation as
a REIT, Public Storage generally will not be subject to federal corporate income
taxes on net income that it distributes currently to shareholders. However,
Public Storage will be subject to federal income tax in the following
circumstances.
(1) Public Storage will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(2) Under certain circumstances, Public Storage may be subject to the
"alternative minimum tax" on its items of tax preference.
(3) If Public Storage has (i) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by foreclosure or otherwise on default of a lease or a loan
secured by the property) that is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, Public Storage will be subject to tax at the highest
corporate rate on such income.
(4) If Public Storage has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
(other than foreclosure property) held primarily for sale to customers in
the ordinary course of business), such income will be subject to a 100%
tax.
(5) If Public Storage should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed above), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which Public Storage fails the
75% or 95% gross income test.
(6) If Public Storage should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, Public Storage would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed.
(7) Under the "Built-in Gain Rules" of IRS Notice 88-19 (described
above), Public Storage generally will be subject to a corporate level tax
if it disposes in a taxable transaction of Built-in Gain Assets during the
10-year Restriction Period. This tax would be imposed pursuant to
anticipated Treasury Regulations that have not yet been promulgated at the
highest regular corporate rate (currently 35%) in effect
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at the time of the disposition on the amount of any "Built-in Gain" Public
Storage made an election pursuant to IRS Notice 88-19 with respect to the
PSMI Merger. Accordingly, Public Storage will be subject to a corporate
level tax with respect to the assets acquired in the PSMI Merger only if it
disposes of any Built-in Gain Assets acquired in the PSMI Merger at any
time during the applicable Restriction Period. Public Storage currently
does not intend to dispose any material portion of the assets acquired in
the PSMI Merger during the Restriction Period, but there can be no
assurance that one or more such dispositions will not occur.
Failure to Qualify as a REIT. For any taxable year that Public Storage
fails to qualify as a REIT and relief provisions do not apply, Public Storage
would be taxed at the regular corporate rates on all of its taxable income,
whether or not it makes any distributions to its shareholders. Those taxes
would reduce the amount of cash available to Public Storage for distributions to
its shareholders or for reinvestment. As a result, failure of Public Storage to
qualify as a REIT during any taxable year could have a material adverse effect
upon Public Storage and its shareholders.
Termination of REIT Election. Public Storage's election to be treated as a
REIT will terminate automatically if Public Storage fails to meet the REIT
qualification requirements described above. If a termination (or a voluntary
revocation) occurs, unless certain relief provisions apply, Public Storage would
not be eligible to elect REIT status again until the fifth taxable year that
begins after the first year for which Public Storage's election was terminated
(or revoked). If Public Storage loses its REIT status, but later qualifies and
elects to be taxed as a REIT again, Public Storage may face significant adverse
tax consequences. Immediately prior to the effectiveness of the election to
return to REIT status, Public Storage would be treated as if it disposed of all
of its assets in a taxable transaction, triggering taxable gain with respect to
Public Storage's appreciated assets. (Public Storage would, however, be
permitted to elect under Notice 88-19 to have any gains taken into account only
as and when they actually are recognized upon sales of the appreciated property
occurring within the 10-year Restriction Period after return to REIT status.)
Public Storage would not receive the benefit of a dividends paid deduction to
reduce any such taxable gains. Thus, any such gains on appreciated assets would
be subject to double taxation, at the corporate as well as the shareholder
level.
Taxation of U.S. Shareholders Owning Public Storage Common Stock
As used below, the term "U.S. Shareholder" means a holder of shares of
Public Storage common stock who (for United States federal income tax purposes):
(i) is a citizen or resident of the United States, (ii) is a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or any political subdivision of the United States, (iii) is an
estate the income of which is subject to United States federal income taxation
regardless of its source or (iv) is a trust the administration of which is
subject to the primary supervision of a United States court and which has one or
more United States persons who have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons, shall also be considered U.S. Shareholders.
Distributions by Public Storage. As long as Public Storage qualifies as a
REIT, distributions made to Public Storage's taxable U.S. Shareholders (and not
designated as capital gain dividends) will generally be taxable to such
shareholders as ordinary income to the extent of Public Storage's current or
accumulated earnings and profits. For purposes of determining whether
distributions on shares of common stock are out of current or accumulated
earnings and profits, the earnings and profits of Public Storage will be
allocated first to shares of Preferred Stock and second to shares of common
stock. Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year
generally are treated as if received by the shareholders on December 31 of the
calendar year during which they were declared.
Distributions designated by Public Storage as capital gain dividends
generally will be taxed as gain from the sale or exchange of a capital asset
held for more than one year (to the extent that the distributions do not exceed
Public Storage's actual net capital gain for the taxable year) without regard to
the period for which the Shareholder has held its stock. Corporate shareholders
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.
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Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of Public Storage. Instead, such losses
would be carried over by Public Storage for potential offset against future
income (subject to certain limitations). Distributions made by Public Storage
and gain arising from the sale or exchange by a U.S. Shareholder of Public
Storage common stock will not be treated as passive activity income, and, as a
result, shareholders generally will not be able to apply any "passive losses"
against such income or gain. Future regulations may require that the
shareholders take into account, for purposes of computing their individual
alternative minimum tax liability, certain tax preference items of Public
Storage. In addition, taxable distributions from Public Storage will be treated
as investment income for purposes of the investment interest limitations.
Capital gain dividends and capital gains from the disposition of shares
(including distributions treated as such), however, will be treated as
investment income only if the U.S. Shareholder so elects, in which case such
capital gains will be taxed at ordinary income rates. Public Storage will
notify shareholders after the close of its taxable year as to the portions of
the distributions attributable to that year that constitute ordinary income,
return of capital and capital gain.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a U.S. shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of common stock, but rather will
reduce the adjusted basis of such shares of common stock. To the extent that
such distributions exceed the adjusted basis of a U.S. shareholder's shares of
common stock, they will be included in income as capital gains, assuming the
shares of common stock are a capital asset in the hands of the U.S. Shareholder.
For Public Storage's taxable years commencing on or after January 1, 1998,
Public Storage may elect to require the holders of common stock to include
Public Storage's undistributed net long-term capital gains in their income. If
Public Storage makes such an election, the holders of common stock will (i)
include in their income as long-term capital gains their proportionate share of
such undistributed capital gains and (ii) be deemed to have paid their
proportionate share of the tax paid by Public Storage on such undistributed
capital gains and thereby receive a credit or refund for such amount. A holder
of common stock will increase the basis in its common stock by the difference
between the amount of capital gain included in its income and the amount of the
tax it is deemed to have paid. The earnings and profits of Public Storage will
be adjusted appropriately. With respect to such long-term capital gain of a
taxable domestic 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 to sales of depreciable real property by an individual or an estate
or trust 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.
Distributions by Public Storage, whether characterized as ordinary income
or as capital gain, are not eligible for the 70% dividends received deduction
for corporations.
In any year in which Public Storage does not qualify as a REIT,
distributions by Public Storage to shareholders will be taxable in the same
manner discussed above, except that no distributions can be designated as
capital gain dividends, distributions will be eligible for the corporate
dividends received deduction, and shareholders will not receive any share of
Public Storage's tax preference items.
Sales of Public Storage Common Stock. In general, a U.S. Shareholder will
realize gain or loss upon the sale of Public Storage common stock equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such disposition and (ii) the shareholder's adjusted basis
of such shares of Public Storage common stock (shares received as a result of
the merger will have a basis at the time of the merger equal to the then fair
market value of the shares). Such gain or loss will be capital gain or loss if
the shares have been held as a capital asset. In the case of a taxable U.S.
Shareholder who is an individual or an estate or trust, such gain or loss will
be long-term capital gain or loss, and such long-term capital gain shall be
subject to the maximum capital gain rate of 20%. In the case of a taxable U.S.
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 and any such
capital gain shall be subject to the maximum capital gain rate of 35%. Loss
upon a sale or exchange of shares of common stock by a shareholder who has held
such shares of common stock for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss to the extent
of distributions from Public Storage required to be treated by such shareholder
as long-term capital gain.
Recent Legislation. The Taxpayer Relief Act of 1997 (the "Taxpayer Relief
Act") altered the taxation of capital gain income. Under the Taxpayer Relief
Act, individuals, trusts and estates that hold certain investments for
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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 long-term capital gain rate of 28% on the sale or exchange
of those investments. The Taxpayer Relief 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
IRS Restructuring Act of 1998, however, reduced the holding period requirement
established by the Taxpayer Relief Act for the application of the 20% and 25%
capital gain tax rates to 12 months from 18 months for sales of capital gain
assets after December 31, 1997 and thus eliminated the 28% rate. The Taxpayer
Relief Act allows the IRS to prescribe regulations on how the Taxpayer Relief
Act's capital gain rates will apply to sales of capital assets by "pass-through
entities," including REITs, such as Public Storage and to sales of interests in
"pass-through entities." Shareholders are urged to consult with their own tax
advisors with respect to the rules contained in the Taxpayer Relief Act and the
IRS Restructuring Act.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that Public Storage may classify portions of its designated capital-
gain dividend as (i) a 20% rate gain distribution (which would be taxed as long-
term capital gain in the 20% group), (ii) an unrecaptured Section 1250 gain
distribution (which would be taxed as long-term capital gain in the 25% group),
or (iii) a 28% rate gain distribution (which would be taxed as long-term capital
gain in the 28% group). If no designation is made, the entire designated
capital gain dividend will be treated as a 28% rate gain distribution. IRS
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% rate capital gain dividends by performing the
computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. The Notice
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. Although Notice 97-64 will apply to sales of
capital gain assets after July 28, 1997 and before January 1, 1998, it is
expected that the IRS will issue clarifying guidance, most likely applying the
same principles set forth in Notice 97-64, regarding a REIT's designation of
capital gain dividends in light of the new holding period requirements.
Backup Withholding. Public Storage will report to its domestic
shareholders and the IRS the amount of dividends paid during each calendar year,
and the amount of tax withheld, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number and certifies as to no loss of
exemption from backup withholding. Amounts withheld as backup withholding will
be creditable against the stockholder's income tax liability. In addition,
Public Storage may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to Public Storage. See "- Taxation of Non-U.S. Shareholders" below.
Taxation of Tax-Exempt Shareholders. As a general rule, amounts
distributed to a tax-exempt entity by a corporation do not constitute "unrelated
business taxable income" ("UBTI"), and thus distributions by Public Storage to a
stockholder that is a tax-exempt entity generally should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
shares of common stock with "acquisition indebtedness" within the meaning of the
Code and the shares of common stock are not otherwise used in an unrelated trade
or business of the tax-exempt entity. However, distributions by a REIT to a tax-
exempt employee's pension trust that owns more than 10% of the REIT will be
treated as UBTI in an amount equal to the percentage of gross income of the REIT
that is derived from an "unrelated trade or business" (determined as if the REIT
were a pension trust) divided by the gross income of the REIT for the year in
which the dividends are paid. This rule only applies, however, if (i) the
percentage of gross income of the REIT that is derived from an unrelated trade
or business for the year in which the dividends are paid is at least 5%, (ii)
the REIT qualifies as a REIT only because the pension trust is not treated as a
single individual for purposes of the "five-or-fewer rule" (see condition (6)
discussed in "- General Tax Treatment of Public Storage Technical Requirements
for Taxation as a REIT" above), and (iii) (A) one pension trust owns more than
25 percent of the value of the REIT or, (B) a group of pension trusts
individually holding more than 10 percent of the value of the REIT collectively
own more than 50 percent of the value of the REIT.
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Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of non-U.S. Shareholders
are complex, and the following discussion is intended only as a summary of
certain of those rules. Non-U.S. Shareholders should consult with their tax
advisors to determine the impact of U.S. federal, state, and local income tax
laws on an investment in Public Storage, including any reporting requirements,
as well as the tax treatment of such an investment under their home country
laws.
Distributions by Public Storage. Distributions to a non-U.S. Shareholder
that are not attributable to gain from sales or exchanges by Public Storage of
U.S. real property interests and not designated by Public Storage as capital
gain dividends will generally be subject to tax as ordinary income to the extent
of Public Storage's current or accumulated earnings and profits as determined
for U.S. federal income tax purposes. Such distributions will generally be
subject to withholding of that income tax at a 30% rate, unless reduced by an
applicable tax treaty or unless the dividends are treated as effectively
connected with a United States trade or business. If the amount distributed
exceeds a non-U.S. Shareholder's allocable share of current or accumulated
earnings and profits, the excess will be treated as a tax-free return of capital
to the extent of such shareholder's adjusted basis in the common stock. To the
extent that such distributions exceed the adjusted basis of a non-U.S.
Shareholder's common stock, such distributions will generally be subject to tax
if such shareholder would otherwise be subject to tax on any gain from the sale
or disposition of its common stock, as described below.
For withholding tax purposes, Public Storage currently is required to treat
all distributions as if made out of its current or accumulated earnings and
profits and thus intends to withhold at the rate of 30% (or a reduced treaty
rate if applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a non-U.S. Shareholder. Under
regulations generally effective for distributions on or after January 1, 1999,
Public Storage would not be required to withhold at the 30% rate on
distributions it reasonably estimates to be in excess of Public Storage's
current and accumulated earnings and profits. If it cannot be determined at the
time a distribution is made whether such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to ordinary dividends. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, under
current law, it appears that Public Storage will be required to withhold 10% of
any distribution to a non-U.S. Shareholder in excess of Public Storage's current
and accumulated earnings and profits. Consequently, although Public Storage
intends to withhold at a rate of 30% on the entire amount of any distribution to
a non-U.S. Shareholder (or lower applicable treaty rate), to the extent Public
Storage does not do so, any portion of such a distribution not subject to
withholding at a rate of 30% (or lower applicable treaty rate) will be subject
to withholding at a rate of 10%. However, the non-U.S. Shareholder may seek a
refund of such amounts from the IRS if it subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of Public Storage, and the amount withheld exceeded the non-U.S.
Shareholder's United States tax liability, if any, with respect to the
distribution.
Distributions to a non-U.S. Shareholder that are designated by Public
Storage at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) the investment in the common stock is effectively connected with the non-
U.S. Shareholder's United States trade or business, in which case the non-U.S.
Shareholder will be subject to the same treatment as domestic shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax) or (ii) the non-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other
requirements are met, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a non-U.S. Shareholder that are attributable to gain from sales
or exchanges by Public Storage of United States real property interests (whether
or not designated as a capital gain dividend) will be taxed at the normal
capital gains rates applicable to domestic shareholders (subject to a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a non-U.S. Shareholder that is a corporation and is not entitled to
treaty relief or exemption. That amount is creditable against the non-U.S.
Shareholder's United States FIRPTA income tax liability. Public Storage is
required by applicable
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FIRPTA Treasury Regulations to withhold 35% of any such distribution that is or
could be designated by Public Storage as a capital gain dividend.
Even if Public Storage does not qualify or ceases to be a domestically
controlled REIT, gain arising from the sale or exchange by a non-U.S.
Shareholder of common stock would still not be subject to U.S. taxation under
FIRPTA as a sale of a United States real property interest if (i) the class or
series of shares being sold is "regularly traded," as defined by applicable
Treasury Regulations, on an established securities market such as the New York
Stock Exchange, and (ii) the selling non-U.S. Shareholder owned 5% or less of
the value of the outstanding class or series of shares being sold throughout the
five-year period ending on the date of the sale or exchange.
If gain on the sale or exchange of common stock were subject to taxation
under FIRPTA, the non-U.S. Shareholder would be subject to regular United States
income tax with respect to such gain in the same manner as a taxable U.S.
Shareholder, subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of non-resident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations. The purchaser of the common stock would be required to withhold
and remit to the IRS 10% of the purchase price.
Although the law is not entirely clear on the matter, it appears that
amounts designated by Public Storage pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of shares of common stock (see "Taxation
of U.S. Shareholders Owning Public Storage Common Stock" above) would be treated
with respect to non-U.S. Shareholders in the manner outlined in the preceding
paragraph for actual distributions by Public Storage of capital gain dividends.
Under that approach, the non-U.S. Shareholders would be able to offset as a
credit against their United States federal income tax liability resulting
therefrom their proportionate share of the tax paid by Public Storage on such
undistributed capital gains (and to receive from the IRS a refund to the extent
their proportionate share of such tax paid by Public Storage were to exceed
their actual United States federal income tax liability).
Sale of Common Stock. Gain recognized by a non-U.S. Shareholder upon a
sale of its common stock will generally not be subject to tax under FIRPTA if
Public Storage is a "domestically controlled REIT," which is defined generally
as a REIT in which at all times during a specified testing period less than 50%
in value of its shares were held directly or indirectly by non-U.S. persons.
Because only a minority of Public Storage's shareholders are believed to be non-
U.S. Shareholders, Public Storage expects to qualify as a "domestically
controlled REIT." Accordingly, a non-U.S. Shareholder should not be subject to
U.S. tax from gains recognized upon disposition of the common stock, provided
that such gain is not effectively connected with the conduct of a United States
trade or business and, in the case of an individual shareholder, such holder is
not present in the United States for 183 days or more during the year of sale
and certain other requirements are met.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at a rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends, or
(iii) distributions attributable to gain from the sale or exchange by Public
Storage of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of common stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally a foreign
corporation controlled by United States shareholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a non-U.S. Shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of common stock is subject
to both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a non-U.S.
Shareholder, or otherwise establishes an exemption. A non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
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The United States Treasury Department has recently finalized regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not alter the substantive withholding and
information reporting requirements but unify certification procedures and forms
and clarify and modify reliance standards. These regulations generally are
effective for payments made after December 31, 1999, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000, or the date of
the expiration of the certificate under rules currently in effect, unless
otherwise invalidated due to changes in the circumstances of the person whose
name is on such certificate. A non-U.S. Shareholder should consult its advisor
regarding the effect of the new Treasury Regulations.
