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As filed with the Securities and Exchange Commission on February 2, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
______________
PUBLIC STORAGE PROPERTIES XI, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-4300881 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial
Classification Code Number)
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701 Western Avenue HARVEY LENKIN
Glendale, California 91201-2397 Public Storage Properties XI, Inc.
(818) 244-8080 701 Western Avenue
(Address, including zip code, and Glendale, California 91201-2397
telephone number, including area code, (818) 244-8080
of registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
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______________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage Properties XI, Inc.
701 Western Avenue
Glendale, California 91201-2397
______________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
______________
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Offering Maximum Maximum
to be Price Aggregate Amount of
Title of Each Class of Securities to be Registered Registered Per Share Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
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Common Stock Series A, $.01 par value per share 16,288,000 shares(1) (1) (1) $82,496(1)(2)
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(1) This Registration Statement relates to the proposed merger of American
Office Park Properties, Inc. ("AOPP") into the Registrant and the
conversion of shares of common stock of AOPP into either cash (as to up to
20% of the outstanding shares of common stock of AOPP) or common stock
series A of the Registrant. At the merger, there will be a maximum of
13,802,870.83 shares of common stock of AOPP outstanding. The book
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value of the common stock of AOPP at September 30, 1997 was $20.26 per
share. The maximum number of shares of Registrant to be issued in the
merger is 16,288,000. 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. $32,668 of the registration fee was previously paid in connection
with the Registrant's preliminary proxy materials.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PUBLIC STORAGE PROPERTIES XI, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
__________, 1998
The annual meeting of shareholders of Public Storage Properties XI, Inc., a
California corporation ("PSP11"), will be held at PSP11's offices at 701 Western
Avenue, Glendale, California on __________, 1998, at the hour of 10:00 a.m. for
the following purposes:
1. To consider and vote on a proposal to approve an Agreement and Plan of
Reorganization among PSP11, American Office Park Properties, Inc. ("AOPP")
and Public Storage, Inc. ("PSI") described in the accompanying proxy
statement that provides for the following:
. AOPP will merge into PSP11, and each share of capital stock of AOPP
will be converted into 1.18 shares of PSP11 Common Stock (subject to a
cash election right described in the proxy statement).
. Each outstanding share of Common Stock Series A of PSP11 (the "PSP11
Common Stock") will continue to be owned by holders of PSP11 Common
Stock or converted into the right to receive $20.50 in cash as
follows:
. If holders of 20% or less of the outstanding PSP11 Common Stock
elect to receive cash in the merger, shares held by holders
electing cash will be converted into the right to receive $20.50
in cash for each share of PSP11 Common Stock. To be effective a
cash election must be made by __________, 1998, in accordance
with the accompanying cash election form.
. If holders of more than 20% of the outstanding PSP11 Common Stock
elect to receive cash in the merger, shares held by such holders
will be converted into the right to receive $20.50 in cash on a
pro rata basis to the extent of 20% of the outstanding PSP11
Common Stock and the balance of such shares will continue to be
owned by PSP11 shareholders.
. If a PSP11 shareholder does not elect cash, he or she will
continue to own PSP11 Common Stock.
. Shares held by PSP11 shareholders who have properly exercised
dissenter's rights under California law will be purchased by
PSP11 on the terms described under "Proposal One - The Merger -
Dissenting Shareholders' Rights of Appraisal" in the accompanying
proxy statement.
. Each share of Common Stock Series B of PSP11 and each share of Common
Stock Series C of PSP11 will be converted into .8641 share of PSP11
Common Stock (subject to a cash election right described in the proxy
statement).
. PSP11 will exchange 13 predominantly mini-warehouse properties for 11
commercial properties owned by PSI.
2. To consider and vote on amendments to the articles of incorporation of
PSP11 to:
. Increase the number of authorized shares of PSP11 Common Stock from
2,828,929 to 100,000,000, up to 16,858,000 of which will be issued in
the merger.
. Authorize 50,000,000 shares of preferred stock, none of which will be
issued in the merger.
. Authorize 100,000,000 shares of equity stock, none of which will be
issued in the merger.
3. To consider and vote on the following amendments to the articles of
incorporation and bylaws of PSP11 to convert PSP11 from a "finite life" to
an "infinite life" entity:
. Eliminate the fixed term of PSP11.
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. Eliminate the provision allowing officers and directors of PSP11 to
compete with PSP11 for investment opportunities.
. Eliminate the requirement for shareholder approval for the
disposition of assets or the issuance of securities, except as
required by California law.
. Allow transactions with affiliates if approved by the independent
directors upon receipt of independent appraisals or fairness
opinions.
. Modify the proposal for the disposition of PSP11's assets if the
merger is approved.
. Eliminate the restrictions on PSP11's investment objectives.
. Eliminate provisions that are inapplicable upon conversion of the
Common Stock Series B and C of PSP11 into PSP11 Common Stock.
4. To consider and vote on an amendment to the articles of incorporation and
bylaws of PSP11 to establish an ownership limitation for PSP11's capital
stock to assist in preserving PSP11's status as a real estate investment
trust.
5. To consider and vote on an amendment to the bylaws of PSP11 to change the
authorized number of directors from a range of three to five to a range of
five to nine, with the exact number of directors to be initially fixed at
seven.
6. To consider and vote on a proposal to assume and adopt the AOPP 1997 Stock
Option and Incentive Plan.
7. To elect PSP11's Board of Directors.
Approval of the merger is conditioned upon approval of all of the other
proposals, and approval of each of the other proposals is conditioned upon
approval of the merger.
The Board of Directors has determined that holders of record of PSP11
common stock at the close of business on January 22, 1998 will be entitled to
receive notice of, and to vote at, the meeting or any adjournment of the
meeting.
Please complete, date, sign and promptly mail the enclosed proxy in the
stamped return envelope included with these materials.
You are cordially invited to attend the meeting in person. If you do
attend and you have already signed and returned the proxy, the powers of the
proxy holders named in the proxy will be suspended if you desire to vote in
person. Therefore, whether or not you intend to attend the meeting in person,
you are urged to complete, date, sign and return the proxy.
By Order of the Board of Directors
OBREN B. GERICH, Secretary
Glendale, California
__________, 1998
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PUBLIC STORAGE PROPERTIES XI, INC.
PROXY STATEMENT AND PROSPECTUS
ANNUAL MEETING OF SHAREHOLDERS OF
PUBLIC STORAGE PROPERTIES XI, INC.
____________, 1998
This proxy statement and prospectus relates to the proposed merger of
American Office Park Properties, Inc. ("AOPP") into Public Storage Properties
XI, Inc. ("PSP11"), which shareholders of PSP11 are being asked to approve at
the upcoming annual meeting. The purpose of the merger is to convert PSP11 into
a fully-integrated and self-managed real estate company focused on commercial
properties and AOPP into a publicly traded company.
The merger involves certain risks that should be considered by PSP11
shareholders, including the following:
. The investment of PSP11 shareholders is being changed from holding an
interest in a specified portfolio of primarily mini-warehouse
properties for a fixed period to holding an investment in an ongoing,
fully-integrated real estate company with a growing portfolio of
commercial properties.
. Public Storage, Inc. ("PSI") owns approximately 43% of the AOPP common
stock. PSI and its executive officers have significant relationships
with PSP11, and PSI and B. Wayne Hughes, the chief executive officer
of each of PSI and PSP11, own in the aggregate approximately 37% of
the capital stock of PSP11. After the merger, the ownership of PSP11
by public shareholders will be reduced from approximately 63% to 11%
(7% assuming completion of pending AOPP transactions) while that of
PSI will increase from approximately 37% to 43% (27% assuming
completion of pending AOPP transactions). This ownership, as well as
other factors, will prevent any takeover of PSP11 not approved by PSI.
. The level of distributions to holders of Common Stock Series A of
PSP11 ("PSP11 Common Stock") will be significantly lower after than
before the merger.
. The merger has not been negotiated at arm's length. No independent
persons were hired to negotiate the terms of the merger on behalf of
PSP11. No person was asked to make an offer to buy PSP11's
properties.
. Conflicts of interest exist between PSP11 and its related parties,
primarily PSI, in connection with the merger and PSP11's continuing
operations. In the absence of such conflicts, the terms of the merger
may have been more favorable to PSP11 shareholders.