Ownership Records
To monitor Public Storage's compliance with the REIT share ownership
requirements, Public Storage is required to demand annual written statements
from the record holders of designated percentages of its capital stock
disclosing the actual owners of the capital stock and to maintain permanent
records showing the information it has received as to the actual ownership of
such capital stock and a list of those persons failing or refusing to comply
with such demand.
Proposed Changes to REIT Qualification Requirements
The administration's fiscal year 2000 budget proposal, announced February
1, 1999, includes a proposal that would change the 10% voting securities test to
a 10% vote or value test. Under the proposal, except for a qualified REIT
subsidiary or another REIT, a REIT would not be able to own more than 10% of the
vote or value of the outstanding securities of any corporation, such as the
Lock/Box Company (see "General Tax Treatment of Public Storage Asset Tests"
above). The proposal also contains an exception to the 5% and 10% asset tests
that would allow a REIT to have "taxable REIT subsidiaries," including both
"qualified independent contractor subsidiaries," which could perform
noncustomary and other currently prohibited services for tenants and other
customers, and "qualified business subsidiaries," which could undertake third-
party management and development activities as well as other non-real estate
related activities. Under the proposal, no more than 15% of a REIT's total
assets could consist of taxable REIT subsidiaries and no more than 5% of a
REIT's total assets could consist of qualified independent contractor
subsidiaries. Under the budget proposal, a taxable REIT subsidiary would not be
entitled to deduct any interest on debt funded directly or indirectly by the
REIT. This proposal would be effective after the date of enactment and a REIT
would be allowed to combine and convert existing corporate subsidiaries into
taxable REIT subsidiaries tax-free prior to a certain date. A transition period
would allow for conversion of existing corporate subsidiaries before the 10%
vote or value test would become effective. For Public Storage's taxable years
after the effective date of the proposal and after any applicable transition
period, the 10% vote or value test would apply to Public Storage's ownership in
any of the non-qualified REIT subsidiaries not converted into taxable REIT
subsidiaries.
On April 28, 1999, the Real Estate Investment Trust Modernization Act of
1999 (the "bill") was introduced in Congress. The bill is similar to the
administration's proposal in several respects. Like the administration's
proposal, the bill would create "taxable REIT subsidiaries" that would not be
subject to the 5% asset test, but that would remain subject to the 25% asset
test (see "General Tax Treatment of Public Storage Asset Tests" above). The
"taxable REIT subsidiaries" would also be subject to "earnings stripping"
limitations on the deductibility of interest. Under the bill, a REIT would be
able to rent up to 10% of a property to a taxable REIT subsidiary and generally
have the rent qualify as good income. The bill would also change the 10% voting
securities test to a 10% vote or value test unless the corporation elects to be
a taxable REIT subsidiary or the securities qualify for the "grandfather rule."
In general, the "grandfather rule" would apply to securities of a corporation in
which the REIT owned an interest on April 28, 1999. The grandfather rule would
also apply to securities acquired in a tax-free exchange for "grandfathered
securities" and to securities acquired in a qualifying tax-free reorganization
with another REIT, if those securities were grandfathered in the hands of the
other REIT. Securities of a corporation will lose their "grandfathered" status
if the corporation acquires any substantial asset or engages in a substantial
new line of business after April 28, 1999 (other than pursuant to a binding
contract in effect on that date).
It is presently uncertain whether any proposal regarding REIT subsidiaries,
including the budget proposal or the bill, will be enacted or, if enacted, what
the terms, including the effective date, of such proposal will be.
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STATE AND LOCAL TAXES
The tax treatment of limited partners, Public Storage and Public Storage's
shareholders in states having taxing jurisdiction over them may differ from the
federal income tax treatment. Accordingly, no discussion of state taxation of
limited partners, Public Storage or Public Storage's shareholders is provided
nor is any representation made as to the tax status of Public Storage in such
states. All limited partners should consult their own tax advisors as to the
treatment under the respective state tax laws applicable to them.
LEGAL OPINIONS
David Goldberg, senior vice president and general counsel of Public
Storage, will deliver an opinion to the effect that the shares of Public Storage
common stock to be issued in the merger will be validly issued, fully paid and
nonassessable. Mr. Goldberg owns 97,880 shares of Public Storage common stock
and 600 shares of Public Storage senior preferred stock and has options to
acquire an additional 184,501 shares of Public Storage common stock. A. Timothy
Scott, senior vice president and tax counsel of Public Storage, has rendered an
opinion to the effect that the discussion under "Federal Income Tax
Considerations" fairly summarizes the material federal income tax considerations
to a limited partner as a result of the merger, and the subsequent ownership of
Public Storage common stock. Mr. Scott owns 3,367 shares of Public Storage
common stock and has options to acquire an additional 70,000 shares of Public
Storage common stock.
EXPERTS
The consolidated financial statements of Public Storage at December 31,
1998 and 1997 and for the three years in the period ended December 31, 1998
which are included in Public Storage's Annual Report on Form 10-K have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated by reference herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of the Partnership and SEI/PSPIII Joint Ventures
at December 31, 1998 and 1997 and for the three years in the period ended
December 31, 1998 appearing herein and in the Annual Report on Form 10-K of the
Partnership have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports included herein. Such financial statements are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
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GLOSSARY
The following are definitions of certain terms used in this statement:
"General Partners." The general partners of the Partnership.
"Hughes." B. Wayne Hughes, a general partner of the Partnership.
"Limited Partners." The limited partners of the Partnership.
"Merger." The merger of a subsidiary of Public Storage with and into the
Partnership.
"Partnership." PS Partners III, Ltd., a California limited partnership.
"Partnership Agreement." The amended and restated agreement of limited
partnership of the Partnership.
"Partnership Units." Units of limited partnership interest in the
Partnership.
"PSBP." PS Business Parks, L.P.
"Public Storage." Public Storage, Inc., a REIT organized as a California
corporation (formerly Storage Equities, Inc.). Public Storage is a general
partner of the Partnership.
"Public Storage common stock." Shares of Common Stock, par value $.10 per
share, of Public Storage.
"Public Storage shareholder." A holder of shares of Public Storage common
stock.
"PSMI." Public Storage Management, Inc., a California corporation, which,
together with its affiliates, was merged into Storage Equities, Inc. on November
16, 1995.
"REIT." A real estate investment trust.
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Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as
of this 10th day of June, 1999, by and among PUBLIC STORAGE, INC., a California
corporation ("PSI"), PS Partners III Merger Co., Inc., a California corporation
("Sub") and PS Partners III, Ltd., a California limited partnership ("PSP").
A. This Agreement provides for the merger of Sub, a wholly-owned, second
tier subsidiary of PSI, with and into PSP in accordance with the applicable
provisions of the California Revised Limited Partnership Act (the "CRLPA") and
the Certificate of Merger in the form prescribed by the California Secretary of
State as provided in Section 15678.4 of the CRLPA (the "Certificate of Merger").
B. The Board of Directors of PSI and the general partners of PSP believe
that it is in the best interests of PSI and PSP to enter into and complete this
Agreement and they have approved this Agreement and the transactions
contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. Adoption of Plan. The parties hereby adopt the Plan of Reorganization
hereinafter set forth.
2. The Merger.
2.1 Completion of the Merger. At the Effective Time (as defined
below), Sub will be merged with and into PSP (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Certificate of
Merger. The Merger shall become effective at the time at which the Certificate
of Merger is filed with the California Secretary of State in accordance with the
CRLPA, except that if the Certificate of Merger specifies a date subsequent to
the date of such filing on which the Merger is to become effective, the Merger
shall be effective on such specified subsequent date (the "Effective Time").
Sub and PSP are sometimes collectively referred to herein as the "Constituent
Entities" and PSP, as the surviving entity in the Merger, is sometimes referred
to herein as the "Surviving Entity."
2.2 Effect of the Merger. At the Effective Time:
2.2.1 Constituent Entities. The separate corporate existence
of Sub shall cease and the Surviving Entity shall thereupon succeed, without
other transfer, to all the rights and property of Sub and shall be subject to
all the debts and liabilities of Sub in the same manner as if the Surviving
Entity had itself incurred them; all rights of creditors and all liens upon the
property of each of the Constituent Entities shall be preserved unimpaired,
provided that such liens upon property of Sub shall be limited to the property
affected thereby immediately prior to the Effective Time; and any action or
proceeding pending by or against Sub may be prosecuted to judgment, which shall
bind the Surviving Entity, or the Surviving Entity may be proceeded against or
substituted in its place.
2.2.2 Partnership Agreement. The partnership agreement of
PSP in effect at the Effective Time shall continue in full force and effect
until amended or terminated as provided in such partnership agreement or as
provided by law.
2.2.3 General Partners. The general partners of PSP shall
remain as its general partners with the same interests in PSP that they owned at
the Effective Time.
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2.3 Conversion of Partnership Units. The manner of converting the
outstanding units of limited partnership interest of PSP (the "Units") into cash
and/or shares of Common Stock ($.10 par value) of PSI (the "PSI Shares") shall
be as follows:
2.3.1 Cash Election. At the Effective Time, each Unit as to
which a cash election has been made in accordance with the provisions of Section
2.5 hereof and has not been revoked, relinquished or lost pursuant to Section
2.5 hereof (the "Cash Election Units") shall be converted into and shall
represent the right to receive $545 in cash (the "Cash Election Price"). As
soon as practicable after the Effective Time, the registered holders of Cash
Election Units shall be paid the cash to which they are entitled hereunder in
respect of such Cash Election Units.
2.3.2 Share Exchange. At the Effective Time, subject to
Sections 2.4 and 2.5 hereof, each Unit (other than Cash Election Units and Units
owned by the parent of Sub) shall be converted into that number of PSI Shares
equal to, rounded to the nearest thousandth, the quotient (the "Conversion
Number") derived by dividing $545 by the average of the per share closing prices
on the New York Stock Exchange, Inc. (the "NYSE") of PSI Shares during the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Time. If, prior to the Effective Time, PSI should split or combine the PSI
Shares, or pay a stock dividend, the Conversion Number will be appropriately
adjusted to reflect such action.
2.4 No Fractional Shares. Notwithstanding any other term or
provision of this Agreement, no fractional PSI Shares and no certificates or
script therefor, or other evidence of ownership thereof, will be issued in the
Merger. In lieu of any such fractional share interests, each holder of Units
who would otherwise be entitled to such fractional share will receive a whole
PSI Share if such fractional share to which such holder would otherwise have
been entitled is .5 of an PSI Share or more, and such fractional share shall be
disregarded if it represents less than .5 of an PSI Share; provided, however,
that, such fractional share shall not be disregarded if such fractional share to
which such holder would otherwise have been entitled represents .5 of 1% or more
of the total number of PSI Shares such holder is entitled to receive in the
Merger. In such event, such holder shall be paid an amount in cash (without
interest), rounded to the nearest $.01, determined by multiplying (i) the per
share closing price on the NYSE of the PSI Shares at the Effective Time by (ii)
the fractional interest.
2.5 Procedure for Cash Election. At the time of the mailing of the
Information Statement provided for in Section 6.5 hereof, PSI will send to each
holder of record of Units a cash election form (the "Form of Election")
providing such holder with the option to elect to receive the Cash Election
Price with respect to all or any portion of such holder's Units. Any such
election to receive the cash payment contemplated by Section 2.3.1 hereof shall
have been properly made only if BankBoston, N.A. (the "Exchange Agent") shall
have received at its designated office, by 5:00 p.m., New York time, on the last
business day preceding the Effective Time, a Form of Election properly
completed, as set forth in such Form of Election. Any Form of Election may be
revoked by the person submitting the same to the Exchange Agent only by written
notice received by the Exchange Agent prior to 5:00 p.m., New York time, on the
last business day before the Effective Time. In addition, all Forms of Election
shall automatically be revoked if the Exchange Agent is notified in writing by
the parties hereto that the Merger have been abandoned. The Exchange Agent may
determine whether or not elections to receive cash have been properly made or
revoked pursuant to this Section 2.5, and any such determination shall be
conclusive and binding. If the Exchange Agent determines that any election to
receive cash was not properly or timely made, the Units covered thereby shall
not be treated as Cash Election Units, and shall be converted in the Merger as
provided in Section 2.3.2 hereof. The Exchange Agent may, with the agreement of
PSI and PSP, establish such procedures, not inconsistent with this Section 2.5,
as may be necessary or desirable to implement this Section 2.5.
2.6 Conversion of Shares. At the Effective Time, the shares of
capital stock of Sub shall be converted into an aggregate of 128,000 Units.
2.7 Cancellation of Units Owned by Parent of Sub. At the Effective
Time, any Units owned by the parent of Sub (other than Units acquired pursuant
to Section 2.6 hereof) shall be cancelled and retired and no shares shall be
issuable, and no cash shall be exchangeable, with respect thereto.
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2.8 Delivery of Certificates. After the Effective Time, each holder
of Units which were converted into PSI Shares pursuant to Section 2.3.2 shall be
entitled to receive a certificate representing the number of whole PSI Shares
into which such Units shall have been converted as provided in Section 2.3.2
hereof and cash payment in lieu of fractional share interests, if any, as
provided in Section 2.4 hereof.
3. Closing.
3.1 Time and Place of Closing. If this Agreement is approved by the
limited partners of PSP, a meeting (the "Closing") shall take place as promptly
as practicable thereafter at which the applicable parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as PSI may designate. The date of the
Closing shall be referred to as the "Closing Date."
3.2 Execution and Filing of Certificate of Merger. At or before the
Closing and after approval of the limited partners of PSP, the applicable
parties shall execute the Certificate of Merger for filing with the California
Secretary of State. The Certificate of Merger shall be duly filed with the
California Secretary of State in accordance with the CRLPA.
4. Representations, Warranties and Agreements of PSP. PSP represents,
warrants and agrees with PSI that:
4.1 Authorization. Subject to approval of this Agreement by the
limited partners of PSP, (i) the execution, delivery and performance of this
Agreement by PSP has been duly authorized and approved by all necessary action
of PSP, and (ii) PSP has necessary power and authority to enter into this
Agreement, to perform its obligations hereunder and to complete the transactions
contemplated hereby.
4.2 Organization and Related Matters. PSP is a limited partnership
duly organized, existing and in good standing under the laws of the State of
California with all requisite power and authority to own, lease and operate its
properties and to carry on its business as and where now owned, leased, operated
or carried on, as the case may be; and is duly qualified to do business and is
in good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business carried on by it requires such
qualification and where the failure to so qualify would have a material adverse
effect on its business, properties, results of operations or financial
condition.
4.3 Units. PSP has outstanding 128,000 Units, all of which have been
duly and validly authorized and issued, and are fully paid and nonassessable.
There are no options or agreements to which PSP is a party or by which it is
bound calling for or requiring the issuance of additional Units.
4.4 Consents and Approvals; No Violation. Assuming approval of the
Merger and of this Agreement by the limited partners of PSP, neither the
execution and delivery of this Agreement nor the consummation by PSP of the
transactions contemplated hereby will: (i) conflict with or result in any
breach of any provision of its partnership agreement; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) where the failure to obtain such consent, approval, authorization
or permit, or to make such filing or notification, would not in the aggregate
have a material adverse effect on PSP or adversely affect the ability of PSP to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, mortgage, agreement or other instrument or obligation to
which PSP is a party or any of its properties or assets may be bound, except for
such violations, breaches and defaults which, in the aggregate, would not have a
material adverse effect on PSP or adversely affect the ability of PSP to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
this Section 4.4 are duly and timely obtained or made, violate any order, writ,
injunction, decree, statute,
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rule or regulation applicable to PSP or its properties or assets, except for
violations which would not in the aggregate have a material adverse effect on
PSP or adversely affect the ability of PSP to consummate the transactions
contemplated hereby.
4.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSP, threatened against PSP or
involving any of its properties or assets.
4.6 SEC Reports. Since January 1, 1996, PSP has filed all forms,
reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the rules
and regulations promulgated by the SEC thereunder, all of which complied in all
material respects with all applicable requirements of the federal securities
laws and such rules and regulations (collectively, the "PSP SEC Reports"). None
of the PSP SEC Reports, including without limitation any financial statements or
schedules included therein, at the time filed contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 Financial Statements. The financial statements included in the
PSP SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSP as
of their respective dates, and the results of operations of PSP for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
4.8 Absence of Certain Changes or Events. Since January 1, 1999, the
business of PSP has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 Registration Statement and Information Statement. None of
the information supplied or to be supplied by PSP for inclusion or incorporation
by reference in the S-4 Registration Statement or the Information Statement (as
such terms are defined in Section 6.5 hereof) will (i) in the case of the S-4
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) in the case of the Information
Statement, at the time of the mailing of the Information Statement and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
4.10 Insurance. All material insurance of PSP is currently in full
force and effect and PSP has reported all claims and occurrences to the extent
required by such insurance.
4.11 Disclosure. The representations and warranties by PSP in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
5. Representations, Warranties and Agreements of PSI. PSI hereby
represents, warrants and agrees with PSP that:
5.1 Authorization. The execution, delivery and performance of this
Agreement by PSI have been duly authorized and approved by all necessary
corporate action of PSI, and PSI has all necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
complete the transactions contemplated hereby.
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5.2 Organization and Related Matters. PSI is a corporation duly
organized, existing and in good standing under the laws of the State of
California, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSI.
5.3 Capital Stock. The authorized capital stock of PSI consists
solely of (i) 200,000,000 shares of Common Stock ($.10 par value), 115,965,945
of which were issued and outstanding as of December 31, 1998, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of December 31, 1998, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 11,129,650 of which were issued and outstanding as of December
31, 1998 and (iv) 200,000,000 shares of Equity Stock ($.01 par value), 225,000
of which were issued and outstanding at December 31, 1998. All of the issued
and outstanding shares of Common Stock, Class B Common Stock, Preferred Stock
and Equity Stock of PSI have been duly and validly authorized and issued, and
are fully paid and nonassessable. The issuance of the PSI Shares in the Merger
has been duly and validly authorized and, when issued and delivered as provided
in this Agreement, the PSI Shares will have been duly and validly issued, fully
paid and nonassessable; and the shareholders of PSI have no preemptive rights
with respect to any shares of capital stock of PSI.
5.4 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement nor the consummation by PSI of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) where the failure to obtain such consent, approval, authorization
or permit, or to make such filing or notification, would not in the aggregate
have a material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, mortgage, agreement or other instrument or obligation to
which PSI is a party or any of its properties or assets may be bound, except for
such violations, breaches and defaults which, in the aggregate, would not have a
material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
this Section 5.4 are duly and timely obtained or made, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to PSI or its
properties or assets, except for violations which would not in the aggregate
have a material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby.
5.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSI, threatened against PSI or
involving any of its properties or assets.
5.6 SEC Reports. Since January 1, 1996, PSI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Financial Statements. The financial statements included in PSI's
SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on
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a basis consistent with prior periods (except as otherwise noted therein), and
present fairly the financial position of PSI as of their respective dates, and
the results of operations of PSI for the periods presented therein (subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments).
5.8 Absence of Certain Changes or Events. Since January 1, 1999,
the business of PSI has been carried on only in the ordinary and usual course
and there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
5.9 S-4 Registration Statement and Information Statement. None of
the information supplied or to be supplied by PSI for inclusion or incorporation
by reference in the S-4 Registration Statement or the Information Statement (as
those terms are defined in Section 6.5 hereof) will (i) in the case of the S-4
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) in the case of the Information
Statement, at the time of the mailing of the Information Statement and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
5.10 Insurance. All material insurance of PSI is currently in full
force and effect and PSI has reported all claims and occurrences to the extent
required by such insurance.
5.11 Disclosure. The representations and warranties by PSI in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
6. Covenants and Agreements.
6.1 Ordinary Course. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, each of
PSI and PSP will carry on its business in the ordinary course in substantially
the same manner as heretofore conducted and use all reasonable efforts to: (a)
preserve intact its present business, organization and goodwill, (b) maintain
all permits, licenses and authorizations required by applicable laws, and (c)
keep available the services of its present employees and preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. PSP will not issue
any Units or debt securities convertible into Units. PSI and PSP will promptly
notify the other of any event or occurrence not in the ordinary and usual course
of business or which may have a material adverse effect on the properties or
financial condition of such party.
6.2 Action by PSP. PSP will take all action necessary in accordance
with applicable law as promptly as practicable to secure approval of this
Agreement, it being understood that the principal terms of the Agreement must be
approved by the affirmative vote of a majority of the outstanding Units.
6.3 Vote by PSI. PSI agrees to cause its subsidiary to vote its
Units in favor of the Merger prior to the mailing of the Information Statement.
6.4 Acquisition Proposals. PSP will not initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving PSP, or any purchase of all or any significant portion of its assets,
or any equity interest in it, other than the transactions contemplated hereby
(an "Acquisition Proposal"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal; provided, however, that PSP's
general partners may furnish or cause to be furnished information and may
participate in such discussions and negotiations through its representatives
with persons who have sought the same if the failure to provide such information
or participate in such negotiations and discussions might cause the general
partners of PSP to breach their fiduciary duty to the limited partners of PSP
under applicable law as advised by counsel. PSP will
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notify PSI immediately if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with PSP, and will keep PSI informed of the
status and terms of any such proposals and any such negotiations or discussions.
6.5 Registration and Information Statement. PSP will promptly
prepare and file with the SEC a preliminary information statement and notice of
action without a meeting in connection with the approval of the Merger by the
limited partners of PSP. PSI will, as promptly as practicable, prepare and file
with the SEC a registration statement on Form S-4 (the "S-4 Registration
Statement"), containing an information statement, notice of action without a
meeting and prospectus, in connection with the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the PSI Shares to be issued to
holders of Units in the Merger (such information statement, notice of action
without a meeting and prospectus, together with any amendments thereof or
supplements thereto, in each case in the form or forms to be mailed to the
limited partners of PSP, being herein called the "Information Statement"). PSI
and PSP will use their best efforts to have or cause the S-4 Registration
Statement to be declared effective as promptly as practicable, and also will
take any other action required to be taken under federal or state securities
laws, and PSP will use its best efforts to cause the Information Statement to be
mailed to its limited partners at the earliest practicable date. PSP agrees
that if at any time prior to the Effective Time any event with respect to PSP
should occur which is required to be described in an amendment of, or a
supplement to, the Information Statement or the S-4 Registration Statement, such
event shall be so described, and such amendment or supplement shall be promptly
filed with the SEC and, as required by law, disseminated to the limited partners
of PSP and (ii) the Information Statement will (with respect to PSP) comply as
to form in all material respects with the requirements of the federal securities
laws. PSI agrees that (i) if at any time prior to the Effective Time any event
with respect to PSI should occur which is required to be described in an
amendment of, or a supplement to, the Information Statement or the S-4
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the limited partners of PSP and (ii) the Information Statement
will (with respect to PSI) comply as to form in all material respects with the
requirements of the federal securities laws.
6.6 Best Efforts. Each of PSI and PSP shall: (i) promptly make its
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best efforts to promptly take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 Registration and Listing of PSI Shares. PSI will use its best
efforts to register the PSI Shares under the applicable provisions of the
Securities Act and to cause the PSI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 Distributions. PSP will not, at any time prior to the Effective
Time, declare or pay any cash distributions to its limited partners, except (i)
regular quarterly distributions at a quarterly rate not in excess of $8.70 per
Unit and (ii) distributions to limited partners of record immediately prior to
the Effective Time in an aggregate amount equal to the amount by which the
estimated Net Asset Value of PSP (as defined below) as of the Effective Time
exceeds $545 per Unit. For this purpose, the Net Asset Value of PSP is the sum
of (a) PSP's share of the fair market value as of April 30, 1999 of 40 of the
properties in which PSP has an interest, as determined by appraisal by The
Nicholson Group, Ltd., and PSP's share of a condemnation award for a wholly
condemned facility not appraised by The Nicholson Group, Ltd., (b) the book
value of PSP's non-real estate assets (excluding marketable securities) as of
the date of determination and (c) the fair value of PSP's partnership interests
in PS Business Parks, L.P. based on the average of the per share closing prices
on the American Stock Exchange of the shares of common stock of PS Business
Parks, Inc. during the 20 consecutive trading days ending on the fifth trading
day prior to the Effective Time and less (d) PSP's liabilities as of the date of
determination. The determination of book value and liabilities shall be from
PSP's financial statements prepared in accordance with generally accepted
accounting principles on a basis consistent with prior periods.
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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 Limited Partner Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved by the limited
partners of PSP as contemplated by Section 6.2.
7.1.2 Governmental and Regulatory Consents. All filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from, governmental and regulatory authorities in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the expiration of the waiting period
requirements of the HSR Act) shall have been made or obtained (as the case may
be) without material restrictions, except where the failure to obtain such
consents, approvals, permits and authorizations could not reasonably be expected
to have a material adverse effect on PSI or PSP.
7.1.3 Litigation. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) or taken any action
which prohibits the consummation of the transactions contemplated by this
Agreement and no legal action challenging such transactions shall be pending.
7.1.4 Registration Statement. The S-4 Registration Statement
shall have been declared effective and no stop order suspending effectiveness
shall have been issued, no action, suit, proceeding or investigation by the SEC
to suspend the effectiveness thereof shall have been initiated and be
continuing, and all necessary approvals under federal and state securities laws
relating to the issuance or trading of the PSI Shares shall have been received.
7.1.5 Listing of PSI Shares on NYSE. The PSI Shares shall
have been approved for listing on the NYSE upon official notice of issuance.
7.1.6 Fairness Opinion. PSP shall have received the opinion
of Robert A. Stanger & Co., Inc. in form and substance satisfactory to it to the
effect that the consideration to be received by the public limited partners of
PSP in the Merger is fair to such public limited partners from a financial point
of view, and such opinion shall not have been withdrawn or revoked.
7.1.7 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 PSP contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSP shall have performed or complied with all agreements
and covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
7.2.2 Certificate of General Partners. PSI shall have
received such certificates of the general partners of PSP as PSI may reasonably
request in connection with the Closing, to the effect that, to the best of their
knowledge, all representations and warranties of PSP contained in this Agreement
are true and correct in all material respects at and as of the Closing Date as
if made at and as of the Closing Date, and PSP has performed or
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complied with all agreements and covenants required by this Agreement to be
performed or complied with by PSP at or prior to the Closing.
7.2.3 Title to Properties; Environmental Audits. PSI in its
sole discretion shall be satisfied as to the status of title to (including the
existence and effect of liens and encumbrances), and the results of an
environmental audit of, each of the real properties owned by PSP.
7.2.4 Trading Price of PSI Shares. The average of the per
share closing prices of the PSI Shares on the NYSE during the 20 consecutive
trading days ending on the fifth trading day prior to the Effective Time (the
"Average PSI Share Price") shall be not less than $25.
7.3 Conditions to Obligations of PSP. The obligations of PSP to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSP to the extent permitted by applicable law.
7.3.1 Accuracy of Representations; Performance of Agreements.
Each of the representations and warranties of PSP contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSI shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing.
7.3.2 Certificate of Officers. PSP shall have received such
certificates of officers of PSI as PSP may reasonably request in connection with
the Closing, including upon request a certificate satisfactory to PSP of the
Chief Executive Officer and the Chief Financial Officer of PSI, to the effect
that, to the best of their knowledge, all representations and warranties of PSI
contained in this Agreement are true and correct in all material respects at and
as of the Closing Date as if made at and as of the Closing Date, and PSI has
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing.
8. Termination.
8.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after limited partner approval, by the mutual written consent of PSI and PSP.
8.2 Termination by PSI or PSP. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of PSI or by the
general partners of PSP if (i) the Merger shall not have been consummated by
December 31, 1999 (provided that the right to terminate this Agreement under
this Section 8.2 shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date); (ii) any court of
competent jurisdiction in the United States or some other governmental body or
regulatory authority shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or (iii) the limited partners of PSP shall have failed to
approve this Agreement and the transactions contemplated hereby.
8.3 Termination by PSI. This Agreement may be terminated by PSI, and
the Merger may be abandoned at any time prior to the Effective Time, as to the
defaulting party if (i) PSP shall have failed to comply in any material respect
with any of the covenants, conditions or agreements contained in this Agreement
to be complied with or performed by such party at or prior to such date of
termination, which failure to comply has not been cured within five business
days following notice to such party of such failure to comply, or (ii) any
representation or warranty of PSP contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or breach (if capable of
cure) has not been cured within five business days following notice to PSP of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
A-9
<PAGE>
8.4 Termination by PSP. This Agreement may be terminated by PSP and
the Merger may be abandoned at any time prior to the Effective Time, before or
after limited partner approval, if (i) PSI shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in this Agreement to be complied with or performed by PSI at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to PSI of such failure to comply, or (ii) any
representation or warranty of PSI contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or beach (if capable of
cure) has not been cured within five business days following notice to PSI of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Section 8, no party (or any directors, officers, employees, agents or
representatives of any party) shall have any liability or further obligation to
any other party or any person who controls a party within the meaning of the
Securities Act, except as provided in Section 9.1 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
9. Miscellaneous.
9.1 Payment of Expenses. If the Merger is consummated, PSI shall pay
all the expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby. If the
Merger is not consummated, each of PSI and PSP shall pay its own expenses,
except that any expenses incurred in connection with the printing of the S-4
Registration Statement and the Information Statement, the real estate appraisals
and environmental audits of the properties of PSP and preparation for real
estate closings, and any filing fees under the HSR Act, the Securities Act and
the Securities Exchange Act of 1934, as amended shall be paid 50% by PSI and 50%
by PSP.
9.2 Survival of Representations, Warranties and Covenants. The
respective representations and warranties of PSI and PSP contained herein or in
any certificate or document delivered pursuant hereto shall expire with and be
terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 Modification or Amendment. The parties may modify or amend this
Agreement by written agreement authorized by the Board of Directors of PSI and
the general partners of PSP and executed and delivered by the parties; provided,
however, that after approval of this Agreement by the limited partners of PSP,
no amendment shall be made which changes any of the principal terms of the
Merger or this Agreement, without the approval of such limited partners.
9.4 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the principles of conflict of laws thereof.
9.6 Interpretation. This Agreement has been negotiated by the
parties and is to be interpreted according to its fair meaning as if the parties
had prepared it together and not strictly for or against any party. Each of the
capitalized terms defined in this Agreement shall, for all purposes of this
Agreement (and whether defined in the plural and used in the singular, or vice
versa), have the respective meaning assigned to such term in the Section in
which such meaning is set forth. References in this Agreement to "parties" or a
"party" refer to parties to this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation."
A-10
<PAGE>
9.7 Headings. The descriptive headings contained in the Sections
and subsections of this Agreement are for convenience of reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
9.8 Parties in Interest. This Agreement, and the rights, interests
and obligations created by this Agreement, shall bind and inure to the benefit
of the parties and their respective successors and permitted assigns, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
9.9 Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or sent by U.S. mail, postage prepaid, addressed as follows or such
other address as the party to be notified has furnished in writing by a notice
given in accordance with this Section 9.9:
If to PSI or to Sub:
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PSP:
PS Partners III, Ltd.
c/o Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
9.11 Assignment. No rights, interests or obligations of either party
under this Agreement may be assigned or delegated without the prior written
consent of the other party.
9.12 Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations,
representations and discussions, whether written or oral.
A-11
<PAGE>
9.13 Severable Provisions. If any of the provisions of this
Agreement may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially enforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
------------------------------------
Harvey Lenkin
President
PS PARTNERS III, LTD.
By: Public Storage, Inc.,
General Partner
By: /s/ HARVEY LENKIN
-------------------------------
Harvey Lenkin
President
By: /s/ B. WAYNE HUGHES
------------------------------------
B. Wayne Hughes
General Partner
PS PARTNERS III MERGER CO., INC.
By: /s/ HARVEY LENKIN
------------------------------------
Harvey Lenkin
President
A-12
<PAGE>
Appendix B
[Letterhead of The Nicholson Group, Ltd.]
June 9, 1999
PS Partners III, Ltd.
&
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Re: PS Partners III, Ltd.
(a portfolio of 40 self-storage properties)
Gentlemen:
We have completed a limited appraisal of the aggregate Market Value of the fee
simple estate in a portfolio of 40 properties in which PS Partners III, Ltd. has
an ownership interest in and submit our findings in this brief appraisal report.
We understand that our valuation opinion will be utilized in conjunction with
the proposed acquisition of PS Partners III, Ltd's ownership interest in the
subject portfolio of properties by Public Storage, Inc. The intended users of
this report are PS Partners III, Ltd., Public Storage, Inc. and Robert A.
Stanger & Company, Inc. (in their capacity as fairness opinion provider in this
proposed portfolio acquisition). Use of this report by others is not intended
by the appraiser.
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 Professional Appraisal Practice were invoked. This appraisal is limited in
that our services have been conducted as an office service - we did not inspect
any of the properties. Furthermore, our appraisal is limited in that we have
relied primarily upon the Income Capitalization Approach in arriving at our
value opinion. Given the income-producing nature of the subject properties and
their reported stabilized historic operation levels, the Income Capitalization
Approach is considered the most applicable approach to value.
The general analytical process that was undertaken included a review of each
property's unit mix, rental rates and historical financial statements.
Following these reviews, a stabilized level of operating performance was
projected for each property. The value estimate by the Income Capitalization
Approach was made using direct capitalization and a discounted cash flow
analysis. As additional support for the indicated value for the self-storage
properties, we prepared a regression analysis on sales of self-storage
properties that have occurred throughout the nation in the last several years.
Based upon a correlation of these methodologies, we arrived at an opinion of
value for the portfolio of properties. Utilizing this methodology, in our
opinion, we have performed actions necessary to ensure a fair valuation of the
subject portfolio.
Historical operating statements, unit mix, net rentable areas, rental rates,
rent rolls and other property-specific data for the portfolio of properties
appraised were furnished by PS Partners III, Ltd. and Public Storage, Inc. This
information has been accepted as correctly representing operations and
conditions of the subject properties. We have independently conducted certain
local market research verifying competition rent surveys as provided; this
market research was completed via telephone.
<PAGE>
Assets included within the scope of our valuation include land, land
improvements, building improvements and all fixed building service equipment.
Assets excluded are furniture, fixtures, machinery and equipment, personal
property, inventory, and intangible or other business-related assets.
We have made no investigation of, nor assume any responsibility for the
existence or impact of any deferred maintenance, structural repairs or hazardous
substances, which may or may not be present on the properties, in the
development of our limited appraisal opinion.
Market Value is defined as:
the most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
1. buyer and seller are typically motivated;
2. both parties are well informed or well advised, and acting in what
they consider their best interests;
3. a reasonable time is allowed for exposure in the open market;
4. payment is made in terms of cash in United States 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 Estate is defined as:
an absolute fee, free of limitations to any particular class of heirs or
restrictions, but subject to the limitations of eminent domain, escheat,
police poser, and taxation.
Based upon the investigations and analyses as described, it is our opinion, as
of April 30, 1999, that the aggregate market value of the fee simple estate in
the PS Partners III, Ltd. 40-property portfolio, is:
Ninety-Eight Million Two Hundred Thousand Dollars
($98,200,000)
Note that this aggregate market value conclusion reflects the value of property
# 24315 (Austin, Texas) prior to any condemnation partial taking. We understand
that any sale price adjustments to PS Partners III, Ltd. to reflect the amount
of the partial taking will be made by Public Storage, Inc.
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.