. After the merger, PSP11 intends to focus on the ownership and
operation of commercial properties, instead of mini-warehouses.
Commercial properties present certain risks not associated with mini-
warehouses, and PSI and its affiliates operate significantly less
commercial space than mini-warehouse space.
. The market price of PSP11 Common Stock may decrease because of adverse
reactions to the merger based on the significant change in the nature
of the investment of PSP11 shareholders and in PSP11's business.
. The merger may decrease the liquidity of the PSP11 Common Stock.
. Under California law, PSP11 shareholders will be entitled to
dissenters' rights of appraisal in connection with the merger only if
demands for payments are filed with respect to 5% or more of the
outstanding shares of PSP11 Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROXY STATEMENT FOR A FULL
DISCUSSION OF THESE AND OTHER FACTORS. See "Glossary" beginning on page 111 for
definitions of certain terms used in this proxy statement.
____________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE'S SECURITIES
REGULATOR HAS APPROVED THE COMMON STOCK OF PUBLIC STORAGE PROPERTIES XI, INC. TO
BE ISSUED UNDER THIS PROXY STATEMENT AND PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT AND PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
_________, 1998
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The merger will be effected by the Amended and Restated Agreement and Plan
of Reorganization attached as Appendix A to this proxy statement. Under the
merger agreement, the name of the surviving corporation will be changed to "PS
Business Parks, Inc." and PSP11 will exchange 13 predominantly mini-warehouse
properties for 11 commercial properties owned by PSI. The proxy statement also
serves as the prospectus of PSP11 for the issuance in the merger of up to
16,288,000 shares of PSP11 Common Stock to the holders of AOPP common stock.
At the annual meeting, shareholders of PSP11 will also be asked to approve
certain proposed amendments to PSP11's articles of incorporation and bylaws,
including amendments (1) to increase the number of authorized shares of PSP11
Common Stock from 2,828,929 to 100,000,000, up to 16,858,000 of which will be
issued in the merger, (2) to authorize 50,000,000 shares of preferred stock and
100,000,000 shares of equity stock, none of which will be issued in the merger,
(3) to convert PSP11 from a "finite life" to an "infinite life" entity, (4) to
establish an ownership limitation for PSP11's capital stock to assist in
preserving PSP11's status as a real estate investment trust and (5) to change
the authorized number of directors from a range of three to five to a range of
five to nine, with the exact number of directors to be initially fixed at seven.
At the annual meeting, PSP11 shareholders will also be asked to approve a stock
option plan and to elect seven directors. Approval of the merger is conditioned
on approval of all of the other proposals, and approval of each of the other
proposals is conditioned on approval of the merger.
The merger agreement and the amendments to PSP11's articles of
incorporation and bylaws must be approved by a majority of the outstanding
shares of PSP11 Common Stock, Common Stock Series B and Common Stock Series C,
voting together as a group. The merger agreement requires the PSP11 Common
Stock Series B and C to vote with the holders of a majority of the unaffiliated
shares of the PSP11 Common Stock. The Board of Directors of PSP11, based on
recommendations of a special committee composed of independent directors,
recommends that PSP11 shareholders vote for the merger, the amendments and the
stock option plan. The Board of Directors also recommends that PSP11
shareholders vote for the election of the director nominees.
The PSP11 Common Stock is traded on the American Stock Exchange under the
symbol "PSM". On August 15, 1997, the closing price of the PSP11 Common Stock
on the AMEX was $20. The AOPP common stock is not listed for trading. After
the merger, the PSP11 Common Stock is expected to trade on the AMEX under the
symbol "PSB".
This proxy statement is first being mailed on or about _________, 1998 to
shareholders of record of PSP11 at the close of business on January 22, 1998.
ii
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TABLE OF CONTENTS
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Available Information.............................................................................................. 1
Incorporation of Certain Documents by Reference.................................................................... 1
Cautionary Statement............................................................................................... 1
Summary............................................................................................................ 2
Overview of the Merger.......................................................................................... 2
Overview of the Amendments to PSP11's Articles of Incorporation and Bylaws...................................... 3
Summary Risk Factors............................................................................................ 3
Change from Finite Life to Infinite Life..................................................................... 3
Control and Influence by PSI and Ownership Limitations....................................................... 3
Lower Level of Distributions After the Merger................................................................ 4
No Arm's Length Negotiation or Independent Representatives................................................... 4
Conflicts of Interest........................................................................................ 4
Change from Investment in Mini-warehouses to Commercial Properties........................................... 4
Uncertainty Regarding Market Price of PSP11 Common Stock..................................................... 4
Decreased Liquidity.......................................................................................... 4
Terms of Exchange Based on Appraisals Instead of Arm's Length Negotiations................................... 4
Limitation on Dissenters' Rights of Appraisal................................................................ 4
Cash Election Payments Less Than Recent and Proposed Sales Prices............................................ 4
Limitation on Funding by Institutional Investors............................................................. 4
Certain Investors Have Special Rights........................................................................ 4
Increased Risk of Loss of Investment from Debt............................................................... 4
Possible Future Dilution..................................................................................... 5
Tax to PSP11 Shareholders Upon Receipt of Cash............................................................... 5
Benefits to Insiders............................................................................................ 5
Adoption of AOPP 1997 Stock Option and Incentive Plan........................................................... 5
Election of Directors........................................................................................... 6
Meeting and Vote Requirements of PSP11 Shareholders............................................................. 6
PSP11........................................................................................................... 6
AOPP............................................................................................................ 7
PSI............................................................................................................. 7
Background and Reasons for the Merger........................................................................... 7
Potential Benefits of the Merger................................................................................ 8
Detriments of the Merger........................................................................................ 9
Rights of Dissenting Shareholders............................................................................... 9
Federal Income Tax Matters...................................................................................... 9
Recommendations; Opinion of Financial Advisor................................................................... 10
Comparison of PSP11 Common Stock Before and After the Merger and the Amendments................................. 11
Summary Financial Information................................................................................... 13
Relationships................................................................................................... 14
Risk Factors....................................................................................................... 17
No Arm's Length Negotiation or Independent Representatives...................................................... 17
Change from Finite Life to Infinite Life........................................................................ 17
Change from Investment in Mini-Warehouses to Commercial Properties.............................................. 17
Control and Influence by PSI; Ownership Limitations and Antitakeover Provisions................................. 17
Lower Level of Distributions After the Merger................................................................... 18
Uncertainty Regarding Market Price of PSP11 Common Stock........................................................ 18
Decreased Liquidity............................................................................................. 18
Terms of Exchange Based on Appraisals Instead of Arm's Length Negotiation....................................... 18
Limitation on Dissenters' Rights of Appraisal................................................................... 18
Conflicts of Interest........................................................................................... 18
Relationships Among Parties.................................................................................. 18
Structuring of Merger by Insiders............................................................................ 18
Benefits to Insiders......................................................................................... 18
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PSI's Consent to Certain Property Sales...................................................................... 19
Cash Election Payments Less Than Recent and Proposed Sales Prices............................................... 19
Limitation on Funding by Institutional Investors................................................................ 19
Certain Investors Have Special Rights........................................................................... 19
Tax Risks....................................................................................................... 19
Tax Liability to PSP11 if Merger Treated as Taxable Event.................................................... 19
Tax to PSP11 Shareholders who Receive Cash................................................................... 20
Reduced Cash Flow to PSP11 Shareholders if AOPP Fails to Qualify as a REIT................................... 20
Reduced Cash Flow to PSP11 Shareholders if PSP11 Fails to Qualify as a REIT.................................. 20
Financing Risks................................................................................................. 20
Dilution and Subordination................................................................................... 20
Increased Risk of Loss of Investment from Debt............................................................... 21
Operating Risks................................................................................................. 21
Value of Investment Reduced by General Risks of Real Estate Owenership....................................... 21
Lease Expirations............................................................................................ 21
Financially Distressed Tenants............................................................................... 21
Significant Competition Among Commercial Properties.......................................................... 21
Reduced Property Income from Changes in Laws................................................................. 21
Lack of Control of Properties by PSP11 Resulting from Partnership and
Joint Venture Property Ownership Structures................................................................ 22