<PAGE>
This brief appraisal letter report is also referred to as a Restricted Appraisal
Use 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 Use 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.
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
Respectfully submitted,
THE NICHOLSON GROUP, LTD.
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
Professional Assistance By:
Ann M. Donohoo
Anne L. Martin
attachments
<PAGE>
EXHIBIT A
Assumptions and Limiting Conditions
As agreed upon with the clients prior to the preparation of this appraisal, this
is a Limited Appraisal; it invokes the Departure Provision of the Uniform
Standards of Professional Appraisal Practice ("USPAP"). The intended user of
this appraisal is warned that the reliability of the value conclusion provided
may be impacted to the degree that there is departure from specific guidelines
of USPAP.
This is a Restricted Use 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 Use 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>
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. 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>
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 correct.
. the reported analyses, opinions and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
impartial and unbiased professional analyses, opinions and conclusions.
. I have no present or prospective interest in the properties that are the
subject of this report, and no personal interest with respect to the
parties involved.
. I have no bias with respect to the properties that are the subject of this
report or the parties involved with the assignment.
. my engagement in this assignment was not contingent upon developing or
reporting predetermined results.
. my compensation for completing this assignment is not contingent upon the
development or reporting of a predetermined value or direction in value
that favors the cause of the client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event
directly related to the intended use of this appraisal.
. 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 conformity 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.
. The subject properties have not been inspected as part of this appraisal
process.
. 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.
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
<PAGE>
$4/NOFOLIO
Appendix C
[Letterhead of Robert A. Stanger & Co., Inc.]
Form Of Opinion
PS Partners III, LTD.,
a California Limited Partnership
701 Western Avenue, Suite 200
Glendale, CA 91201-2397
Gentlemen:
We have been advised that PS Partners, III, LTD. (the "Partnership"), a
California Limited Partnership, is entering into a transaction (the
"Transaction") in which the Partnership will be merged with a subsidiary of
Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the limited partners of the Partnership
(the "Limited Partners") will be offered the option of converting their
interests in the Partnership (the "Units") into $545 of cash per Unit or shares
of PSI Common Stock with an equivalent market value based upon the average
closing prices on the New York Stock Exchange during the twenty consecutive
trading days ending five days prior to the closing date of the Transaction
(collectively, the "Consideration"). We have been further advised that the Unit
price offered to the Limited Partners is equivalent to the net asset value per
Unit based in part on an independent appraisal of the Partnership's properties.
We also have been advised that additional distributions will be made to the
Limited Partners prior to the consummation of the Transaction to the extent
required to cause the Partnership's net asset value as of the closing date of
the Transaction to be substantially equivalent to the estimate of the
Partnership's net asset value as of March 31, 1999 contained in the Information
Statement to be filed with the Securities and Exchange Commission.
The Partnership has requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide its opinion as to the fairness to the Limited Partners (excluding PSI or
its affiliates), from a financial point of view, of the Consideration to be
received in the Transaction.
In the course of our review to render this opinion, we have, among other things:
o Reviewed the Information Statement related to the Transaction to be filed
with the Securities and Exchange Commission (the "SEC");
o Reviewed the Partnership's and PSI's annual reports to shareholders filed
with the SEC on Form 10-K for the years ending December 31, 1996, 1997, and
1998, and the Form 10-Q filed as of March 31, 1999, which reports the
Partnership's management and PSI's management have indicated to be the most
current financial statements available;
o Reviewed the MAI-certified appraised value of the portfolio owned by the
Partnership as of April 30, 1999 prepared by The Nicholson Group, Ltd. (the
"Appraisal");
<PAGE>
o Reviewed information regarding purchases and sales of self-storage
properties by PSI or any affiliated entities and other information available
relating to acquisition criteria for self-storage properties;
o Reviewed internal financial analyses and forecasts prepared by the
Partnership, and based in part on the Appraisal, of the current net liquidation
value per Unit of the Partnership's assets and projections of cash flow from
operations, cash flow distributions and going-concern values per Unit for the
Partnership, including the Partnership's calculation of the allocation of such
values between the limited and general partners;
o Discussed with members of senior management of the Partnership and PSI
conditions in self-storage property markets, conditions in the market for
sales/acquisitions of properties similar to those owned by the Partnership,
current and projected operations and performance, financial condition and future
prospects of the Partnership and PSI;
o Reviewed historical market prices, trading volume and dividends for PSI
Common Stock, and secondary market transactions involving interests in the
Partnership; 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 Information Statement or that was furnished
or otherwise communicated to us by the Partnership and PSI. We have not
performed an independent appraisal of the assets and liabilities of the
Partnership or PSI and have relied upon and assumed the accuracy of the
restricted appraisal performed by The Nicholson Group, Ltd. We have also relied
on the assurance of the Partnership and PSI that any pro forma financial
statements, projections, budgets, estimates of environmental liability, or value
estimates contained in the Information Statement or otherwise provided to us,
were reasonably prepared on bases consistent with actual historical experience
and reflect the best currently available estimates and good faith judgments;
that the allocation of Consideration to the Limited Partners has been determined
by the Partnership in accordance with the provisions of the Partnership
Agreement; that no material changes have occurred in the appraised value of the
properties or the information reviewed between the date of the Appraisal or the
date of the other information provided and the date of this letter; and that the
Partnership and PSI are not aware of any information or facts that would cause
the information supplied to us to be incomplete or misleading in any material
respect.
<PAGE>
We have not been requested to, and therefore did not: (i) select the method of
determining the Consideration offered in the Transaction; (ii) make any
recommendation to the Limited Partners of the Partnership as to whether to
select the cash or Common Stock option in the Transaction; or (iii) express any
opinion as to the business decision to effect the Transaction, alternatives to
the Transaction, or tax factors resulting from the Transaction or relating to
PSI's continued qualification as a REIT. Our opinion is based on business,
economic, real estate and securities markets, and other conditions as of the
date of our analysis and addresses the Transaction in the context of information
available as of the date of our analysis. Events occurring after that date may
materially affect the assumptions used in preparing the opinion.
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that as of the date of this letter the Consideration to be received in
the Transaction is fair to the public Limited Partners of the Partnership from a
financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Partnership that our entire analysis must be considered as a whole
and that selecting portions of our analysis and the factors considered by us,
without considering all analyses and facts, could create an incomplete view of
the evaluation process underlying this opinion.
Yours truly,
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
June 30, 1999
<PAGE>
Appendix D
Proposed Amendment to Partnership Agreement
Add a new section 13.5 to the partnership agreement of PS Partners III,
Ltd. that would read in its entirety as follows:
13.5 Merger. Notwithstanding anything in the Agreement to the
contrary, the Partnership may merge with PSI or a subsidiary, provided that
such merger is approved by a Majority Vote.
<PAGE>
PS PARTNERS III, LTD.
FINANCIAL STATEMENTS OF THE PARTNERSHIP
APPENDIX E
<PAGE>
Appendix E
PS PARTNERS III, LTD.
FINANCIAL STATEMENTS OF THE PARTNERSHIP
<TABLE>
<CAPTION>
Financials at March 31, 1999
- ----------------------------
<S> <C>
Condensed Balance Sheets at March 31, 1999 (Unaudited)
and December 31, 1998 1
For the Three Months Ended March 31, 1999 and 1998 (Unaudited):
Condensed Statements of Income 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4-5
Financials at December 31, 1998
- -------------------------------
PS Partners III, Ltd.
Report of Independent Auditors 6
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 7
For the Years Ended December 31, 1998, 1997 and 1996:
Statements of Income 8
Statements of Partners' Equity 9
Statements of Cash Flows 10
Notes to Financial Statements 11-15
Financial Statements of 50 percent or less owned persons require pursuant to
Rule 3-09:
PS Business Parks, Inc. - PS Business Parks, Inc. is a registrant with the
Securities and Exchange Commission and its filings can be accessed through the
Securities and Exchange Commission.
SEI/PSP III Joint Ventures
Report of Independent Auditors 16
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 17
For the Years Ended December 31, 1998, 1997 and 1996:
Statements of Income 18
Statements of Partners' Equity 19
Statements of Cash Flows 20-21
Notes to Financial Statements 22-25
</TABLE>
<PAGE>
PS PARTNERS III, LTD.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,005,000 $ 3,122,000
Rent and other receivables 13,000 16,000
Real estate facilities, at cost:
Land 3,558,000 3,558,000
Buildings and equipment 13,096,000 13,062,000
--------------------------------
16,654,000 16,620,000
Less accumulated depreciation (7,519,000) (7,339,000)
--------------------------------
9,135,000 9,281,000
Investment in real estate entities 13,640,000 13,897,000
Other assets 59,000 21,000
--------------------------------
$23,852,000 $26,337,000
================================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable $ 348,000 $ 228,000
Advance payments from renters 101,000 82,000
Partners' equity:
Limited partners' equity, $500 per unit, 128,000
units authorized, issued and outstanding 23,085,000 25,683,000
General partner's equity 318,000 344,000
--------------------------------
Total partners' equity 23,403,000 26,027,000
--------------------------------
$23,852,000 $26,337,000
================================
</TABLE>
See accompanying notes.
Appendix E - Page 1
<PAGE>
PS PARTNERS III, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------
1999 1998
------------------------------------------
<S> <C> <C>
REVENUE:
Rental income $ 685,000 $ 682,000
Equity in earnings of real estate entities 1,350,000 669,000
Interest income 40,000 20,000
-------------------------------
2,075,000 1,371,000
-------------------------------
COSTS AND EXPENSES:
Cost of operations 252,000 231,000
Management fees 41,000 41,000
Depreciation and amortization 180,000 165,000
Administrative 26,000 22,000
-------------------------------
499,000 459,000
-------------------------------
NET INCOME $1,576,000 $ 912,000
===============================
Limited partners' share of net income
($8.95 per unit in 1999 and
$6.28 per unit in 1998) $1,145,000 $ 804,000
General partner's share of net income 431,000 108,000
-------------------------------
$1,576,000 $ 912,000
===============================
</TABLE>
See accompanying notes.
Appendix E - Page 2
<PAGE>
PS PARTNERS III, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------------
1999 1998
----------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,576,000 $ 912,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 180,000 165,000
Decrease in rent and other receivables 3,000 48,000
Increase in other assets (38,000) (5,000)
Increase (decrease) in accounts payable 120,000 (81,000)
Increase in advance payments from renters 19,000 5,000
Equity in earnings of real estate entities (1,350,000) (669,000)
-----------------------------------
Total adjustments (1,066,000) (537,000)
-----------------------------------
Net cash provided by operating activities 510,000 375,000
-----------------------------------
Cash flows provided by investing activities:
Distributions from real estate entities 1,607,000 1,026,000
Additions to real estate facilities (34,000) (71,000)
-----------------------------------
Net cash provided by investing activities 1,573,000 955,000
-----------------------------------
Cash flows used in financing activities:
Distributions to partners (4,200,000) (1,000,000)
-----------------------------------
Net cash used in financing activities (4,200,000) (1,000,000)
-----------------------------------
Net (decrease) increase in cash and cash equivalents (2,117,000) 330,000
Cash and cash equivalents at the beginning of the period 3,122,000 1,222,000
-----------------------------------
Cash and cash equivalents at the end of the period $ 1,005,000 $ 1,552,000
===================================
</TABLE>
See accompanying notes.
Appendix E - Page 3
<PAGE>
PS PARTNERS III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes
appearing in the Partnership's Form 10-K for the year ended December 31,
1998.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Partnership's financial position
at March 31, 1999, the results of operations for the three months ended
March 31, 1999 and 1998 and cash flows for the three months then ended.
3. The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
4. In January 1997, the Joint Venture, PSI, and other related partnerships
transferred a total of 35 business parks to PS Business Parks, LP
("PSBPLP"), an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the
properties transferred was the Joint Venture's business park in exchange
for a partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc.
5. Summarized combined financial data with respect to the Real Estate Entities
is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
1999 1998
<S> <C> <C>
Total revenues............................................... $32,566,000 $18,056,000
Minority interest in income.................................. $ 2,966,000 $ 2,814,000
Net income................................................... $10,809,000 $ 4,999,000
</TABLE>
6. During the first quarter of 1999, the Joint Venture and the State of Texas
("Texas") reached agreement on the terms of a conveyance, in lieu of an
exercise of the State's right of eminent domain, of a parcel of land with
improvements at the Joint Venture's East Ben White, Austin, Texas property.
Texas intends to use the parcel of land for road expansion. As a result of
the agreement, the Joint Venture received net settlement
Appendix E - Page 4
<PAGE>
PS PARTNERS III, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
6. (Continued)
proceeds of approximately $771,000. The Joint Venture recognized a gain on
the partial disposition of the property of approximately $533,000, the
Partnership's portion of which was approximately $438,000.
In March 1999, the Joint Venture and the City of Manchester, Airport
Authority ("Airport Authority") reached agreement on the terms of an
acquisition by termination, in lieu of an exercise of the City's right of
eminent domain, of the Joint Venture's Manchester, New Hampshire property.
The Airport Authority intends to use the land for the construction of an
extension of its runways and for the relocation of an adjoining road.
According to the terms of the agreement of acquisition, the Airport
Authority will acquire the property at the purchase price $2,250,000. The
Joint Venture expects the receipt of net proceeds and the close of
transaction to be completed during the second quarter of 1999.
Appendix E - Page 5
<PAGE>
Report of Independent Auditors
The Partners
PS Partners III, Ltd.
We have audited the balance sheets of PS Partners III, Ltd. as of December 31,
1998 and 1997 and the related statements of income, partners' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PS Partners III, Ltd. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
February 10, 1999
Los Angeles, CA
Appendix E - Page 6
<PAGE>
PS PARTNERS III, LTD.
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,122,000 $ 1,222,000
Rent and other receivables 16,000 133,000
Real estate facilities, at cost:
Land 3,558,000 3,558,000
Buildings and equipment 13,062,000 12,770,000
-----------------------------------
16,620,000 16,328,000
Less accumulated depreciation (7,339,000) (6,659,000)
-----------------------------------
9,281,000 9,669,000
Investment in real estate entities 13,897,000 14,813,000
Other assets 21,000 20,000
-----------------------------------
$26,337,000 $25,857,000
===================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 228,000 $ 200,000
Advance payments from renters 82,000 77,000
Partners' equity:
Limited partners' equity, $500 per unit, 128,000
units authorized, issued and outstanding 25,683,000 25,240,000
General partner's equity 344,000 340,000
-----------------------------------
Total partners' equity 26,027,000 25,580,000
-----------------------------------
$26,337,000 $25,857,000
===================================
</TABLE>
See accompanying notes.
Appendix E - Page 7
<PAGE>
PS PARTNERS III, LTD.
STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Rental income $2,764,000 $2,636,000 $2,496,000
Equity in earnings of real estate entities 3,574,000 2,691,000 2,129,000
Interest income 133,000 47,000 23,000
----------------------------------------------------
6,471,000 5,374,000 4,648,000
----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 1,022,000 992,000 956,000
Management fees 166,000 158,000 149,000
Depreciation and amortization 680,000 655,000 595,000
Administrative 156,000 146,000 139,000
---------------------------------------------------
2,024,000 1,951,000 1,839,000
----------------------------------------------------
NET INCOME $4,447,000 $3,423,000 $2,809,000
====================================================
Limited partners' share of net income
($31.30, $23.38, and $17.86 per unit in
1997, 1996, and 1995, respectively) $4,006,000 $2,993,000 $2,286,000
General partner's share of net income 441,000 430,000 523,000
----------------------------------------------------
$4,447,000 $3,423,000 $2,809,000
====================================================
</TABLE>
See accompanying notes.
Appendix E - Page 8
<PAGE>
PS PARTNERS III, LTD.
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
--------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1995 $27,980,000 $ 367,000 $28,347,000
Net income 2,286,000 523,000 2,809,000
Distributions (4,454,000) (545,000) (4,999,000)
----------------------------------------
Balances at December 31, 1996 25,812,000 345,000 26,157,000
Net income 2,993,000 430,000 3,423,000
Distributions (3,565,000) (435,000) (4,000,000)
----------------------------------------
Balances at December 31, 1997 25,240,000 340,000 25,580,000
Net income 4,006,000 441,000 4,447,000
Distributions (3,563,000) (437,000) (4,000,000)
----------------------------------------
Balances at December 31, 1998 $25,683,000 $ 344,000 $26,027,000
========================================
</TABLE>
See accompanying notes.
Appendix E - Page 9
<PAGE>
PS PARTNERS III, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,447,000 $ 3,423,000 $ 2,809,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 680,000 655,000 595,000
Decrease (increase) in rent and other receivables 117,000 (105,000) 10,000
(Increase) decrease in other assets (1,000) 31,000 (18,000)
Increase (decrease) in accounts payable 28,000 56,000 (29,000)
Increase (decrease) in advance payments from renters 5,000 (1,000) (3,000)
Equity in earnings of real estate entities (3,574,000) (2,691,000) (2,129,000)
-------------------------------------------------------
Total adjustments (2,745,000) (2,055,000) (1,574,000)
-------------------------------------------------------
Net cash provided by operating activities 1,702,000 1,368,000 1,235,000
-------------------------------------------------------
Cash flows provided by investing activities:
Distributions from real estate entities 4,490,000 3,870,000 4,152,000
Additions to real estate facilities (292,000) (305,000) (261,000)
-------------------------------------------------------
Net cash provided by investing activities 4,198,000 3,565,000 3,891,000
-------------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (4,000,000) (4,000,000) (4,999,000)
-------------------------------------------------------
Net cash used in financing activities (4,000,000) (4,000,000) (4,999,000)
-------------------------------------------------------
Net increase in cash and cash equivalents 1,900,000 933,000 127,000
Cash and cash equivalents at the beginning of the period 1,222,000 289,000 162,000
-------------------------------------------------------
Cash and cash equivalents at the end of the period $ 3,122,000 $ 1,222,000 $ 289,000
=======================================================
</TABLE>
See accompanying notes.
Appendix E - Page 10
<PAGE>
PS PARTNERS III, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
Description of Partnership
--------------------------
PS Partners III, Ltd. (the "Partnership") was formed with the proceeds
of an interstate public offering. PSI Associates II, Inc. ("PSA"), an
affiliate of Public Storage Management, Inc., organized the Partnership
along with B. Wayne Hughes ("Hughes"). In September 1993, Storage
Equities, Inc., now known as Public Storage, Inc. ("PSI") acquired the
interest of PSA relating to its general partner capital contribution in the
Partnership and was substituted as a co-general partner in place of PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator),
Public Storage, Inc. and their affiliates (collectively, "PSMI"),
culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI
into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc. was
renamed Public Storage, Inc. and it acquired substantially all of PSMI's
United States real estate operations, and became the operator of the mini-
warehouse properties in which the Partnership has an interest.
The Partnership has invested in existing mini-warehouse storage
facilities which offer self-service storage spaces for lease, usually on a
month-to-month basis, to the general public and, to a lesser extent, in an
existing business park facility which offers industrial and office space
for lease.
The Partnership has ownership interests in 41 properties in 15 states
(collectively referred to as the "Mini-Warehouse Properties"), which
exclude a property transferred to PS Business Parks, L.P. ("PSBPLP") in
January 1997. 34 of the properties are owned by SEI/PSP III Joint Ventures
(the "Joint Venture"), a general partnership between the Partnership and
PSI. The Partnership is the managing general partner of the Joint Venture,
with ownership interests in the individual properties of the Joint Venture
ranging from 49% to 89%.
As used hereinafter, the Joint Venture and PSBPLP are referred to as
the "Real Estate Entities."
Basis of Presentation
---------------------
The financial statements include the accounts of the Partnership. The
accounts of the Joint Venture, which the Partnership does not control, are
not consolidated with the Partnership and the Partnership's interest in the
Joint Venture is accounted for on the equity method.
The Partnership does not control the Joint Venture because PSI has
significant control rights with respect to the management of the
properties, including the right to compel the sale of each property in the
Joint Venture and the right to require the Partnership to submit operating
budgets.
Under the terms of the general partnership agreement of the Joint
Venture all depreciation and amortization with respect to each property is
allocated solely to the Partnership until the limited partners recover
their initial capital contribution. Thereafter, all depreciation and
amortization is allocated solely to PSI until it recovers its initial
capital contribution. All remaining depreciation and amortization is
allocated to the Partnership and PSI in proportion to their ownership
percentages.
Appendix E - Page 11
<PAGE>
PS PARTNERS III, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
(Continued)
-----------
Under the terms of the general partnership agreement of the Joint
Venture, for property acquisitions in which PSI issued convertible
securities to the sellers for its interest, PSI's rights to receive cash
flow distributions from the partnerships for any year after the first year
of operation are subordinated to cash distributions to the Partnership
equal to a cumulative annual 7% of its cash investment (not compounded).
These agreements also specify that upon sale or refinancing of a property
for more than its original purchase price, distribution of proceeds to PSI
is subordinated to the return to the Partnership of the amount of its cash
investment and the 7% distribution described above.
Depreciation and amortization
-----------------------------
The Partnership and the Joint Venture depreciate the buildings and
equipment on a straight-line method over estimated useful lives of 25 and 5
years, respectively. Leasing commissions relating to business park
properties are expensed when incurred.
Revenue Recognition
-------------------
Property rents are recognized as earned.
Allocation of Net Income
------------------------
The General Partners' share of net income consists of an amount
attributable to their 1% capital contribution and an additional percentage
of cash flow (as defined, see Note 4) which relates to the General
Partners' share of cash distributions as set forth in the Partnership
Agreement. All remaining net income is allocated to the limited partners.
Per Unit Data
-------------
Per unit data is based on the number of limited partnership units
(128,000) outstanding during the year.
Cash Distributions
------------------
The Partnership Agreement provides for quarterly distributions of cash
flow from operations (as defined). Cash distributions per unit were
$27.84, $27.84, and $34.80 for 1998, 1997, and 1996, respectively.
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Partnership considers all highly
liquid investments purchased with a maturity of three months or less to be
cash equivalents.
Appendix E - Page 12
<PAGE>
PS PARTNERS III, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
(Continued)
-----------
Environmental Cost
------------------
Substantially all of the real estate facilities in which the
Partnership has an interest were acquired prior to the time that it was
customary to conduct extensive environmental investigations in connection
with the property acquisitions. During the fourth quarter of 1995, an
independent environmental consulting firm completed environmental
assessments on the properties of the Partnership and the Joint Venture to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. Although there can be no assurance, the
Partnership is not aware of any environmental contamination of the Mini-
Warehouse Properties which individually or in the aggregate would be
material to the Partnership's overall business, financial condition, or
results of operations.
Segment Reporting
-----------------
Effective January 1, 1998, the Partnership adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS
No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Partnership only has one
reportable segment as defined within SFAS No. 131, therefore the adoption
of SFAS No. 131 had no effect the Partnership's disclosures.
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. Real Estate Facilities
----------------------
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the method of accounting for long-lived assets that are expected
to be disposed. The Partnership adopted Statement 121 in 1996 and the
adoption had no effect.
3. Investment in Real Estate Entities
----------------------------------
During 1998, 1997, and 1996, the Partnership recognized earnings from
the Real Estate Entities of $3,574,000, $2,691,000 and $2,129,000,
respectively, and received cash distributions totaling $4,490,000,
$3,870,000, and $4,152,000, respectively from the Real Estate Entities.
Appendix E - Page 13
<PAGE>
PS PARTNERS III, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Investment in Real Estate Entities (Continued)
----------------------------------------------
The accounting policies of the Real Estate Entities are similar to
that of the Partnership. Summarized combined financial data with respect to
the Real Estate Entities are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
<S> <C> <C>
For the year ended December 31,
Total revenues $103,798,000 $ 44,619,000
Minority interest in income 11,208,000 8,566,000
Net income 35,036,000 9,318,000
At December 31,
Total assets, net of accumulated depreciation $751,932,000 $367,590,000
Total liabilities 67,609,000 12,962,000
Total minority interest 153,015,000 168,665,000
Total equity 531,308,000 185,963,000
</TABLE>
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entities for the year
ended December 31, 1998 and at December 31, 1998, respectively, as compared
to prior periods, is the result of additional properties acquired by PSBLP
during 1997 and 1998. PSI has a significant interest in PSBPLP.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K for 1998, in Item 14. PS Business Parks, Inc. is a
registrant with the Securities and Exchange Commission, and its filings can
be accessed through the Securities and Exchange Commission.
4. General Partners' Equity
------------------------
The General Partners have a 1% interest in the Partnership. In
addition, the General Partners have a 10% interest in cash distributions
attributable to operations, exclusive of distributions attributable to
sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed entirely to
the limited partners until the limited partners recover their investment
plus a cumulative 8% annual return (not compounded); thereafter, the
General Partners have a 15% interest in remaining proceeds.
5. Related Party Transactions
--------------------------
The Partnership has a management agreement with PSI whereby PSI
operates the Mini-Warehouse Properties for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In January 1997, the Joint Venture transferred its business park
facility to PSBPLP in exchange for a partnership interest in PSBPLP.
PSI has a significant economic interest in PSBPLP.
Appendix E - Page 14
<PAGE>
PS PARTNERS III, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
6. Leases
------
The Partnership has invested primarily in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease to the
general public. Leases for such space are usually on a month-to-month
basis.
7. Taxes Based on Income
---------------------
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $5,447,000, $6,537,000 and $2,358,000
for the years ended December 31, 1998, 1997 and 1996, respectively. The
difference between taxable income and book income is primarily related to
timing differences in depreciation expense.
Appendix E - Page 15
<PAGE>
Report of Independent Auditors
The Partners
SEI/PSP III Joint Ventures
We have audited the balance sheets of the SEI/PSP III Joint Ventures as of
December 31, 1998 and 1997 and the related statements of income, partners'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Joint
Ventures' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the SEI/PSP III Joint Ventures
at December 31, 1998 and 1997, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
February 10, 1999
Los Angeles, CA
Appendix E - Page 16
<PAGE>
SEI/PSP III JOINT VENTURES
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 303,000 $ 233,000
Rent and other receivables 96,000 111,000
Real estate facilities, at cost:
Land 10,298,000 10,298,000
Buildings and equipment 57,195,000 56,161,000
--------------------------------
67,493,000 66,459,000
Less accumulated depreciation (31,226,000) (28,399,000)
--------------------------------
36,267,000 38,060,000
Investment in real estate entity 5,723,000 5,608,000
Other assets 129,000 124,000
--------------------------------
$ 42,518,000 $ 44,136,000
================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 706,000 $ 732,000
Advance payments from renters 409,000 399,000
Partners' equity:
PS Partners III, Ltd. 13,897,000 14,813,000
Public Storage, Inc. 27,506,000 28,192,000
--------------------------------
Total partners' equity 41,403,000 43,005,000
--------------------------------
$ 42,518,000 $ 44,136,000
================================
</TABLE>
See accompanying notes.
Appendix E - Page 17
<PAGE>
SEI/PSP III JOINT VENTURES
STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Rental income $13,049,000 $12,697,000 $13,345,000
Equity in earnings of real estate entity 489,000 344,000 -
-----------------------------------------------------
13,538,000 13,041,000 13,345,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 4,292,000 4,114,000 4,372,000
Management fees 783,000 762,000 792,000
Depreciation and amortization 2,827,000 2,683,000 2,946,000
-----------------------------------------------------
7,902,000 7,559,000 8,110,000
-----------------------------------------------------
NET INCOME $ 5,636,000 $ 5,482,000 $ 5,235,000
=====================================================
Partners' share of net income:
PS Partners III, Ltd.'s share $ 3,574,000 $ 2,691,000 $ 2,129,000
Public Storage Inc.'s share 2,062,000 2,791,000 3,106,000
-----------------------------------------------------
$ 5,636,000 $ 5,482,000 $ 5,235,000
=====================================================
</TABLE>
See accompanying notes.
Appendix E - Page 18
<PAGE>
SEI/PSP III JOINT VENTURES
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
PS Partners Public Storage
III, Ltd. Inc. Total
-------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1995 $18,015,000 $28,183,000 $46,198,000
Net income 2,129,000 3,106,000 5,235,000
Distributions (4,152,000) (2,992,000) (7,144,000)
---------------------------------------------
Balances at December 31, 1996 15,992,000 28,297,000 44,289,000
Net income 2,691,000 2,791,000 5,482,000
Distributions (3,870,000) (2,896,000) (6,766,000)
---------------------------------------------
Balances at December 31, 1997 14,813,000 28,192,000 43,005,000
Net income 3,574,000 2,062,000 5,636,000
Distributions (4,490,000) (2,748,000) (7,238,000)
---------------------------------------------
Balances at December 31, 1998 $13,897,000 $27,506,000 $41,403,000
=============================================
</TABLE>
See accompanying notes.
Appendix E - Page 19
<PAGE>
SEI/PSP III JOINT VENTURES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,636,000 $ 5,482,000 $ 5,235,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,827,000 2,683,000 2,946,000
Decrease (increase) in rent and other receivables 15,000 (16,000) (34,000)
(Increase) decrease in other assets (5,000) 100,000 (78,000)
Decrease in accounts payable (26,000) (18,000) (10,000)
Increase (decrease) in advance payments from renters 10,000 (34,000) (1,000)
Equity in earnings of real estate entity (489,000) (344,000) -
-----------------------------------------
Total adjustments 2,332,000 2,371,000 2,823,000
-----------------------------------------
Net cash provided by operating activities 7,968,000 7,853,000 8,058,000
-----------------------------------------
Cash flows used in investing activities:
Distributions from real estate entity 374,000 135,000 -
Additions to real estate facilities (1,034,000) (1,229,000) (967,000)
-----------------------------------------
Net cash used in investing activities (660,000) (1,094,000) (967,000)
-----------------------------------------
Cash flows used in financing activities:
Distributions to partners (7,238,000) (6,766,000) (7,144,000)
-----------------------------------------
Net cash used in financing activities (7,238,000) (6,766,000) (7,144,000)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 70,000 (7,000) (53,000)
Cash and cash equivalents at the beginning of the period 233,000 240,000 293,000
-----------------------------------------
Cash and cash equivalents at the end of the period $ 303,000 $ 233,000 $ 240,000
=========================================
</TABLE>
See accompanying notes.
Appendix E - Page 20
<PAGE>
SEI/PSP III JOINT VENTURES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Investment in real estate entity $- $(5,399,000) $-
Transfer of real estate facility for interest in real estate
entity, net - 5,399,000 -
</TABLE>
See accompanying notes.
Appendix E - Page 21
<PAGE>
SEI/PSP III JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Description of Partnership
---------------------------
SEI/PSP III Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 23 separate
general partnerships between Public Storage Inc. ("PSI") and PS Partners
III, Ltd. ("PSP III"). The Joint Venture, through its predecessor general
partnerships, invested in existing mini-warehouse facilities which offer
self-service storage spaces for lease, usually on a month-to-month basis,
to the general public and, to a lesser extent, in existing business park
facilities which offer industrial and office space for lease.
The Joint Venture owns 34 properties (referred to hereinafter as the
"Mini-Warehouses"), which excludes one property which was transferred to PS
Business Parks, L.P. ("PSBPLP") in January 1997. PSP III is the managing
general partner of the Joint Venture, with its ownership interests in the
properties of the Joint Venture ranging from 49% to 89%.
2. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
Basis of Presentation
---------------------
The financial statements include the accounts of the Joint Venture.
Under the terms of the general partnership agreement of the Joint
Venture, for property acquisitions in which PSI issued convertible
securities to the sellers for its interest, PSI's right to receive cash
flow distributions for any year after the first year of operation are
subordinated to cash distributions to PSP III equal to a cumulative annual
7% of its cash investment (not compounded). In addition, upon sale or
refinancing of a property for more than its original purchase price,
distribution of proceeds to PSI is subordinated to the return to PSP III of
the amount of its cash investment and the 7% distribution described above.
Depreciation and amortization
-----------------------------
The Joint Venture depreciates the buildings and equipment on a
straight-line method over estimated useful lives of 25 and 5 years,
respectively. Leasing commissions relating to business park properties are
expensed when incurred.
Revenue Recognition
-------------------
Property rents are recognized as earned.
Allocation of Net Income to PSP III and PSI
-------------------------------------------
Net income prior to depreciation is allocated to PSP III and PSI based
upon their relative ownership interest in each property and the results of
each property.
Under the terms of the general partnership agreement of the Joint
Venture all depreciation and amortization with respect to each Joint
Venture is allocated solely to PSP III until it recovers its initial
capital contribution. Thereafter, all depreciation and amortization is
allocated solely to PSI until it recovers its initial capital contribution.
All remaining depreciation and amortization is allocated to PSP III and PSI
in proportion to their ownership percentages.
Appendix E - Page 22
<PAGE>
SEI/PSP III JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
2. Summary of Significant Accounting Policies and Partnership Matters
------------------------------------------------------------------
(Continued)
-----------
Cash Distributions
------------------
The general partnership agreement of the Joint Venture provides for
regular distributions of cash flow from operations (as defined).
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Joint Venture considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
Environmental Cost
------------------
Substantially all of the real estate facilities in which the Joint
Venture has an interest were acquired prior to the time that it was
customary to conduct extensive environmental investigations in connection
with the property acquisitions. During the fourth quarter of 1995, an
independent environmental consulting firm completed environmental
assessments on the Joint Venture's properties to evaluate the environmental
condition of, and potential environmental liabilities of such properties.
Although there can be no assurance, the Joint Venture is not aware of any
environmental contamination of the Mini-Warehouses which individually or in
the aggregate would be material to the Joint Venture's overall business,
financial condition or results of operations.
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Segment Reporting
-----------------
Effective January 1, 1998, the Joint Venture adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS
No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Joint Venture only has one
reportable segment as defined within SFAS No. 131, therefore the adoption
of SFAS No. 131 had no effect the Joint Venture's disclosures.
3. Real Estate Facilities
----------------------
The State of Texas, Department of Transportation and the Joint Venture
reached agreement on the terms of a conveyance in lieu of an exercise of
the State's right of eminent domain of a parcel of land at the Joint
Venture's East Ben White, Austin, Texas property. In January 1999, the
Joint Venture received net settlement proceeds of approximately $771,000.
The Joint Venture does not anticipate the recognition of a loss in 1999 as
a result of the settlement.
Appendix E - Page 23
<PAGE>
SEI/PSP III JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
3. Real Estate Facilities (Continued)
---------------------------------
The City of Manchester, Airport Authority ("Airport Authority")
intends to acquire the Joint Venture's Manchester, New Hampshire property
either through the exercise of its right of eminent domain or pursuant to a
conveyance in lieu of an exercise of such power. The Airport Authority
intends to construct an extension of its runways, and relocate an adjoining
road. The Joint Venture is currently negotiating with the Airport
Authority to determine an equitable reparation settlement. The Joint
Venture does not anticipate the recognition of a loss as a result of the
taking.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the method of accounting for long-lived assets that are expected
to be disposed. The Joint Venture adopted Statement 121 in 1996 and the
adoption had no effect.
In January 1997, the Joint Venture, PSI and other affiliated
partnerships of PSI transferred a total of 35 business parks to PSBPLP, an
operating partnership formed to own and operate business parks in which PSI
has a significant interest. Included among the properties transferred was
the Joint Venture's business park in exchange for a partnership interest in
PSBPLP. The general partner of PSBPLP is PS Business Parks, Inc. ("PSBP").