Reduced Property Income from Environmental Liabilities....................................................... 22
Benefits to Insiders............................................................................................... 22
Proposal One - The Merger.......................................................................................... 24
General......................................................................................................... 24
Background...................................................................................................... 24
Reasons for the Merger.......................................................................................... 29
Alternatives to the Merger...................................................................................... 29
No Solicitation of Other Proposals.............................................................................. 31
Potential Benefits of the Merger................................................................................ 31
Detriments of the Merger........................................................................................ 32
Recommendation to PSP11 Shareholders and Fairness Analysis...................................................... 32
Comparison of Cash Election Payments to Other Alternatives...................................................... 33
Exchange of Properties.......................................................................................... 36
Real Estate Portfolio Appraisal by TNG.......................................................................... 36
Real Estate Portfolio Appraisal by Wilson....................................................................... 39
Fairness Opinion from Jefferies................................................................................. 41
The Merger Agreement............................................................................................ 46
Cash Election Procedure......................................................................................... 47
Consequences to PSP11 if the Merger Is Not Completed............................................................ 48
Costs of the Merger............................................................................................. 48
Accounting Treatment............................................................................................ 49
Regulatory Requirements......................................................................................... 49
Comparison of PSP11 Common Stock Before and After the Merger and the Amendments................................. 50
Dissenting Shareholders' Rights of Appraisal.................................................................... 53
Proposal Two - Amendments to PSP11's Articles of Incorporation - Increased Capitalization.......................... 55
General......................................................................................................... 55
Common Stock.................................................................................................... 55
Preferred Stock and Equity Stock................................................................................ 56
Proposal Three - Amendments to PSP11's Articles of Incorporation and Bylaws - Infinite Life Entity................ 57
General......................................................................................................... 57
Fixed Term...................................................................................................... 57
Competition from Corporate Officers and Directors............................................................... 57
Shareholder Voting.............................................................................................. 58
Transactions with Affiliates.................................................................................... 58
Proposal for Sale or Financing of Properties.................................................................... 58
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iv
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Investment Policy...................................................... 58
Conversion of PSP11 Common Stock Series B and C........................ 58
Changes to Definitions................................................. 58
Proposal Four - Amendments to PSP11's Articles of Incorporation and
Bylaws-Ownership Limitation............................................... 59
Proposal Five - Amendment to PSP11's Bylaws - Increase in Authorized
Number of Directors........................................................ 61
Proposal Six - Adoption of 1997 Stock Option and Incentive Plan............ 62
General................................................................. 62
Reasons for the Plan.................................................... 62
Description of the Plan................................................. 62
Federal Income Tax Consequences of PSP11 Grants Under the Plan.......... 65
New Plan Benefits....................................................... 66
Proposal Seven - Election of Directors..................................... 67
Directors' and Committee Meetings....................................... 68
Compensation of Directors............................................... 68
Compensation of Executive Officers...................................... 68
Compensation Committee Interlocks and insider Participation..............69
Report of the Board of Directors on Executive Compensation.............. 69
Stock Price Performance Graph........................................... 70
Approval of the Proposals.................................................. 71
General................................................................. 71
Security Ownership of Certain Beneficial Owners and Management.......... 71
Solicitation of Proxies................................................. 73
Public Storage Properties XI, Inc.......................................... 74
General................................................................. 74
Description of PSP11's Properties....................................... 74
American Office Park Properties, Inc....................................... 78
General................................................................. 78
Agreement with Subsidiary of State Pension Plan......................... 78
Proposed Stock Issuances to Institutional Investors..................... 80
Description of AOPP's Properties........................................ 80
Operating Partnership................................................... 82
PSI Exchange Properties.................................................... 85
AOPP's Recent and Proposed Acquisitions.................................... 86
Certain Relationships and Related Party Transactions....................... 88
PSI's Ownership of PSP11 and AOPP Common Stock.......................... 88
Common Executive Officers and Directors................................. 88
Compensation to Executive Officers and Directors........................ 89
Distributions and Price Range of PSP11 Common Stock........................ 90
Selected Financial Information............................................. 91
PSP11 Historical Financial Information.................................. 91
AOPP Historical Financial Information................................... 92
Comparative PSP11 Historical and Pro Forma Financial Information........ 93
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 96
PSP11 Historical........................................................ 96
AOPP Historical......................................................... 99
Federal Income Tax Considerations..........................................104
The Merger..............................................................104
PSP11 Cash Election.....................................................106
The Exchange............................................................107
Effect of the Merger on the Federal Income Tax Treatment
of PSP11 as a REIT....................................................107
General Tax Treatment of PSP11 as a REIT................................108
Taxation of U.S. Shareholders Holding PSP11 Common Stock................110
Backup Withholding......................................................111
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Taxation of Tax Exempt Investors........................................111
Taxation of Non-U.S. Shareholders.......................................112
Recent Legislation......................................................112
Tax Aspects of PSP11's Ownership of Interests in the Operating
Partnership...........................................................112
Federal Tax Law Changes.................................................114
State and Local Taxes......................................................114
Legal Opinions.............................................................114
Experts....................................................................114
Independent Auditors.......................................................114
Shareholder Proposals......................................................115
Glossary...................................................................116
Historical and Pro Forma Financial Statements............................. F-1
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Appendix A - Amended and Restated Agreement and Plan of Reorganization among PSP11, AOPP and
PSI dated as of December 17, 1997
Appendix B-1 - Real Estate Appraisal Report by The Nicholson Group, Ltd. dated August 1, 1997
Appendix B-2 - Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc. dated
April 30, 1997
Appendix C - Opinion of Jefferies & Company, Inc. dated February 2, 1998
Appendix D - Chapter 13 of the California General Corporation Law Concerning Dissenters'
Rights
Appendix E-1 - Proposed Amendment to PSP11's Articles of Incorporation - Increased
Capitalization
Appendix E-2 - Proposed Amendment to PSP11's Articles of Incorporation and Bylaws - Infinite
Life REIT
Appendix E-3 - Proposed Amendment to PSP11's Articles of Incorporation and Bylaws - Ownership
Limitation
Appendix E-4 - Proposed Amendment to PSP11's Bylaws - Increase in Authorized Number of Directors
Appendix F - AOPP 1997 Stock Option and Incentive Plan
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vi
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AVAILABLE INFORMATION
PSP11 is required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). This material can be
inspected and copied at the Commission's public reference facilities in
Washington, D.C. and at the Regional Offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048; and Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
be obtained at prescribed rates from the Commission's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 or by accessing the Commission's
Worldwide Web site at http://www.sec.gov. This material can also be inspected
at the AMEX, 86 Trinity Place, New York, New York 10006.
PSP11 has filed with the Commission a registration statement on Form S-4
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This proxy statement does not contain all the information set forth in the
Registration Statement. For further information, please refer to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by PSP11 with the Commission under Section 13
of the Exchange Act (File No. 1-10709) are incorporated herein by reference:
(i) the Annual Report on Form 10-K for the year ended December 31, 1996, as
amended by Form 10-K/A dated April 30, 1997; (ii) the Quarterly Reports on Form
10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30,
1997; and (iii) the Current Report on Form 8-K dated August 18, 1997, as amended
by Form 8-K/As dated October 21, 1997, December 17, 1997 and January 29, 1998.
PSP11 shareholders and AOPP shareholders should rely on information in this
proxy statement over different information in documents previously filed. Any
information in documents previously filed different from information in this
proxy statement should be disregarded.
The merger agreement, which is attached as Appendix A to this proxy
statement, is also made part of this proxy statement.
AS NOTED ABOVE, OTHER DOCUMENTS NOT INCLUDED WITH THIS PROXY STATEMENT ARE
MADE A PART OF THIS PROXY STATEMENT. IF YOU WOULD LIKE COPIES OF THESE OTHER
DOCUMENTS, PLEASE WRITE OR CALL THE INVESTOR SERVICES DEPARTMENT, 701 WESTERN
AVENUE, GLENDALE, CALIFORNIA 91201-2397 OR BY TELEPHONE AT (818) 244-8080. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
______________, 1998. DOCUMENTS WILL BE SENT BY FIRST CLASS MAIL WITHIN ONE
BUSINESS DAY AFTER YOUR REQUEST IS RECEIVED.