4. Investment in real estate entity
--------------------------------
In 1998 and 1997, the Joint Venture recognized $489,000 and $344,000,
respectively, in equity in earnings of real estate entity with respect to
the investment in PSBPLP, described in Note 3 above.
The accounting policies of PSBPLP are similar to that of the Joint
Venture. Summarized combined financial data with respect to PSBPLP is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------ --------------------
<S> <C> <C>
For the year ended December 31,
Total revenues $ 90,260,000 $ 31,578,000
Minority interest in income 11,208,000 8,566,000
Net income 29,400,000 3,836,000
At December 31,
Total assets, net of accumulated depreciation $709,414,000 $323,454,000
Total liabilities 66,494,000 11,831,000
Total minority interest 153,015,000 168,665,000
Total equity 489,905,000 142,958,000
</TABLE>
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entity for the year
ended December 31, 1998 and at December 31, 1998, respectively, as compared
to prior periods, is the result of additional properties acquired by PSBLP
during 1997 and 1998. PSI has a significant interest in PSBPLP.
Appendix E - Page 24
<PAGE>
SEI/PSP III JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
4. Investment in real estate entity (continued)
--------------------------------------------
PS Business Parks, Inc., which owns PSBPLP, is a registrant with the
Securities and Exchange Commission, and its filings can be accessed through
the Securities and Exchange Commission.
5. Related Party Transactions
--------------------------
The Joint Venture has a management agreement with PSI whereby PSI
operates the Mini-Warehouses for a fee equal to 6% of the facilities'
monthly gross revenue (as defined).
In January 1997, the Joint Venture transferred its business park
facility to PSBPLP in exchange for a partnership interest in PSBPLP.
PSI has a significant economic interest in PSBPLP and PSBP.
6. Leases
------
The Joint Venture has invested primarily in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease to the
general public. Leases for such space are usually on a month-to-month
basis.
7. Taxes Based on Income
---------------------
Taxes based on income are the responsibility of PSP III and PSI and,
accordingly, the Joint Venture's financial statements do not reflect a
provision for such taxes.
Unaudited taxable net income was $5,640,000, $5,735,000 and $1,407,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The
difference between taxable income and book income is primarily related to
timing differences in depreciation expense.
Appendix E - Page 25
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
APPENDIX F
<PAGE>
Appendix F
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<S> <C>
Forward Looking Statements 1
Results of Operations - Financials at March 31, 1999
- ----------------------------------------------------
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998 1
Supplemental Property Data 2
Liquidity and Capital Resources 2
Results of Operations - Financials at December 31, 1998
- --------------------------------------------------------
Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997: 3
Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996: 4
Supplemental Property Data 4
Impact of Year 2000 5-6
</TABLE>
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward looking" statements that involve risks and
uncertainties and are based upon a number of assumptions. Actual results and
trends may differ materially depending upon a number of factors. Information
regarding these factors is contained in the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
Results of Operations Financials at March 31, 1999
- ---------------------------------------------------
Three months ended March 31, 1999 compared to three months ended March 31, 1998:
The Partnership's net income for the three months ended March 31, 1999 was
$1,576,000 compared to $912,000 for the three months ended March 31, 1998,
representing an increase of $664,000, or 73%. The increase was primarily due to
the Partnership's share of the gain on the disposition of a portion of the Joint
Venture's East Ben White property of $438,000, combined with a decrease in
depreciation allocated to the Partnership with respect to the Joint Venture,
partially offset by a decrease in the Partnership's share of property operations
at the real estate facilities in which the Partnership has an interest.
Excluding the effect of the partial disposition of the property, the
Partnership's net income for the three months ended March 31, 1999 was
$1,138,000 compared to $912,000 for the three months ended March 31, 1998,
representing an increase of $226,000, or 25%.
Rental income for the Partnership's wholly-owned mini-warehouse properties
was $685,000 compared to $682,000 for the three months ended March 31, 1999 and
1998, respectively, representing an increase of $3,000. Cost of operations
(including management fees) increased $21,000, or 8%, to $293,000 from $272,000
for the three months ended March 31, 1999 and 1998, respectively. Accordingly,
for the Partnership's wholly-owned mini-warehouse properties, property net
operating income decreased by $18,000, or 5%, from $410,000 to $392,000 for the
three months ended March 31, 1998 and 1999, respectively.
Equity in Earnings of Real Estate Entities: Equity in earnings of real
------------------------------------------
estate entities was $1,350,000 in the three months ended March 31, 1999 as
compared to $669,000 during the three months ended March 31, 1998, representing
an increase of $681,000, or 102%. This increase was due primarily to the
Partnership's share of the gain on the disposition of a portion of the Joint
Venture's East Ben White property of $438,000, combined with a decrease in
depreciation allocated to the Partnership with respect to the Joint Venture,
partially offset by a decrease in the Partnership's share of operating results
at the Joint Venture's mini-warehouse properties. Excluding the effect of the
partial disposition of the property, equity in earnings of real estate entities
was $912,000 compared to $669,000 for the three months ended March 31, 1999 and
1998, respectively, representing an increase of $243,000, or 36%.
Appendix F - Page 1
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization: Depreciation and amortization increased
-----------------------------
$15,000, or 9%, from $165,000 to $180,000 for the three months ended March 31,
1998 and 1999, respectively. This increase was primarily attributable to the
depreciation of capital expenditures made during 1998 and 1999.
Supplemental Property Data
- --------------------------
Most of the Partnership's net income is from the Partnership's share of the
operating results of the Mini-Warehouse Properties. Therefore, in order to
evaluate the Partnership's operating results, the General Partners analyze the
operating performance of the Mini-Warehouse Properties. Because of the partial
condemnation of the Joint Venture's East Ben White facility, the operating
results of the East Ben White property are not comparable on a 1999 to 1998
basis. Consequently, the amounts described below exclude the operations of the
East Ben White property.
Three months ended March 31, 1999 compared to three months ended March 31,
--------------------------------------------------------------------------
1998: Rental income for the Mini-Warehouse Properties was $3,864,000 compared
- ----
to $3,801,000 for the three months ended March 31, 1999 and 1998, respectively,
representing an increase of $63,000, or 2%. The increase in rental income was
primarily attributable to increased rental rates, partially offset by a decrease
in average occupancy rates. The monthly average realized rent per square foot
for the Mini-Warehouse Properties was $.62 compared to $.59 for the three months
ended March 31, 1999 and 1998, respectively. The weighted average occupancy
levels at the Mini-Warehouse Properties decreased from 89% to 87% for the three
months ended March 31, 1998 and 1999, respectively. Cost of operations
(including management fees) increased $161,000, or 11%, to $1,642,000 from
$1,481,000 for the three months ended March 31, 1999 and 1998, respectively.
This increase was primarily attributable to increases in advertising, payroll,
repairs and maintenance, and property tax expenses. Accordingly, for the Mini-
Warehouse Properties, property net operating income decreased by $98,000, or 4%,
from $2,320,000 to $2,222,000 for the three months ended March 31, 1998 and
1999, respectively.
Liquidity and Capital Resources
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and long-term basis, primarily from internally generated
cash from property operations and cash reserves. Cash generated from operations
and distributions from real estate entities ($2,117,000 for the three months
ended March 31, 1999) has been sufficient to meet all current obligations of the
Partnership.
During 1999, the Partnership anticipates approximately $194,000 of capital
improvements with respect to the Partnership's wholly-owned facilities. Total
capital improvements were $34,000 for the three months ended March 31, 1999 with
respect to these properties.
Appendix F - Page 2
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Partnership paid distributions to the limited and general partners
totaling $3,742,000 ($29.23 per unit) and $458,000, respectively, during the
first three months of 1999. Included in these distributions were special
distributions of a portion of the Partnership's operating reserve to the limited
and general partners totaling approximately $2,851,000 ($22.27 per unit) and
$349,000, respectively. Future distribution rates may be adjusted to levels
which are supported by operating cash flow after capital improvements and any
other necessary obligations.
Results of Operations - Financial at December 31, 1998
- ------------------------------------------------------
Year ended December 31, 1998 compared to year ended December 31, 1997:
The Partnership's net income was $4,447,000 in 1998 compared to $3,423,000
in 1997, representing an increase of $1,024,000, or 29.9%. The increase is due
primarily to the Partnership's share of an improvement in operations of the
mini-warehouses in which the Partnership has an interest (the "Mini-Warehouse
Properties") and a decrease in depreciation allocated to the Partnership with
respect to the Joint Venture.
Property Operations: Rental income for the Partnership's wholly-owned
-------------------
mini-warehouse properties was $2,764,000 in 1998 compared to $2,636,000 during
1997, representing an increase of $128,000, or 4.9%. Cost of operations
(including management fees) increased $38,000, or 3.3%, to $1,188,000 in 1998
from $1,150,000 in 1997. Accordingly, for the Partnership's wholly-owned mini-
warehouse properties, net operating income increased by $90,000, or 6.1%, from
$1,486,000 in 1997 to $1,576,000 during 1998.
Equity in Earnings of Real Estate Entities: Equity in earnings of real
------------------------------------------
estate entities was $3,574,000 in 1998 as compared to $2,691,000 during 1997,
representing an increase of $883,000, or 32.8%. This increase was due primarily
to the Partnership's share of improved operating results at the Joint Venture's
mini-warehouse properties, as well as a decrease in depreciation expense
allocated to the Partnership with respect to the Joint Venture.
Depreciation and Amortization: Depreciation and amortization for the
-----------------------------
Partnership's wholly-owned properties increased $25,000, or 3.8% from $655,000
in 1997 to $680,000 in 1998. This increase was primarily attributable to the
depreciation of capital expenditures made during 1997 and 1998.
Appendix F - Page 3
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to year ended December 31, 1996:
The Partnership's net income was $3,423,000 in 1997 compared to $2,809,000
in 1996, representing an increase of $614,000, or 21.9%. The increase is due
primarily to the Partnership share of an improvement in operations of the mini-
warehouses in which the Partnership has an interest and a decrease in
depreciation allocated to the Partnership with respect to the Joint Venture.
Property Operations: Rental income for the Partnership's wholly-owned
-------------------
mini-warehouse properties was $2,636,000 in 1997 compared to $2,496,000 during
1996, representing an increase of $140,000, or 5.6%. Cost of operations
(including management fees) increased $45,000, or 4.1%, to $1,150,000 in 1997
from $1,105,000 in 1996. Accordingly, for the Partnership's wholly-owned mini-
warehouse properties, net operating income increased by $95,000, or 6.8%, from
$1,391,000 in 1996 to $1,486,000 during 1997.
Equity in Earnings of Real Estate Entities: Equity in earnings of real
------------------------------------------
estate entities was $2,691,000 in 1997 as compared to $2,129,000 during 1996,
representing an increase of $562,000, or 26.4%. This increase was due primarily
to the Partnership's share of improved operating results at the Joint Venture's
mini-warehouse properties, as well as a decrease in depreciation expense
allocated to the Partnership with respect to the Joint Venture.
Depreciation and Amortization: Depreciation and amortization for the
-----------------------------
Partnership's wholly-owned properties increased $60,000, or 10.1% from $595,000
in 1996 to $655,000 in 1997. This increase was primarily attributable to the
depreciation of capital expenditures made during 1996 and 1997.
Supplemental Property Data
- --------------------------
During 1998 and 1997, a majority of the Partnership's net income was from
the Partnership's share of the operating results of the Mini-Warehouse
Properties. Therefore, in order to evaluate the Partnership's operating
results, the General Partners analyze the operating performance of the Mini-
Warehouse Properties.
Year ended December 31, 1998 compared to the year ended December 31, 1997:
-------------------------------------------------------------------------
Rental income for the Mini-Warehouse Properties was $15,813,000 in 1998 compared
to $15,333,000 during 1997, representing an increase of $480,000, or 3.1%. The
increase in rental income was primarily attributable to increased rental rates,
partially offset by decreased average occupancy levels. The monthly average
realized rent per square foot was $.61 in 1998 compared to $.58 in 1997. The
weighted average occupancy levels decreased from 90% in 1997 to 89% in 1998.
Cost of operations (including management fees) increased $237,000, or 3.9%, to
$6,263,000 during 1998 from $6,026,000 in 1997. This increase was primarily
attributable to increases in advertising and property tax
Appendix F - Page 4
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expenses. Accordingly, for the Mini-Warehouse Properties, property net
operating income increased by $243,000, or 2.6%, from $9,307,000 in 1997 to
$9,550,000 during 1998.
Year ended December 31, 1997 compared to the year ended December 31, 1996:
-------------------------------------------------------------------------
Rental income for the Mini-Warehouse Properties was $15,333,000 in 1997 compared
to $14,855,000 during 1996, representing an increase of $478,000, or 3.2%. The
increase in rental income was primarily attributable to increased rental rates,
partially offset by decreased average occupancy levels. The monthly average
realized rent per square foot was $.58 in 1997 compared to $.56 in 1996. The
weighted average occupancy levels decreased from 91% in 1996 to 90% in 1997.
Cost of operations (including management fees) increased $227,000, or 4.0%, to
$6,026,000 during 1997 from $5,799,000 in 1996. This increase was primarily
attributable to increases in advertising, property tax, and management expenses.
Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $251,000, or 2.8%, from $9,056,000 in 1996 to $9,307,000 during
1997.
Impact of Year 2000
- -------------------
The Partnership utilizes PSI's information systems in connection with a
cost sharing and administrative services agreement. PSI has completed an
assessment of all of its hardware and software applications to identify
susceptibility to what is commonly referred to as the "Y2K Issue" whereby
certain computer programs have been written using two digits rather than four to
define the applicable year. Any of PSI's computer programs or hardware with the
Y2K Issue that have date-sensitive applications or embedded chips may recognize
a date using "00" as the year 1900 rather than the year 2000, resulting in
miscalculations or system failure causing disruptions of operations.
PSI has two phases in its process with respect to each of its systems; i)
assessment, whereby PSI evaluates whether the system is Y2K compliant and
identifies the plan of action with respect to remediating any Y2K issues
identified and ii) implementation, whereby PSI completes the plan of action
prepared in the assessment phase and verifies that Y2K compliance has been
achieved.
Many of PSI's critical applications, relative to the direct management of
properties, have recently been replaced and PSI believes they are already Year
2000 compliant. PSI has an implementation in process on the remaining critical
applications, including its general ledger and related systems, that are
believed to have Y2K issues. PSI expects the implementation to be complete by
June 1999. Contingency plans have been developed for use in case PSI's
implementations are not completed on a timely basis. While PSI presently
believes that the impact of the Y2K Issue on its systems can be mitigated, if
PSI's plan for ensuring Year 2000 Compliance and the related contingency plans
were to fail, be insufficient, or not be implemented on a timely basis,
Partnership operations could be materially impacted.
Appendix F - Page 5
<PAGE>
PS PARTNERS III, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain of PSI's other non-computer related systems that may be impacted by
the Y2K Issue, such as security systems, are currently being evaluated, and PSI
expects the evaluation to be complete by June 1999. PSI expects the
implementation of any required solutions to be complete in advance of December
31, 1999. PSI has not fully evaluated the impact of lack of Year 2000
compliance on these systems, but has no reason to believe that lack of
compliance would materially impact the Partnership's operations.
The Partnership exchanges electronic data with certain outside vendors in
the banking and payroll processing areas. The Partnership has been advised by
these vendors that their systems are or will be Year 2000 compliant, but has
requested a Year 2000 compliance certification from these entities. The
Partnership is not aware of any other vendors, suppliers, or other external
agents with a Y2K Issue that would materially impact the Partnership's results
of operations, liquidity, or capital resources. However, the Partnership has no
means of ensuring that external agents will be Year 2000 compliant, and there
can be no assurance that the Partnership has identified all such external
agents. The inability of external agents to complete their Year 2000 compliance
process in a timely fashion could materially impact the Partnership. The effect
of non-compliance by external agents is not determinable.
The cost of the PSI's year 2000 compliance activities (which primarily
consists of the costs of new systems) to be allocated to the Partnership and the
Joint Venture is estimated at approximately $184,000. These costs are
capitalized. PSI's year 2000 compliance efforts have not resulted in any
significant deferrals in other information system projects.
The costs of the projects and the date on which PSI and the Partnership
expect to achieve Year 2000 Compliance are based upon management's best
estimates, and were derived utilizing numerous assumptions of future events.
There can be no assurance that these estimates will be achieved, and actual
results could differ materially from those anticipated. There can be no
assurance that the Partnership or PSI has identified all potential Y2K Issues
either within the Partnership, at PSI, or at external agents. In addition, the
impact of the Y2K issue on governmental entities and utility providers and the
resultant impact on the Partnership, as well as disruptions in the general
economy, may be material but cannot be reasonably determined or quantified.
Appendix F - Page 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 3.23) 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, 1998 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 1.(i) and 1.(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 (5)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
7. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
8. Except as permitted by General Instruction H to Form S-4 (in a
transaction not covered by General Instruction I), to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
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 30th day of June, 1999.
PUBLIC STORAGE, INC.
By: HARVEY LENKIN
------------------------------------
Harvey Lenkin, President
Each person whose signature appears below hereby authorizes B. Wayne Hughes
and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on his behalf,
individually and in each capacity stated below, any amendment, including post-
effective amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
Chairman of the Board, Chief Executive
B. WAYNE HUGHES Officer and Director (principal executive June 30, 1999
________________________ officer)
B. Wayne Hughes
HARVEY LENKIN President and Director June 30, 1999
________________________
Harvey Lenkin
B. WAYNE HUGHES, JR. Vice President and Director June 30, 1999
________________________
B. Wayne Hughes, Jr.
Senior Vice President and Chief
JOHN REYES Financial Officer (principal financial June 30, 1999
________________________ officer and principal accounting officer)
John Reyes
ROBERT J. ABERNETHY Director June 30, 1999
________________________
Robert J. Abernethy
DANN V. ANGELOFF Director June 30, 1999
________________________
Dann V. Angeloff
WILLIAM C. BAKER Director June 30, 1999
________________________
William C. Baker
THOMAS J. BARRACK, JR. Director June 30, 1999
________________________
Thomas J. Barrack, Jr.