PSP11 SHAREHOLDERS AND AOPP SHAREHOLDERS SHOULD RELY ONLY ON THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT OR IN DOCUMENTS TO WHICH PSP11
SHAREHOLDERS AND AOPP SHAREHOLDERS HAVE BEEN REFERRED. PSP11 HAS NOT AUTHORIZED
ANYONE TO PROVIDE PSP11 SHAREHOLDERS AND AOPP SHAREHOLDERS WITH INFORMATION THAT
IS DIFFERENT.
CAUTIONARY STATEMENT
Statements contained in this proxy statement that are not based on
historical fact are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "continue" or similar terms, variations of those
terms or the negative of those terms. Cautionary statements set forth in "Risk
Factors" and elsewhere in this proxy statement identify important factors that
could cause actual results to differ materially from those in the forward-
looking statements.
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SUMMARY
The following summary information is qualified by more detailed information
elsewhere in this proxy statement, including in the appendices. PSP11
shareholders should review such information and the appendices carefully. All
references to "AOPP" in this proxy statement refer to AOPP and its subsidiaries,
including the Operating Partnership (as defined), unless the context indicates
otherwise. As a result of the merger, PSP11 will replace AOPP as the sole
general partner of the Operating Partnership. All references to "PSP11" in this
proxy statement refer both to PSP11 before the merger and to PSP11, as the
surviving corporation, after the merger, as the context requires. See
"Glossary" beginning on page 111 for definitions of certain terms used in this
proxy statement.
OVERVIEW OF THE MERGER
The merger agreement provides for the following:
. AOPP will merge into PSP11, and each share of AOPP common stock will
be converted into 1.18 shares of PSP11 Common Stock (subject to a cash
election right described in "Proposal One - The Merger - Cash Election
Procedure").
. Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash as follows:
. If holders of 20% or less of the outstanding PSP11 Common Stock
elect to receive cash in the merger, shares held by holders
electing cash will be converted into the right to receive $20.50
in cash for each share of PSP11 Common Stock. To be effective a
cash election must be made by __________, 1998, in accordance
with the accompanying cash election form.
. If holders of more than 20% of the outstanding PSP11 Common Stock
elect to receive cash in the merger, shares held by such holders
will be converted into the right to receive $20.50 in cash on a
pro rata basis to the extent of 20% of the outstanding PSP11
Common Stock and the balance of such shares will continue to be
owned by PSP11 shareholders.
. If a PSP11 shareholder does not elect cash, he or she will
continue to own PSP11 Common Stock.
. Shares held by PSP11 shareholders who have properly exercised
dissenter's rights under California law will be purchased by
PSP11 on the terms described under "Proposal One - The Merger -
Dissenting Shareholders' Rights of Appraisal."
. Each share of PSP11 Common Stock Series B and each share of PSP11
Common Stock Series C will be converted into .8641 share of PSP11
Common Stock (subject to a cash election right described in "Proposal
One - The Merger - Cash Election Procedure").
. PSP11 will exchange 13 predominantly mini-warehouse properties for 11
commercial properties owned by PSI.
For a description of the terms of the merger, see "Proposal One - The
Merger - The Merger Agreement."
The PSP11 Common Stock is listed on the AMEX. On August 15, 1997, the last
full trading day prior to the first announcement of the proposed merger, the
reported closing sales price per share of PSP11 Common Stock on the AMEX was
$20. On _________, 1998, the last full trading day prior to the date of this
proxy statement, the reported closing sales price per share of PSP11 Common
Stock was $____. The AOPP common stock is not listed for trading. After the
merger, the PSP11 Common Stock will trade under the symbol "PSB".
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OVERVIEW OF THE AMENDMENTS TO PSP11'S ARTICLES OF INCORPORATION AND BYLAWS
Certain of the amendments modify PSP11's authorized capital stock as
follows:
. Increase the number of authorized shares of PSP11 Common Stock from
2,828,929 to 100,000,000, up to 16,858,000 of which will be issued in
the merger.
. Authorize 50,000,000 shares of preferred stock, none of which will be
issued in the merger.
. Authorize 100,000,000 shares of equity stock, none of which will be
issued in the merger.
The following amendments convert PSP11 from a "finite life" to an "infinite
life" entity:
. Eliminate the fixed term of PSP11.
. Eliminate the provision allowing officers and directors of PSP11 to
compete with PSP11 for investment opportunities.
. Eliminate the requirement for shareholder approval for the disposition
of assets or the issuance of securities, except as required by
California law.
. Allow transactions with affiliates if approved by the independent
directors upon receipt of independent appraisals or fairness opinions.
. Modify the requirement for a proposal for the disposition of PSP11's
assets if the merger is approved.
. Eliminate the restrictions on PSP11's investment objectives.
. Eliminate provisions that are inapplicable upon conversion of the PSP11
Common Stock Series B and C into PSP11 Common Stock.
One of the amendments establishes an ownership limitation for PSP11's
capital stock to assist in preserving PSP11's status as a real estate investment
trust. Another of the amendments changes the authorized number of directors
from a range of three to five to a range of five to nine, with the exact number
of directors to be initially fixed at seven.
Approval of the merger is conditioned upon approval of all of the
amendments, and approval of each of the amendments is conditioned upon approval
of the merger.
SUMMARY RISK FACTORS
The merger and the amendments to PSP11's articles of incorporation and
bylaws involve certain risks and detriments that should be considered by PSP11
shareholders, including the following:
. Change from Finite Life to Infinite Life. The investment of PSP11
shareholders is being changed from holding an interest in a specified
portfolio of primarily mini-warehouse properties for a fixed period to
holding an investment in an ongoing, fully-integrated real estate
company with a growing portfolio of commercial properties. After the
merger, PSP11 expects to change its property portfolio from time to time
without shareholder approval and does not expect to sell its properties
within a fixed period of time. Accordingly, PSP11 shareholders will only
be able to liquidate their investment by selling their shares. The
market value of their shares may or may not reflect the full fair market
value of PSP11's assets.
. Control and Influence by PSI and Ownership Limitations. PSI owns
approximately 43% of the AOPP common stock. PSI and its executive
officers have significant relationships with PSP11, and PSI and B. Wayne
Hughes, the chief executive officer of each of PSI and PSP11, own in the
aggregate approximately 37% of the capital stock of PSP11. After the
merger, the ownership of PSP11 by public shareholders will be reduced
from approximately 63% to 11% (7% assuming completion of pending AOPP
transactions) while that of PSI will increase from approximately 37% to
43% (27% assuming completion of pending AOPP transactions). Also,
PSP11's articles of incorporation restrict the number of shares that may
be owned by any other person, the partnership agreement of the Operating
Partnership (the "Operating Partnership Agreement") contains an anti-
takeover provision and PSI has
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entered into a voting agreement with a large investor in AOPP that
provides PSI even more control. These factors will limit the control of
PSP11 by public shareholders and prevent any takeover not approved by
PSI.
. Lower Level of Distributions After the Merger. The level of
distributions to holders of PSP11 Common Stock will be significantly
lower after than before the merger.
. No Arm's Length Negotiation or Independent Representatives. The merger
has not been negotiated at arm's length. No independent persons were
hired to negotiate the terms of the merger on behalf of PSP11. If such
persons had been hired, the terms of the merger may have been more
favorable to PSP11 shareholders. In addition, no person was asked to
make an offer to buy PSP11's properties. Such an offer could have
generated an alternative transaction to the merger that PSP11
shareholders would have considered preferable to the merger.
. Conflicts of Interest. Conflicts of interest exist between PSP11 and its
related parties, primarily PSI, in connection with the merger and
PSP11's continuing operations. In particular, for a period of 10 years,
PSP11 will be restricted from selling any of 13 designated properties
without PSI's consent. In the absence of such conflicts, the terms of
the merger may have been more favorable to PSP11 shareholders.
. Change from Investment in Mini-warehouses to Commercial Properties.
After the merger, PSP11 intends to focus on the ownership and operation
of commercial properties, instead of mini-warehouses. Commercial
properties present certain risks not associated with mini-warehouses:
commercial properties are larger; there are fewer leases and for longer
terms; and capital expenditures tend to be higher. Furthermore, PSI and
its affiliates operate significantly less commercial space (5,900,000
square feet at September 30, 1997) than mini-warehouse space (67,800,000
square feet at September 30, 1997). AOPP has recently acquired or
proposes to acquire 14 properties containing 3,621,300 square feet of
commercial space that it did not previously operate. See "Risk Factors -
Operating Risks."
. Uncertainty Regarding Market Price of PSP11 Common Stock. The market
price of PSP11 Common Stock may decrease because of adverse reactions to
the merger based on the significant change in the nature of the
investment of PSP11 shareholders and in PSP11's business.
. Decreased Liquidity. The merger may decrease the liquidity of the PSP11
Common Stock.
. Terms of Exchange Based on Appraisals Instead of Arm's Length
Negotiations. The terms of the exchange of 13 of PSP11's properties for
11 of PSI's properties under the merger agreement are based on
independent third party appraisals. 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 price might be higher or lower.
. Limitation on Dissenters' Rights of Appraisal. Under California law,
PSP11 shareholders will be entitled to dissenters' rights of appraisal
in connection with the merger only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PSP11 Common Stock.
. Cash Election Payments Less Than Recent and Proposed Sales Prices. The
cash election payment in the merger of $20.50 per share is less than the
implied price of approximately $22.50 per share paid and to be paid in
recent and proposed stock sales by AOPP to third parties.
. Limitation on Funding by Institutional Investors. Certain institutional
investors are required to provide additional funding to AOPP (PSP11
after the merger) only if the properties proposed to be acquired with
such funding meet certain acquisition criteria or are otherwise approved
by those institutional investors.
. Certain Investors Have Special Rights. After the merger, certain
investors in AOPP will have rights in PSP11, such as the right to
approve nominees to PSP11's board of directors and the right to require
registration of their shares, not available to public PSP11
shareholders.
. Increased Risk of Loss of Investment from Debt. After the merger, PSP11
may incur debt. The use of debt increases the risk of loss of
investment.
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. Possible Future Dilution. After the merger, the interests of PSP11
shareholders can be reduced through the issuance of additional stock,
including preferred stock that would prevent payment of distributions on
PSP11 Common Stock unless distributions are paid on the preferred stock.
. Tax to PSP11 Shareholders Upon Receipt of Cash. PSP11 shareholders who
receive any cash in connection with the merger may recognize a taxable
gain.
BENEFITS TO INSIDERS
The merger and the amendments to PSP11's articles of incorporation and
bylaws involve certain benefits to AOPP and its shareholders, primarily PSI,
which owns 43% of the AOPP common stock, including the following:
. Control of PSP11. After the merger, PSI's ownership of PSP11 will
increase from approximately 37% to 43% (27% upon completion of pending
AOPP transactions). This ownership will prevent any takeover of PSP11
not approved by PSI.
. Avoid Market Risks of IPO. AOPP intends to become publicly-traded. The
merger avoids the market risks and costs of an initial public offering
and enables the surviving corporation to use PSP11's existing AMEX
listing.
. Avoid Unwinding Transaction. AOPP has acquired six properties from a
subsidiary of a state pension plan. The subsidiary has the option to
unwind the transaction if AOPP is not publicly traded within 18 months.
The merger will eliminate this risk for AOPP.
. Avoid Repurchase of Shares. AOPP has an agreement to issue up to
$155,000,000 of common stock to a group of institutional investors. The
institutional investors have the right to require AOPP to repurchase
their shares if AOPP is not publicly traded within 18 months. The merger
will eliminate this risk for AOPP.
. Lower Cost of Capital. AOPP believes that the cost of raising capital as
a publicly-traded corporation after the merger would be less than in an
initial public offering. AOPP estimates that underwriting commissions
are approximately 7% in an initial public offering compared with 5% in a
secondary offering. There can be no assurance as to PSP11's ability or
cost for raising capital after the merger.
. Liquidity. Currently, no public trading market exists for AOPP common
stock. Consequently, the AOPP shareholders' investment is illiquid. Upon
completion of the merger, they will own PSP11 Common Stock with
liquidity.
. Mini-warehouses to PSI. PSI, which is seeking to increase its ownership
of mini-warehouses, will acquire 13 mini-warehouses from PSP11.
. PSI Avoids Taxable Gain. For a period of 10 years, PSP11 will be
restricted from selling any of 13 designated properties without PSI's
consent. PSI would incur a taxable gain upon a sale.
See "Benefits to Insiders."
ADOPTION OF AOPP 1997 STOCK OPTION AND INCENTIVE PLAN
PSP11 proposes to assume and adopt AOPP's 1997 Stock Option and Incentive
Plan (the "Plan"). If this proposal is approved, 1,500,000 shares of PSP11
Common Stock will be available after the merger is approved for issuance under
the Plan pursuant to options assumed in the merger and options and other awards
granted after the merger is approved. For a description of the terms of the
assumption of outstanding options, see "Proposal One - The Merger - The Merger
Agreement - Assumption of Outstanding Options" and for a description of the
terms of the Plan, see "Proposal Six - Adoption of 1997 Stock Option and
Incentive Plan."
Approval of the merger is conditioned on approval of the Plan, and approval
of the Plan is conditioned upon approval of the merger.
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ELECTION OF DIRECTORS
At the annual meeting, PSP11's shareholders will be asked to elect seven
directors of PSP11, to hold office until the next annual meeting and until their
successors are elected and qualified. Approval of the merger and the bylaw
amendment increasing the authorized number of directors are conditioned on the
election of the director nominees, and the election of the director nominees is
conditioned on approval of the merger and the bylaw amendment increasing the
authorized number of directors. See "Proposal Seven - Election of Directors."
MEETING AND VOTE REQUIREMENTS OF PSP11 SHAREHOLDERS
Meeting date _________, 1998 at 10:00 a.m.
Record date January 22, 1998
Purpose To approve the merger agreement and the
amendments to PSP11's articles of incorporation
and bylaws, to assume and adopt the Plan and to
elect directors
Shares outstanding 1,819,937 shares of PSP11 Common Stock
707,071 shares of PSP11 Common Stock Series B
and C
Vote required Majority of outstanding shares of PSP11 Common
Stock and PSP11 Common Stock Series B and C,
voting together as a class, is required to
approve the merger agreement, the amendments to
PSP11's articles of incorporation and bylaws
and the Plan*
Percentage ownership of total
combined outstanding shares of
PSP11 Common Stock and PSP11
Common Stock Series B and C 36.8%
Owned by PSI and Hughes
_______________
* See "Approval of the Proposals" for the vote required for the election of
directors. Under the bylaws of PSP11, the PSP11 Common Stock Series B and C
will be voted with the holders of a majority of the unaffiliated shares of
the PSP11 Common Stock.
PSP11
PSP11 is a real estate investment trust ("REIT") organized as a California
corporation that was formed to succeed to the business of Public Storage
Properties XI, Ltd., a California limited partnership (the "PSP11 Partnership"),
in a reorganization transaction completed on December 31, 1990. PSP11 owns 15
properties located in seven states: 11 mini-warehouses, two commercial
properties and two properties that combine mini-warehouse and commercial space.
All of these facilities are operated under the "Public Storage" name. See
"Public Storage Properties XI, Inc. - Description of PSP11's Properties." The
PSP11 Common Stock is traded on the AMEX under the symbol "PSM".
PSP11's properties are managed by PSI and AOPP. PSP11's operations are
under the general supervision of its three-member board of directors, consisting
of an executive officer of PSI and two other directors. PSP11's bylaws provide
that PSP11 shareholders be presented with a proposal in 1997 for the sale of
PSP11's properties and liquidation. See "- Background and Reasons for the
Merger" and "- Relationships."
Under the merger agreement, PSP11 will exchange its 11 mini-warehouses and
two properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI. After the merger, PSP11 intends to focus on
the ownership and operation of commercial properties.
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AOPP
AOPP was originally organized in 1986 as a California corporation to serve
as the manager of the commercial properties owned by PSI and its related
entities. In January 1997, AOPP was reorganized to succeed to the commercial
properties business of PSI, becoming a fully-integrated, self-administered and
self-managed REIT. AOPP conducts substantially all of its business as the sole
general partner of American Office Park Properties, LP (the "Operating
Partnership").
In January 1997, as part of the reorganization, PSI and its consolidated
partnerships transferred commercial properties to AOPP and the Operating
Partnership. At September 30, 1997, AOPP and the Operating Partnership owned 42
properties located in 10 states. The Operating Partnership also manages an
additional 49 properties owned by PSI and its related entities. As of December
31, 1997, AOPP owned a 35% partnership interest in the Operating Partnership.