URI P. HARKHAM Director June 30, 1999
________________________
Uri P. Harkham
Director
________________________
Daniel C. Staton
Senior Vice President and Director
________________________
Marvin M. Lotz
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization among Registrant, PS Partners III
Merger Co., Inc. and PS Partners III, Ltd. dated as of June 10, 1999
(filed as Appendix A to the Information Statement and Prospectus).
3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 33-54557 and incorporated herein by
reference.
3.2 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series A. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock,
Series B. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the 9.20% Cumulative
Preferred Stock, Series B. Filed with Registrant's Registration
Statement No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the 8.25% Convertible Preferred
Stock. Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Cumulative
Preferred Stock, Series C. Filed with Registrant's Registration
Statement No. 33-54557 and incorporated herein by reference.
3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock,
Series D. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.50% Cumulative Preferred Stock, Series D and
incorporated herein by reference.
3.8 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series E. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 10% Cumulative Preferred Stock, Series E and
incorporated herein by reference.
3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock,
Series F. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.75% Cumulative Preferred Stock, Series F and
incorporated herein by reference.
3.10 Certificate of Determination for the Convertible Participating
Preferred Stock. Filed with Registrant's Registration Statement No.
33-63947 and incorporated herein by reference.
3.11 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 33-63947 and incorporated
herein by reference.
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred
Stock, Series G. Filed with Registrant's Form 8-A/A Registration
Statement relating to the Depositary Shares Each Representing 1/1,000
of a Share of 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 Depositary Shares Each Representing 1/1,000 of a Share
of 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 Depositary Shares Each Representing 1/1,000 of a
Share of 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 Depositary Shares Each Representing 1/1,000 of a
Share of 8% Cumulative Preferred Stock, Series J and incorporated
herein by reference.
3.20 Certificate of Correction of Certificate of Determination for the
8.25% Convertible Preferred Stock. Filed with Registrant's
Registration Statement No. 333-61045 and incorporated herein by
reference.
3.21 Certificate of Determination for 8 1/4% Cumulative Preferred Stock,
Series K. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a
Share of 8 1/4% Cumulative Preferred Stock, Series K and incorporated
herein by reference.
3.22 Certificate of Determination for 8 1/4% Cumulative Preferred Stock,
Series L. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a
Share of 8 1/4% Cumulative Preferred Stock, Series L and incorporated
herein by reference.
3.23 Bylaws, as amended. Filed with Registrant's Registration Statement
No. 33-64971 and incorporated herein by reference.
3.24 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.25 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.26 Amendment to Bylaws adopted on January 6, 1998. Filed with
Registrant's Registration Statement No. 333-41123 and incorporated
herein by reference.
3.27 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.
3.28 Amendment to Bylaws adopted on March 4, 1999. Filed with Registrant's
Current Report on Form 8-K dated March 4, 1999 and incorporated
herein by reference.
3.29 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrant's
Form 10-Q for the quarterly period ended March 31, 1999 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.
S-5
<PAGE>
10.3 Second Amended and Restated Credit Agreement by and among Registrant,
Wells Fargo Bank, National Association, as agent, and the financial
institutions party thereto dated as of February 25, 1997. Filed with
Registrant's Registration Statement No. 333-22665 and incorporated
herein by reference.
10.4 Note Assumption and Exchange Agreement by and among Public Storage
Management, Inc., Public Storage, Inc., Registrant and the holders of
the notes dated as of November 13, 1995. Filed with Registrant's
Registration Statement No. 33-64971 and incorporated herein by
reference.
*10.5 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
*10.6 Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
*10.7 Registrant's 1996 Stock Option and Incentive Plan. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference.
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of A. Timothy Scott (included in Exhibit 8.1).
23.4 Consent of The Nicholson Group, Ltd. Filed herewith.
23.5 Consent of Robert A. Stanger & Co., Inc. Filed herewith.
99.1 Cash Election Form. Filed herewith.
99.2 Real Estate Appraisal Report by The Nicholson Group, Ltd. dated June
9, 1999 (filed as Appendix B to the Information Statement and
Prospectus).
99.3 Opinion of Robert A. Stanger & Co., Inc. dated June 30, 1999 (filed
as Appendix C to the Information Statement and Prospectus).
_______________
* Compensatory benefit plan.
S-6
<PAGE>
Exhibit 5.1
DAVID GOLDBERG
Senior Vice President and General Counsel
701 Western Avenue
Glendale, California 91201-2397
June 30, 1999
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Gentlemen:
As Senior Vice President and General Counsel of Public Storage, Inc. (the
"Company"), I have examined the Registration Statement on Form S-4, which is
expected to be filed by the Company with the Securities and Exchange Commission
on or about the date of delivery of this opinion (the "Registration Statement"),
which relates to the offer and sale of up to 1,200,000 shares of the Company's
common stock, par value $.10 per share (the "Shares").
I am familiar with the proceedings taken or to be taken by the Company
relating to the authorization and issuance of the Shares in the manner set forth
in the Registration Statement. I have also examined the Company's Restated
Articles of Incorporation and Revised Bylaws and have made such other
investigation as I have deemed necessary in order to express the opinions
contained herein.
It is my opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of California.
2. The Shares, when issued and delivered in the manner and on the terms
described in the Registration Statement, will be legally issued, fully paid and
nonassessable.
I hereby consent to the reference to me under the caption "Legal Opinions"
in the Registration Statement and to the filing of this opinion as an exhibit to
the Registration Statement or amendments thereto.
Very truly yours,
/S/ DAVID GOLDBERG
DAVID GOLDBERG
<PAGE>
Exhibit 8.1
A. Timothy Scott
Senior Vice President and Tax Counsel of Public Storage, Inc.
701 Western Ave., Glendale, CA 91201
(818) 244-8080 x286 (voice)
(818) 548-9288 (fax)
June 30, 1999
PS Partners III, Ltd.
701 Western Avenue
Glendale, California 91201
Re: Merger Transaction Tax Opinion
Ladies & Gentlemen:
As Senior Vice President and Tax Counsel of Public Storage, Inc.
("PSI"), I have examined the registration statement expected to be filed by PSI
on Form S-4 with the Securities and Exchange Commission on or about the date of
this opinion (the "Registration Statement"). Unless otherwise defined in this
opinion letter, capitalized terms used below have the same meaning as set forth
in the Registration Statement. The Registration Statement serves as the
definitive information statement relating to PSI's acquisition of the interests
held by the public limited partners of PS Partners III, Ltd. ("Partners III"),
pursuant to a proposed merger of PS Partners III Merger Co., Inc. ("Merger Sub,"
which is a second tier subsidiary of PSI) with and into Partners III (the
"Merger"). In the Merger, each Partners III partnership unit (other than the
partnership units held by PSI and its subsidiaries) will be converted into the
right to receive PSI common stock with a value of $545, or at the election of a
limited partner, $545 in cash. PSI is a general partner of Partners III and now
owns indirectly approximately 61% of the outstanding limited partnership
interests in Partners III.
In connection with your participation in the Merger, you have
requested my opinion that the discussion in the Registration Statement under the
heading "Federal Income Tax Considerations" fairly summarizes the material
federal income tax considerations to the public limited partners as a result of
the Merger and the subsequent ownership of PSI common stock for limited partners
who do not make a cash election, and that PSI is organized and operated so as to
meet the requirements for qualification as a real estate investment trust
("REIT") as defined in Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the "Code").
In preparing this opinion, I examined such documents as I considered
necessary or appropriate for purposes of issuing this opinion, including the
Registration Statement (including related appendices and exhibits, such as the
Agreement and Plan of Reorganization dated as of June 10, 1999 between PSI,
Merger Sub, and Partners III); and PSI's Restated Articles of Incorporation.
I also relied upon certain representations, including representations
set forth in a certificate of an officer of PSI regarding the assets, operations
and activities of PSI in the past and as to the contemplated assets, operations
and activities of PSI in the future. I have assumed that each representation
and all other information that I reviewed is true and correct in all material
respects and
<PAGE>
will remain true and correct, that representations or statements made to the
knowledge of any person are correct without that or any similar qualification,
that all obligations imposed by any documents on the parties have been or will
be performed, and that the Registration Statement and the other information
fairly describes the past and expected future actions of the parties as relevant
to this opinion. I have not made an independent investigation of the accuracy
or completeness of those matters. For example, I have not undertaken to review
and determine whether each limited partnership or limited liability company in
which PSI owns an interest properly has been classified as a "partnership" for
federal income tax purposes. Instead, I have relied upon representations as to
the status of these entities for federal income tax purposes. If any one or
more of these entities were to be classified as an association taxable as a
corporation for federal income tax purposes, that might preclude PSI from
qualifying as a REIT for federal income tax purposes and therefore could have a
material adverse impact on this opinion.
Based on the facts and representations and subject to the assumptions,
qualifications and limitations referred to in this letter and in the
Registration Statement, I am of the opinion that:
(1) the discussion in the Registration Statement under the
heading "Federal Income Tax Considerations" fairly summarizes the material
federal income tax considerations to the public limited partners as a
result of the Merger and the subsequent ownership of PSI common stock for
limited partners who do not make a cash election, and
(2) PSI is organized and operated so as to meet the requirements
for qualification as a REIT as defined in Sections 856 to 860 of the
Internal Revenue Code.
PSI's qualification and taxation as a REIT depends upon both PSI's
satisfaction in the past, and PSI's ability to meet on a continuing basis in the
future, through actual annual operating and other results, the various
requirements under the Code with regard to, among other things, the sources of
its gross income, the composition of its assets, the levels of distributions to
shareholders, the diversity of its stock ownership, and the lack of C
corporation earnings and profits. These matters may also be affected by the tax
treatment of various other entities that are owned by PSI, or have been acquired
by PSI, such as Storage Trust Realty which merged into PSI on March 12, 1999. I
have relied upon representations with respect to these matters and will not
review or audit PSI's compliance with these requirements and am not rendering an
opinion on those underlying matters. For example, I am not rendering an opinion
as to whether: (1) any entity acquired by PSI qualified as a REIT prior to the
acquisition, or (2) whether PSI acquired or had any current or accumulated C
corporation earnings and profits as a result of any merger. (For a discussion of
certain considerations related to these issues, see the discussion in the
Registration Statement under the caption "Federal Income Tax Considerations --
General Tax Treatment of Public Storage -- Technical Requirements for Taxation
as a REIT.") Accordingly, no assurance can be given that the actual results of
PSI's operations, the sources of its income, the nature of its assets, the level
of its distributions to shareholders, the diversity of its share ownership, and
the absence of any C corporation earnings and profits for any given taxable year
have satisfied or will satisfy the requirements under the Code for qualification
and taxation as a REIT.
This opinion is based on my interpretation of the federal income tax
laws of the United States of America as they exist on the date of this letter
and does not cover any state, local or foreign tax issues. I express no opinion
regarding any tax or other issues except as is specifically set forth above.
The federal income tax laws, the regulations, and the judicial and
administrative interpretation and application of those laws is subject to change
at any time. Some issues under existing law that could significantly affect
this opinion have not been authoritatively addressed by the IRS or the courts.
Of
<PAGE>
course, any developments or changes in the law, including those reflected in
future regulations, court decisions or administrative pronouncements, may affect
the conclusions set forth in this letter, perhaps on a retroactive basis. This
opinion is also expressly conditioned upon the truth and accuracy of the
representations, warranties, assumptions, and facts upon which I have relied in
issuing this opinion.
This opinion represents my legal judgment as to the matters set forth
above. An opinion of counsel does not have any binding effect and is not a
guarantee that the IRS will agree with the assumptions, analysis, or conclusions
of counsel. Neither PSI nor Partners III has requested or will request any
ruling from the IRS about any issues presented by the Merger. The IRS may
assert contrary positions, and a court may sustain such a contrary position if
asserted by the IRS.
This opinion is rendered to you in connection with your participation
in the Merger and is solely for your benefit in connection with that
transaction. This opinion may not be relied upon by you for any other purpose,
or relied upon by any other person, firm, corporation or other entity for any
purpose, without my prior written consent. Unless required by applicable law,
this opinion may not be disclosed to or otherwise made available to any other
person, firm, corporation or other entity for any purpose, without my prior
written consent. I disclaim any obligation to advise you of any change of law
that occurs, or any facts of which I become aware, after the date of this
opinion.
I consent to the reference to me under the caption "Legal Opinions" in
the Registration Statement and to the filing of this opinion as an exhibit to
the Registration Statement or amendments to the Registration Statement. In
giving this consent, however, I do not admit that I am an "expert" within the
meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ A. Timothy Scott
A. Timothy Scott
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 (No. 333- ) with respect to Public
Storage, Inc.'s registration of common stock and in the related Information
Statement and Prospectus of Public Storage, Inc. and PS Partners III, Ltd. and
to the incorporation by reference therein of our report dated February 10, 1999,
except for Note 10, as to which the date is March 10, 1999, 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, 1998 filed with the
Securities and Exchange Commission, and to the use of our reports dated February
10, 1999 with respect to the financial statements of PS Partners III, Ltd. and
SEI/PSPIII Joint Ventures included in the Registration Statement and Information
Statement and Prospectus.
/S/ ERNST & YOUNG LLP
Los Angeles, California
June 30, 1999
<PAGE>
Exhibit 23.4
Consent of The Nicholson Group, Ltd.
We hereby consent to the references to our firm under "The Merger -- Real
Estate Portfolio Appraisal by TNG" in the Information Statement and Prospectus
which is a part of this Registration Statement and to the other references to
our firm therein.
/s/ THE NICHOLSON GROUP, LTD.
June 30, 1999
Hartland, Wisconsin
<PAGE>
Exhibit 23.5
Consent of Robert A. Stanger & Co., Inc.
We hereby consent to the references to our firm under "The Merger --
Fairness Opinion from Stanger" in the Information Statement and Prospectus which
is a part of this Registration Statement and to the other references to our firm
therein.
/s/ ROBERT A. STANGER & CO., INC.
June 30, 1999
Shrewsbury, New Jersey
<PAGE>
Exhibit 99.1
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS III, LTD.
Please read and follow carefully the instructions set forth below,
which set forth the requirements that need to be complied with in order to make
an effective election. Nominees, trustees or other persons who hold units of
limited partnership interest ("Units") of PS Partners III, Ltd. (the
"Partnership") in a representative capacity are directed to Instruction F(4).
TO BE EFFECTIVE, THIS CASH ELECTION FORM, PROPERLY COMPLETED AND
SIGNED IN ACCORDANCE WITH THE ACCOMPANYING INSTRUCTIONS, MUST BE RECEIVED BY
BANKBOSTON, N.A. (THE "EXCHANGE AGENT") NAMED BELOW, AT THE APPROPRIATE ADDRESS
SET FORTH BELOW, NO LATER THAN THE ELECTION DEADLINE (AS DEFINED IN INSTRUCTION
A). DELIVERIES MADE TO ADDRESSES OTHER THAN THE ADDRESS FOR THE EXCHANGE AGENT
SET FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES, AND THE EXCHANGE AGENT WILL
NOT BE RESPONSIBLE THEREFOR.
HOLDERS OF UNITS WHO INTEND TO RECEIVE PUBLIC STORAGE, INC. ("PSI")
COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
This Cash Election Form is to be executed and returned to the Exchange
Agent at one of the following addresses:
<TABLE>
<CAPTION>
By Mail By Hand By Overnight Courier For Assistance For Information
- ------------------------ --------------------- -------------------- -------------------- ----------------------------
<S> <C> <C> <C> <C>
BankBoston, N.A. Securities Transfer & BankBoston, N.A. BankBoston, N.A. Public Storage, Inc.
c/o Boston EquiServe Reporting Services c/o Boston EquiServe c/o Boston EquiServe Investor Services Department
P.O. Box 9201 c/o Boston EquiServe Corporate Agency Shareholder Services 701 Western Avenue
Boston, MA 02205-9715 100 William Street & Reorganization (781) 575-3120 Glendale, CA 91201-2397
Galleria 150 Royall Street (800) 421-2856
New York, NY 10038 Mail Stop 45-01-40 (818) 244-8080
Canton, MA 02021
</TABLE>
Delivery of this instrument to an address other than as set forth
above will not constitute a valid delivery. The accompanying instructions
should be read carefully before this Cash Election Form is completed.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
This Cash Election Form is being delivered in connection with the
acquisition by Public Storage, Inc. ("PSI") of all of the Units not currently
owned by PSI through the merger of a PSI subsidiary into the Partnership (the
"Merger"), pursuant to the Agreement and Plan of Reorganization dated as of June
10, 1999, among PSI, PS Partners III Merger Co., Inc. and the Partnership (the
"Merger Agreement").
The undersigned, subject to the Election Procedures (as defined below)
and the other terms and conditions set forth in this Cash Election Form,
including the documents incorporated herein by reference, hereby elects (an
"Election"), as indicated below, upon consummation of the Merger to have each of
the Units owned by the Unitholder converted into the right to receive $545 in
cash, without interest (a "Cash Election").
If the Exchange Agent has not received your properly completed Cash
Election Form by the Election Deadline (as defined in Instruction A), you will
receive PSI Common Stock in the Merger.
The undersigned hereby certifies that this Election covers all of the
Units registered in the name of the undersigned and either (i) beneficially
owned by the undersigned, or (ii) owned by the undersigned in a representative
or fiduciary capacity for a particular beneficial owner or for one or more
beneficial owners, except as otherwise permitted pursuant to Instruction F(4).