The balance of the Operating Partnership is owned by PSI, its consolidated
partnerships and certain third parties. PSI owns 43% of the AOPP common stock
(25% assuming pending AOPP transactions).
Since September 30, 1997, AOPP has acquired six properties from a
subsidiary of a state pension plan and two properties from other third parties.
AOPP has agreements in principle to acquire three properties from other third
parties and has an agreement to issue up to $155,000,000 of shares of common
stock to a group of institutional investors. There can be no assurance that any
of these agreements will be implemented or completed. See "American Office Park
Properties, Inc. - Agreement with Subsidiary of State Pension Plan," "- Proposed
Stock Issuances to Institutional Investors" and "AOPP's Recent and Proposed
Acquisitions."
PSI
PSI is a fully integrated, self-administered and self-managed REIT,
organized as a California corporation that acquires, develops, owns and operates
mini-warehouses. PSI is the largest owner and operator of mini-warehouses in the
United States. Through its ownership of AOPP, PSI also has an interest in
commercial properties. At September 30, 1997, PSI had equity interests (through
direct ownership, as well as general and limited partnership and capital stock
interests) in 1,070 mini-warehouses located in 38 states.
The principal executive offices of PSP11, AOPP and PSI are located at 701
Western Avenue, Glendale, California 91201-2397. The telephone number is (818)
244-8080.
BACKGROUND AND REASONS FOR THE MERGER
THE MERGER HAS BEEN INITIATED AND STRUCTURED BY AN EXECUTIVE OFFICER OF
AOPP AND BY INDIVIDUALS WHO ARE EXECUTIVE OFFICERS OF BOTH PSI AND PSP11. A
SPECIAL COMMITTEE COMPOSED OF THE INDEPENDENT DIRECTORS OF PSP11, VERN O. CURTIS
AND JACK D. STEELE, HAS REVIEWED AND RECOMMENDED FOR APPROVAL THE TERMS OF THE
MERGER, AND THE BOARD OF DIRECTORS OF PSP11, BASED ON RECOMMENDATIONS OF THE
SPECIAL COMMITTEE WHICH THE BOARD OF DIRECTORS HAS ADOPTED, AND ON THE OPINION
OF A FINANCIAL ADVISOR IN WHICH IT CONCURS, BELIEVES THAT THE MERGER IS FAIR TO
THE PUBLIC PSP11 SHAREHOLDERS AND RECOMMENDS THAT PSP11 SHAREHOLDERS VOTE FOR
THE MERGER. THE MERGER HAS NOT BEEN NEGOTIATED AT ARM'S LENGTH, AND ONE OF THE
THREE MEMBERS OF THE PSP11 BOARD OF DIRECTORS HAS SUBSTANTIAL CONFLICTS OF
INTEREST.
PSP11 was organized to succeed to the business of the PSP11 Partnership in
a reorganization transaction completed in December 1990. As a result of the
reorganization, PSP11 included a provision in its bylaws that required its
shareholders to be presented with a proposal in 1997 to sell or finance all or
substantially all of its properties. See "Proposal One - The Merger -
Background." IF APPROVED BY THE SHAREHOLDERS OF PSP11, THE MERGER WOULD OBVIATE
THE OBLIGATION OF PSP11 TO PRESENT SUCH A PROPOSAL TO ITS SHAREHOLDERS. IF NOT
APPROVED, PSP11 INTENDS TO PRESENT THE SHAREHOLDERS OF PSP11 WITH A PROPOSAL FOR
THE DISPOSITION OF ITS PROPERTIES AS CONTEMPLATED BY ITS BYLAWS.
AOPP, which was reorganized in January 1997, intends to increase its asset
and capital base through the acquisition of real estate assets for cash or
capital stock and to become publicly traded either through the merger or an
initial public offering in order to have access to the public securities markets
and to increase the liquidity of AOPP shareholders. AOPP believes that the
merger avoids the market risks and certain costs of an initial public offering.
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After the merger, the surviving corporation intends to continue to increase its
asset and capital base. See "- Benefits to Insiders."
On August 16, 1997, the PSP11 Board of Directors, based on recommendations
of its special committee, which were adopted by the Board of Directors, approved
the merger and determined to recommend that PSP11 shareholders vote for the
merger. The special committee was advised by Jefferies & Company, Inc.
("Jefferies"), as financial adviser, and Hogan & Hartson L.L.P. as legal
counsel.
The PSP11 Board of Directors and its special committee believe that the
consideration to be received in the merger by holders of up to 20% of the
outstanding PSP11 Common Stock ($20.50 per share) compares favorably with a
range of estimated going-concern values per share of PSP11 Common Stock, an
estimated liquidation value per share of PSP11 Common Stock and the book value
per share of PSP11 Common Stock. The PSP11 Board of Directors and its special
committee recognize that this comparison is subject to significant assumptions,
qualifications and limitations. See "Proposal One - The Merger - Comparison of
Cash Election Payments to Other Alternatives."
Prior to concluding that the merger should be proposed to PSP11
shareholders, the PSP11 Board of Directors and the special committee compared
three alternatives to the merger - liquidation of PSP11, continued operation of
PSP11 and a merger of PSP11 into PSI. Based upon a comparison of the potential
benefits and detriments of the merger with the other alternatives, the PSP11
Board of Directors and the special committee have concluded that the merger is
more attractive to PSP11 shareholders than any of the alternatives considered.
The PSP11 Board of Directors did not solicit any proposals for the acquisition
of PSP11 or its properties. See "Proposal One - The Merger - No Solicitation of
Other Proposals."
In comparing the merger to other alternatives, the PSP11 Board of Directors
and its special committee noted the following:
Liquidation. Based on a real estate portfolio appraisal, the PSP11 Board
of Directors estimates that the liquidation value per share of PSP11 Common
Stock is not significantly different from its average trading price prior to the
announcement of the merger. However, if PSP11 liquidated its assets through
asset sales to unaffiliated third parties, PSP11 shareholders would not need to
rely upon the real estate portfolio appraisal to estimate the fair market value
of PSP11's properties.
Continued Operation. Nothing requires the liquidation or merger of PSP11
at this time. PSP11 is operating profitably. Continued operation should
provide PSP11 shareholders with continued distributions of net operating cash
flow and participation in future appreciation of PSP11's properties, as well as
avoiding many of the risks described under "Risk Factors." However, continued
operation would fail to secure the potential benefits of the merger described
under "Proposal One - The Merger - Potential Benefits of the Merger."
Merger with PSI. A merger of PSP11 into PSI, which generally owns the same
type of properties as PSP11, would provide PSP11 shareholders with greater
liquidity, diversification and opportunity for growth than they have as
shareholders of PSP11. However, the estimated net asset value per share of PSP11
Common Stock was about the same as the trading price of the PSP11 Common Stock
before the announcement of the proposed merger between PSP11 and AOPP.
Accordingly, a merger between PSP11 and PSI would not have provided PSP11
shareholders with any premium to the trading price of their shares and may not
have been approved by PSP11 shareholders.
POTENTIAL BENEFITS OF THE MERGER
The PSP11 Board of Directors believes that the merger should result in the
following benefits to PSP11 and the public PSP11 shareholders:
. By combining with AOPP which has substantial experience with
commercial properties, PSP11 will become a fully-integrated and self-
managed real estate company with expertise in the acquisition,
operation and leasing of commercial properties.
. The merger will increase PSP11's asset and capital base, providing
PSP11 with interests in a larger number of properties than before the
merger.
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. As an "infinite life" entity PSP11 will be able to grow through the
issuance of additional securities, the reinvestment of cash flow
and the acquisition of additional properties.
. As a fully-integrated and self-managed real estate company, PSP11
should be more attractive to institutional investors.
. PSP11 will be able to expand its holdings in commercial properties
without a proportionate increase in property management fees, which
would have resulted had its current commercial property management
agreement remained in effect.
. After the merger, PSP11 will have sufficient size and financial
position to seek a rating of certain of its securities from national
credit rating agencies. If PSP11's securities were favorably rated,
PSP11's ability to raise capital at a lower cost will be enhanced.
DETRIMENTS OF THE MERGER
For a summary of certain risks and detriments of the merger, refer to "-
Summary Risk Factors" beginning on page 3.
RIGHTS OF DISSENTING SHAREHOLDERS
Under California law, holders of PSP11 Common Stock will be entitled to
dissenters' rights only if demands for payment are filed with respect to 5% or
more of the outstanding shares of PSP11 Common Stock. A dissenting PSP11
shareholder who wishes to require PSP11 to purchase his or her shares of PSP11
Common Stock must:
(1) vote against the merger any or all of the shares of PSP11 Common
Stock entitled to be voted (shares of PSP11 Common Stock not voted are not
considered to be voted against the merger and will not be counted toward
the 5% minimum for dissenters' rights to exist); provided that if a PSP11
shareholder votes part of the shares entitled to be voted in favor of the
merger, and fails to specify the number of shares voted, it is conclusively
presumed under California law that such shareholder's approving vote is
with respect to all shares entitled to be voted;
(2) make written demand upon PSP11 or its transfer agent, which is
received not later than the date of the meeting of shareholders of PSP11,
setting forth the number of shares of PSP11 Common Stock demanded to be
purchased by PSP11 and a statement as to claimed fair market value of such
shares at August 15, 1997; and
(3) submit for endorsement, within 30 days after the date on which
the notice of approval of the merger by PSP11 shareholders is mailed to
such shareholders, to PSP11 or its transfer agent the certificates
representing any shares in regard to which demand for purchase is being
made, or to be exchanged for certificates of appropriate denominations so
endorsed, with a statement that the shares are dissenting shares.
The provisions of California law governing appraisal rights are technical
in nature and complex. PSP11 shareholders desiring to exercise appraisal rights
and to obtain appraisal of the fair value of their shares should consult
counsel, since the failure to comply strictly with these provisions may result
in a waiver or forfeiture of their appraisal rights. A copy of the applicable
provisions of California law is attached hereto as Appendix D. See "Proposal
One - The Merger - Dissenting Shareholders' Rights of Appraisal."
FEDERAL INCOME TAX MATTERS
The merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
No gain or loss would be recognized by PSP11 shareholders who retain all of
their PSP11 Common Stock. PSP11 shareholders who receive cash in exchange for
their PSP11 Common Stock pursuant to the exercise of dissenters' rights
generally will recognize capital gain or loss for federal income tax purposes in
an amount equal to the difference between their adjusted basis in the
surrendered PSP11 Common Stock and the amount of cash received in exchange for
the surrendered PSP11 Common Stock. A PSP11 shareholder's receipt of cash
pursuant to a cash election generally will be treated as a redemption of the
surrendered PSP11 shares
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and the treatment accorded to a redemption for federal income tax purposes (as
distinguished from a sale, exchange or other disposition) can only be determined
on the basis of particular facts as to each shareholder at the time of the
redemption. See "Federal Income Tax Considerations - The Merger" and "- The Cash
Elections."
Hogan & Hartson L.L.P., counsel to the special committee of the Board of
Directors of PSP11, has rendered an opinion that the merger will constitute a
reorganization under the Code. See "Federal Income Tax Considerations - The
Merger." Hogan & Hartson L.L.P. also has rendered an opinion to the effect that
PSP11 is organized in conformity with the requirements for qualification as a
REIT and its proposed method of operation following the merger will enable PSP11
to continue to meet the requirements for qualification as a REIT. See "Federal
Income Tax Considerations - Effect of the Merger and the Cash Elections on the
Federal Income Tax Treatment of PSP11 as a REIT."
RECOMMENDATIONS; OPINION OF FINANCIAL ADVISOR
RECOMMENDATIONS OF PSP11 BOARD OF DIRECTORS TO PSP11 SHAREHOLDERS. Based
upon an analysis of the merger, the special committee and PSP11 Board of
Directors have concluded that (i) the terms of the merger are fair to holders of
PSP11 Common Stock, (ii) after comparing the potential benefits and detriments
of the merger with those of several alternatives, the merger is more
advantageous to such PSP11 shareholders than such alternatives and (iii) PSP11
shareholders should vote for the merger. The merger has not been negotiated at
arm's length and one of the three members of the PSP11 Board of Directors has
substantial conflicts of interest.
The special committee and the PSP11 Board of Directors based their
conclusions on the following factors: (i) the bylaws of PSP11 require a
proposal for the sale or financing of PSP11's properties in 1997; (ii) the
merger provides PSP11 shareholders with the opportunity to retain their
investment in PSP11 or, in the alternative, with respect to up to 20% of the
outstanding PSP11 Common Stock, receive $20.50 in cash, which is higher than the
estimated liquidation value per share after costs of such liquidation; (iii) the
exchange of PSP11 properties for PSI properties is based on appraisals by
independent appraisers and PSP11 has received a fairness opinion from Jefferies
relating to the consideration to be paid by PSP11 in the merger; (iv) the merger
is required to be approved by a majority of the shares of PSP11 Common Stock and
PSP11 Common Stock Series B and C entitled to vote on the merger, counted
together as a single class, with the shares of PSP11 Common Stock Series B and C
voting with a majority of the shares of PSP11 Common Stock held by unaffiliated
owners and, subject to certain limitations, PSP11 shareholders will have the
right to exercise dissenters' rights; and (v) based on certain significant
assumptions, qualifications and limitations, the consideration to be received by
holders of up to 20% of the outstanding PSP11 Common Stock through cash
elections compares favorably with other alternatives.
ABSENCE OF ARM'S LENGTH NEGOTIATION. The terms of the merger are not the
result of arm's length negotiation. The PSP11 Board of Directors believes that
the absence of independent representatives to negotiate the merger does not
undermine the fairness of the merger because the terms of the merger have been
reviewed and approved by the special committee, which is comprised of
independent directors.
FAIRNESS OPINION FROM JEFFERIES. Jefferies was engaged by PSP11 through
the special committee to deliver a written summary of its determination as to
the fairness of the merger consideration to the public PSP11 shareholders from a
financial point of view. The full text of the opinion is set forth in Appendix
C to this proxy statement. Subject to the assumptions, qualifications and
limitations contained therein, the fairness opinion concludes that, as of the
date of the fairness opinion, the consideration to be paid by PSP11 in the
merger is fair to the public PSP11 shareholders from a financial point of view.
Jefferies was not requested to, and therefore did not: (i) select the method of
determining the terms of the merger; (ii) make any recommendation to the PSP11
shareholders with respect to whether to approve or reject the merger or whether
to make cash elections; 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 PSP11's qualification as a REIT. Jefferies' opinion
is based on business, economic, real estate and securities markets, and other
conditions as of the date of its analysis. See "Proposal One - The Merger -
Fairness Opinion from Jefferies."
10
<PAGE>
COMPARISON OF PSP11 COMMON STOCK BEFORE AND AFTER THE MERGER AND THE AMENDMENTS
The information below summarizes certain principal differences between the
PSP11 Common Stock before and after the merger and the amendments to PSP11's
articles of incorporation and bylaws and the effect of the merger and the
amendments on PSP11 shareholders who retain their PSP11 Common Stock in the
merger (set forth in italics below each caption). For an expanded discussion of
these and other comparisons and effects, see "Proposal One - The Merger -
Comparison of PSP11 Common Stock Before and After the Merger and the
Amendments."
BEFORE THE MERGER AFTER THE MERGER AND THE AMENDMENTS
INVESTMENT OBJECTIVES AND POLICIES
To provide (i) quarterly To maximize funds from operations ("FFO")
cash distributions from allocable to holders of PSP11 Common Stock and
operations and (ii) to increase shareholder value through internal
long-term capital gains growth and acquisitions. FFO is a supplemental
through appreciation in the performance measure for equity REITs used by
value of properties. industry analysts. FFO does not take into
consideration principal payments on debt,
capital improvements, distributions and other
obligations of PSP11. Accordingly, FFO is not a
substitute for the net cash provided by
operating activities or net income as a measure
of the liquidity or operating performance of
PSP11. An increase in PSP11's FFO will not
necessarily correspond with an increase in
distributions to holders of PSP11 Common Stock.