A Unitholder may not make a cash election as to less than all of the Units
beneficially owned by such Unitholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Information Statement and Prospectus dated July __,
1999 (the "Information Statement and Prospectus") furnished to limited partners
of the Partnership, in connection with the Merger, all of which are incorporated
herein by reference. Receipt of the Information Statement and Prospectus,
including the Merger Agreement attached as Appendix A thereto, is hereby
acknowledged. Copies of the Information Statement and Prospectus are available
from the Exchange Agent upon request (see Instruction G(9)).
The Election by each holder of Units, including this Election by the
undersigned, will be subject to the election procedures set forth in the Merger
Agreement and described in the Information Statement and Prospectus (the
"Election Procedures").
1
<PAGE>
INSTRUCTIONS
The Execution Section of this Cash Election Form should be properly
filled in, dated and signed, torn off and delivered to the Exchange Agent at the
appropriate address set forth on the first page of this Cash Election Form.
Please read and follow carefully the instructions regarding completion of this
Cash Election Form set forth below. If you have any questions concerning this
Cash Election Form or require any information or assistance, see Instruction
G(1).
HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER
SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
A. TIME IN WHICH TO ELECT
IN ORDER FOR AN ELECTION TO BE EFFECTIVE, THE EXCHANGE AGENT MUST
RECEIVE A PROPERLY COMPLETED CASH ELECTION FORM NO LATER THAN 5:00 P.M., NEW
YORK CITY TIME, ON AUGUST 5, 1999 (the "Election Deadline"). If all conditions
set forth in the Merger Agreement have been met or, if permissible, waived, the
Merger will be effective on August 6, 1999.
IF THE EXCHANGE AGENT HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH
ELECTION FORM BY THE ELECTION DEADLINE, YOU WILL RECEIVE PSI COMMON STOCK IN THE
MERGER.
For instructions regarding changes or revocations of Elections and the
time in which such changes or revocations can be made, see Instructions F(1) and
F(2) below.
B. ELECTIONS
This Cash Election Form provides for your Election, subject to the
Election Procedures and the other terms and conditions set forth hereunder and
in the documents incorporated herein by reference, upon consummation of the
Merger to have each of the Units covered by this Cash Election Form converted
into the right to receive $545 in cash, without interest (a "Cash Election").
You should understand that your Election is subject to certain terms
and conditions that are set forth in the Merger Agreement and described in the
Information Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Information Statement and Prospectus. Copies of the
Information Statement and Prospectus may be requested from the Exchange Agent at
the address and telephone number set forth on the first page of this Cash
Election Form (see Instruction G(9)). The delivery of this Cash Election Form
to the Exchange Agent constitutes acknowledgement of the receipt of the
Information Statement and Prospectus. EACH HOLDER OF UNITS IS STRONGLY
ENCOURAGED TO READ THE INFORMATION STATEMENT AND PROSPECTUS IN ITS ENTIRETY AND
TO DISCUSS THE CONTENTS THEREOF, THE MERGER AND THIS CASH ELECTION FORM WITH HIS
OR HER PERSONAL FINANCIAL AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO ELECT
CASH. THE TAX CONSEQUENCES TO A HOLDER OF UNITS WILL VARY DEPENDING UPON A
NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF AN ELECTION, SEE "FEDERAL INCOME TAX CONSIDERATIONS -- THE
MERGER" IN THE INFORMATION STATEMENT AND PROSPECTUS.
C. CASH ELECTION
By completing and submitting the Cash Election Form, you are electing,
subject to the Election Procedures and the other terms and conditions set forth
in this Cash Election Form, including the documents incorporated herein by
reference, to receive cash for all of the Units covered by this Cash Election
Form.
D. RECEIPT OF PSI COMMON STOCK
HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER
SHOULD NOT SUBMIT THIS CASH ELECTION FORM. After the Merger, holders of Units
that were converted into shares of PSI Common Stock, without any further action,
will be entitled to receive certificates representing the number of whole shares
of PSI Common Stock into which Units will have been converted and cash payment
in lieu of fractional share interests, if applicable. As soon as practicable
after the Merger, the Exchange Agent will send the certificates for the PSI
Common Stock to each holder of Units whose Units have been converted into shares
of PSI Common Stock. HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN
THE MERGER DO NOT NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE
CERTIFICATES REPRESENTING THE PSI COMMON STOCK.
E. FAILURE TO MAKE EFFECTIVE CASH ELECTION
If you have failed to make an effective Cash Election or if your
Election is deemed by the Exchange Agent or PSI to be defective in any way, you
will receive PSI Common Stock in the Merger.
F. SPECIAL CONDITIONS
(1) Revocation of Election. An election may be revoked by the person or
persons making such election by a written notice signed and dated by such person
or persons and received by the Exchange Agent prior to the Election Deadline,
identifying the name of the registered holder of the Units subject to such
Election and the total number of Units owned by the beneficial owner.
(2) Nullification of Election. All Cash Election Forms will be void and
of no effect if the Merger is not consummated.
(3) Elections Subject to Election Procedures. All Elections are subject
to the Election Procedures set forth in the Merger Agreement and described in
the Information Statement and Prospectus under the caption "The Merger -- Cash
Election Procedure" and to the other terms and conditions set forth thereunder
and hereunder, including the documents incorporated herein by reference.
(4) Units Held by Nominees, Trustees or other Representatives. Holders of
record of Units who hold such Units as nominees, trustees or in other
representative or fiduciary capacities (a "Representative") may submit one or
more Cash Election
2
<PAGE>
Forms covering the aggregate number of Units held by such Representative for the
beneficial owners for whom the Representative is making an Election, provided,
that such Representative certifies that each such Cash Election Form covers all
the Units held by such Representative for a particular beneficial owner. Any
Representative who makes an Election or a Non-Election may be required to
provide the Exchange Agent with such documents and/or additional certifications,
if requested, in order to satisfy the Exchange Agent that such Representative
holds such Units for a particular beneficial owner of such Units. If any Units
held by a Representative are not covered by an effective Cash Election Form,
they will be exchanged for PSI Common Stock.
G. GENERAL
(1) Execution and Delivery. In order to make an effective Election, you
must correctly fill in the Execution Section of this Cash Election Form. After
dating and signing it, you are responsible for its delivery to the Exchange
Agent at the address set forth on the first page of this Cash Election Form by
the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS CASH ELECTION
FORM; HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF YOU CHOOSE TO USE THE
MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT REQUESTED.
(2) Signatures. Except as otherwise permitted below, you must sign this
Cash Election Form exactly the way your name appears on the label in Box A
(Registered Holder Information). If the Units are owned by two or more persons,
each must sign exactly as his or her name appears on the label in Box A
(Registered Holder Information). If the Units have been assigned by the
registered owner, this Cash Election Form should be signed in exactly the same
way as the name of the assignee appearing on the transfer documents. See
Instruction G(5)(a).
(3) Notice of Defects; Resolution of Disputes. None of the Partnership,
PSI and the Exchange Agent will be under any obligation to notify you or anyone
else that the Exchange Agent has not received a properly completed Cash Election
Form or that any Cash Election Form submitted is defective in any way.
Any and all disputes with respect to Cash Election Forms or to
Elections made in respect of Units (including but not limited to matters
relating to the Election Deadline, time limits, effectiveness of any Elections,
will be resolved by PSI and its decision will be conclusive and binding on all
concerned. PSI may delegate this function to the Exchange Agent in whole or in
part. PSI or the Exchange Agent shall have the absolute right in its sole
discretion to reject any and all Cash Election Forms which are deemed by either
of them to be not in proper form or to waive any immaterial irregularities in
any Cash Election Form.
(4) Issuance of Payment Check(s). If the Payment Check(s) are to be
issued in the name of the registered holder(s) as it appears on the label in Box
A (Registered Holder Information), no guarantee of the signature on the Cash
Election Form is required. For corrections in name and change in name not
involving changes in ownership, see Instruction G(5)(b).
(5) Issuance of Payment Check(s) in Different Names. If the Payment
Check(s) are to be issued in the name of someone other than the registered
holder(s) as it appears on the label in Box A (Registered Holder Information),
you must follow the guidelines below. Note that in each circumstance listed
below, unitholder(s) must have signature(s) guaranteed in Box C (Signature
Guarantee) and complete Box E (Special Payment Instructions).
(a) Transferee's Signature and Guarantee. The Cash Election Form
must be signed by the transferee or assignee or his or her agent, and should
not be signed by the transferor or assignor. See Box B (Sign Here). The
signature of such transferee or assignee must be medallion guaranteed by an
eligible guarantor institution as provided below.
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally an eligible guarantor institution, as defined in Rule 17Ad-
15 of the regulations of the Securities and Exchange Commission, means: (i)
banks (as that term is defined in Section 3(a) of the Federal Deposit
Insurance Act); (ii) brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, and government
securities brokers, as those terms are defined under the Securities Exchange
Act of 1934; (iii) credit unions (as that term is defined in Section
19(b)(1)(A) of the Federal Reserve Act); (iv) national securities exchanges,
registered securities associations, clearing agencies, as those terms are
used under the Securities Exchange Act of 1934; and (v) savings associations
(as that term is defined in Section 3(b) of the Federal Deposit Insurance
Act).
(b) Correction of or Change in Name. For a correction of name or for
a change in name which does not involve a change in ownership, proceed as
follows. For a change in name by marriage, etc., the Cash Election Form
should be signed, e.g., "Mary Doe, now by marriage Mary Jones." For a
correction in name, the Cash Election Form should be signed, e.g., "James E.
Brown, incorrectly inscribed as J.E. Brown." The signature in each case
should be guaranteed in the manner described in Instruction G(5)(a) above and
Box E (Special Payment Instructions) should be completed.
You should consult your own tax advisor as to any possible tax
consequences resulting from the issuance of Payment Check(s) in a name
different from that of the registered holder(s) of the Units.
(6) Supporting Evidence. In case any Cash Election Form is executed by an
agent, attorney, administrator, executor, guardian, trustee or any person in any
other fiduciary or representative capacity, or by an officer of a corporation on
behalf of the corporation, there must be submitted (with the Cash Election Form)
documentary evidence of appointment and authority to act in such capacity
(including court orders and corporate resolutions when necessary), as well as
evidence of the authority of the person making such execution to assign, sell or
transfer the Units. Such documentary evidence of authority must be in form
satisfactory to the Exchange Agent.
(7) Special Mailing Instructions. The Payment Check(s) will be mailed to
the address of the registered holder(s) as indicated in Box A (Registered Holder
Information), unless instructions to the contrary are given in Box F (Special
Mailing Instructions).
3
<PAGE>
(8) Federal Income Tax Withholding. Under Federal income tax law, the
Exchange Agent is required to file a report with the Internal Revenue Service
disclosing any payments of cash being made to each holder of Units pursuant to
the Merger Agreement. In order to avoid backup withholding of Federal income
tax on any cash received upon the surrender of Units, a holder thereof must,
unless an exemption applies, provide the Exchange Agent with his or her correct
taxpayer identification number ("TIN") on Substitute Form W-9, which is part of
this Cash Election Form (Box D), and certify, under penalties of perjury, that
such number is correct and that such holder is not otherwise subject to backup
withholding. If the correct TIN and certifications are not provided, a $50
penalty may be imposed by the Internal Revenue Service and payments made for
surrender of Units may be subject to backup withholding of 31%. In addition, if
a holder makes a false statement that results in no imposition of backup
withholding, and there was no reasonable basis for making such a statement, a
$500 penalty may also be imposed by the Internal Revenue Service.
Backup withholding is not an additional Federal income tax. Rather,
the Federal income tax liability of a person subject to backup withholding will
be reduced by the amount of such tax withheld. If backup withholding results in
an overpayment of income taxes, a refund may be obtained from the Internal
Revenue Service.
The TIN that must be provided on the Substitute Form W-9 is that of
the registered holder(s) of the Units at the effective time of the Merger. The
TIN for an individual is his or her social security number. The box in Part II
of the Substitute Form W-9 may be checked if the person surrendering the Units
has not been issued a TIN and has applied for a TIN or intends to apply for a
TIN in the near future. If the box in Part II has been checked, the person
surrendering the Units must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part II is checked (and the Certificate of
Awaiting Taxpayer Identification Number is completed), the Exchange Agent will
withhold 31% on all cash payments with respect to surrendered Units made prior
to the time it is provided with a properly certified TIN.
Exempt persons (including, among others, corporations) are not subject
to backup withholding. A foreign individual may qualify as an exempt person by
submitting Form W-8 or a substitute Form W-8, signed under penalties of perjury,
certifying to such person's exempt status. A form of such statement can be
obtained from the Exchange Agent. A unitholder should consult his or her tax
advisor as to such holder's qualification for an exemption from backup
withholding and the procedure for obtaining such exemption.
The signature and date provided on the Substitute Form W-9 will serve
to certify that the TIN and withholding information provided in this Cash
Election Form are true, correct and complete.
(9) Assistance and Information. If you need assistance to complete this
Cash Election Form or wish to obtain additional copies of the Cash Election Form
and the Information Statement and Prospectus, please contact the Exchange Agent
at the addresses and telephone number set forth on the first page of this Cash
Election Form. If you have questions, please contact PSI, Investor Services
Department, at the address and telephone numbers set forth on the first page of
this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the Merger becomes effective, the
Exchange Agent will make the payments of cash to be received by holders of Units
or their designees in accordance with the Election Procedures. The Exchange
Agent will thereafter issue and mail to you a check for any cash to which you
are entitled.
After the Merger, holders of Units that were converted into shares of
PSI Common Stock, without any further action, will be entitled to receive
certificates representing the number of whole shares of PSI Common Stock into
which Units will have been converted and cash payment in lieu of fractional
share interests, if applicable. As soon as practicable after the Merger, the
Exchange Agent will send the certificates for the PSI Common Stock to each
holder of Units whose Units have been converted into shares of PSI Common Stock.
HOLDERS OF UNITS WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER DO NOT
NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE CERTIFICATES REPRESENTING
THE PSI COMMON STOCK.
4
<PAGE>
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS III, LTD.
EXECUTION SECTION
BOX A
- --------------------------------------------------------------------------------
REGISTERED HOLDER INFORMATION
The following label indicates the Unitholder's name and address and the number
of Units (in the upper right corner of the label) to which this Cash Election
Form relates.
- --------------------------------------------------------------------------------
UNITHOLDER(S) SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Cash Election Form and to
surrender for cancellation the above-described Units and that the rights
represented by the Units are free and clear of all liens, restrictions, charges
and encumbrances and are not subject to any adverse claim. The undersigned
will, upon request, execute any additional documents necessary or desirable to
complete the surrender of the above-described Units surrendered hereby. All
authority herein conferred shall survive the death or incapacity of the
undersigned, and all obligations of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned. This surrender of the above-described Units may be revoked only in
accordance with Instruction F(1).
BOX B
- --------------------------------------------------------------------------------
SIGN HERE
To be completed by all person(s) executing this Cash Election Form.
Signature(s): _________________________________________________________________
_________________________________________________________________
Date: ______________________ Telephone Number: _______________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on the
label in Box A (Registered Holder Information) or by person(s) authorized to
become registered holders by documents transmitted herewith. If signature is by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or in any other fiduciary or representative capacity, please
provide the following information. (See Instruction G(6)).
Name(s): _________________________________________________________________
_________________________________________________________________
Capacity (Full Title): _________________________________________________________
Address: _________________________________________________________________
_________________________________________________________________
- --------------------------------------------------------------------------------
BOX C
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEE
To be completed only if required by Instruction G(5). Your signature must be
MEDALLION GUARANTEED by an eligible financial institution. Note: a notarization
by a notary public is not acceptable.
FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION
CGUARANTEE IN SPACE BELOW.
- --------------------------------------------------------------------------------
E-1
<PAGE>
CASH ELECTION FORM
RELATING TO UNITS OF LIMITED PARTNERSHIP INTEREST OF
PS PARTNERS III, LTD.
EXECUTION SECTION (CONTINUED)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF
AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED.
<TABLE>
BOX D
- ------------------------------------------------------------------------------------------------------------------------------------
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. _______________________________
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Form W-9 Part 2 - Check the box if you are not subject to backup withholding because (1) you have not been
notified that you are subject to backup withholding as a result of failure to report all interest
Department of the Treasury or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to
Internal Revenue Service backup withholding. [_]
-----------------------------------------------------------------------------------------------------
Payer's Request for Taxpayer Certification - Under penalties of perjury, I certify Part 3 -
Identification Number (TIN) that the information provided on this form is true,
correct and complete. Awaiting TIN [_]
--------------------------------------
Signature: _______________________________________________________ Date: _____________________________
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of any
cash payment made to me will be withheld, but that such amount will be refunded
to me if I then provide a Taxpayer Identification Number within sixty (60)
days.
Signature: ____________________________________ Date: __________________________
- --------------------------------------------------------------------------------
SPECIAL PAYMENT AND MAILING INSTRUCTIONS
The undersigned understands that the check issued as payment in cash (such
checks being referred to herein as "Payment Checks") with respect to the Units
surrendered will be issued in the same name(s) as on the label in Box A
(Registered Holder Information) and will be mailed to the address of the
registered holder(s) indicated above, unless otherwise indicated in Box E
(Special Payment Instructions) or Box F (Special Mailing Instructions) below.
If Box E (Special Payment Instructions) is completed, the signature of the
undersigned must be guaranteed as set forth in Instruction G(5).
BOX E
- --------------------------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued in the
name(s) of someone other than the registered holder(s) set forth above.
Signature must be guaranteed. (See Instruction G(5).)
Name: ______________________________________________
Address: ______________________________________________
______________________________________________
Social Security Number or
Employer Identification Number: ______________________________________________
- --------------------------------------------------------------------------------
BOX F
- --------------------------------------------------------------------------------
SPECIAL MAILING INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued to the
registered holder(s) and mailed to an address other than that of the registered
holder(s) set forth above. (See Instruction G(7).)
Address: ________________________________________________________
________________________________________________________
- --------------------------------------------------------------------------------
E-2