Holders who retain PSP11 Common Stock rather than make cash elections will
be changing their investment from a "finite-life" to an "infinite life" entity,
and they will be able to realize the value of their investment only by selling
the PSP11 Common Stock. After the merger and the amendments, the interest of
PSP11 shareholders can be diluted through the issuance of additional securities,
including securities that would have priority over PSP11 Common Stock as to cash
flow, distributions and liquidation proceeds. PSP11 will be able to issue
additional shares of common, preferred and equity stock without shareholder
approval, subject to the rules of the AMEX and California law. There is no
assurance that any such securities will be issued. The preferred stock and the
equity stock are issuable from time to time in one or more series and would, if
issued, have rights, including dividend rights, conversion rights, voting
rights, redemption price and liquidation rights, as may be determined by PSP11's
Board of Directors. The level of distributions to holders of PSP11 Common Stock
will be significantly lower after than before the merger. See "Risk Factors -
Lower Level of Distributions After the Merger," "- Uncertainty Regarding Market
Price of PSP11 Common Stock" and "- Financing Risks - Dilution and
Subordination."
OWNERSHIP BY PSI
PSI owns 37% of the capital PSI will own 43% of the PSP11 Common Stock (27%
stock of PSP11. assuming completion of pending AOPP
transactions) and 70% assuming conversion of
PSI's interest in the Operating Partnership (54%
assuming completion of pending AOPP
transactions).
The merger will result in a shift in control of PSP11 from the public
shareholders to PSI. See "Risk Factors - Control and Influence by PSI;
Ownership Limitations and Antitakeover Provisions."
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<PAGE>
BEFORE THE MERGER AFTER THE MERGER AND THE AMENDMENTS
BORROWING POLICIES
<TABLE>
<S> <C>
Not permitted to incur Permitted to borrow in furtherance of its
borrowings in acquisition investment objectives, subject to certain
of properties. limitations.
</TABLE>
PSP11 will be able to incur debt in the acquisition of properties and to
reinvest proceeds from borrowings. The incurrence of debt increases the risk of
loss of investment.
TRANSACTIONS WITH AFFILIATES
Restricted from entering Restricted from acquiring properties
into a variety of business from its affiliates or from selling
transactions with its properties to them unless the
affiliates without transaction is approved by a majority
shareholder approval. of PSP11's independent directors and is
fair to PSP11 based on an independent
appraisal or fairness opinion.
It will be easier for PSP11 to enter into transactions with its affiliates
because shareholder approval will not be required.
PROPERTIES (Pro forma as of September 30, 1997)
15 wholly owned Direct and indirect equity interests in
predominantly 66 commercial properties with 7,782,000
mini-warehouse properties net rentable square feet of space in 10
with 929,000 net rentable states. See "AOPP Recent and Proposed
square feet of space in Acquisitions" for information on
seven states. properties acquired by AOPP since
September 30, 1997.
Because after the merger PSP11 will own substantially more property
interests in more states than before, PSP11's results of operations will be less
affected by the operations of a single property, and it will be more difficult
to liquidate PSP11 within a reasonable period of time.
PSP11 will own and operate commercial properties instead of mini-warehouses.
Commercial properties present certain risks not associated with mini-warehouses:
commercial properties are larger; there are fewer leases and for longer terms;
and capital expenditures tend to be higher. See "Risk Factors - Change in
Nature of Investment" and "- Operating Risks."
After the merger PSP11 intends to acquire commercial properties and to incur
mortgage debt as appropriate. PSP11 has no plans for the disposition of assets;
under the merger agreement, PSP11 will exchange 13 predominantly mini-warehouse
properties for 11 commercial properties owned by PSI. See "Proposal One - The
Merger - Exchange of Properties."
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
PSP11 shareholders must Subject to the rules of the AMEX and
approve all additional applicable provisions of California law,
issuances of capital stock. PSP11 intends to issue authorized
capital stock without shareholder
approval.
Given the ownership level of PSP11 Common Stock by PSI, PSP11's greater
flexibility to issue capital stock, including senior securities with special
voting rights and priority over PSP11 Common Stock, an anti-takeover provision
in the Operating Partnership Agreement and a voting agreement, after the merger
and the amendments, PSP11 should be in a better position to deter attempts to
obtain control in transactions not approved by its Board of Directors, and PSP11
shareholders could be less likely to benefit from a takeover not approved by
PSP11's Board of Directors. Both before and after the merger and the
amendments, PSP11's organizational documents restrict the number of shares that
may be owned by any person other than PSI.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND FACILITY DATA)
The following table sets forth certain summary historical and pro forma
financial information on PSP11.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 Year Ended December 31, 1996
------------------------------------------------- ------------------------------------------------
PSP11 PSP11 PSP11 PSP11
Post-Merger Post-Merger Post-Merger Post-Merger
(Pro Forma) (Pro Forma) (Pro Forma) (Pro Forma)
PSP11 No Cash Maximum Cash PSP11 No Cash Maximum Cash
(Historical) Elections(3) Elections(3) (Historical) Elections(3) Elections(3)
-------------- ---------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 5,699 $ 52,981 $ 52,981 $7,253 $66,490 $66,490
Depreciation and
amortization 877 9,533 9,533 1,150 12,709 12,709
Interest expense - 1,549 1,824 3 1,949 2,316
Net income $ 2,596 $ 14,602 $ 14,291 $3,155 $16,556 $16,167
Per Share of Common Stock
Net income (1)(2):
Primary $1.32 $1.04 $1.04 $1.59 $1.18 $1.18
Fully-diluted 1.03 1.24
Weighted average shares
of Common Stock:
Primary 1,820 14,088 13,724 1,831 14,088 13,724
Fully-diluted 2,527 2,538
BALANCE SHEET DATA (AS OF
SEPTEMBER 30, 1997):
Total assets $28,809 $451,335 $449,032
Total debt - 26,900 32,059
Shareholders' Equity $27,170 $284,653 $277,191
PROPERTY DATA:
Business parks:
Net rentable square
feet at end of period
(000's) 191 7,782 7,782 191 7,782 7,782
Number of facilities with
business park space at end
of period 4 66 66 4 66 66
Weighted average occupancy
for the period 98% 96% 96% 97% 96% 96%
Weighted average monthly
realized rent per occupied
square feet for the period $ .63 $ .77 $ .77 $ .60 $ .73 $ .73
Mini-warehouses:
Net rentable square feet at
end of period (000's) 738 - - 738 - -
Number of facilities with
mini-warehouse space at end
of period 13 - - 13 - -
Weighted average occupancy
for the period 93% - - 92% - -
Weighted average monthly
realized rent per occupied
square feet for the period $ .74 - - $ .72 - -
</TABLE>
- ---------------
(1) Net income per share for PSP11 is presented on a primary and fully diluted
basis. Primary earnings per share represents the shareholders' rights to
distribution out of the respective period's net income, which is calculated
by dividing net income after reduction for any distributions made to the
holders of the PSP11 Common Stock Series B (holders of the PSP11 Common
Stock Series C are not entitled to cash distributions) by the weighted
average number of shares of PSP11 Common Stock. Fully diluted earnings per
share assumes conversion of the PSP11 Common Stock Series B and C into PSP11
Common Stock.
(2) In connection with the reorganization of the PSP11 Partnership, PSP11 issued
PSP11 Common Stock and PSP11 Common Stock Series B and C. The capital
structure of PSP11 was designed to reflect the economic
13
<PAGE>
rights of the limited partners and general partners in the predecessor
partnership and the capital shares were distributed to the limited and
general partners in respect of their interests in the predecessor
partnership.
PSP11 Common Stock shares are entitled to 100% of cash distributions from
operations from PSP11 until (a) the sum of (1) all cumulative dividends and
other distributions from all sources to the holders of PSP11 Common Stock
and (2) the cumulative predecessor partnership distributions from all
sources with respect to all units equal (b) the product of $20 multiplied by
the number of the then-outstanding shares of PSP11 Common Stock, at which
time PSP11 Common Stock Series B and C will automatically convert to PSP11
Common Stock. As of September 30, 1997, conversion will occur with respect
to PSP11 when $5,397,000 in additional distributions are made to holders of
PSP11 Common Stock (assuming no further repurchases of PSP11 Common Stock).
(3) The pro forma financial data assumes that the transactions which occurred
during 1996 and 1997 as described in the Notes to Pro Forma Financial
Statements occurred at the beginning of 1996. Pro forma per share amounts
are based on the number of shares of PSP11 Common Stock assumed to be
outstanding during each period, after giving effect to the issuance of
shares of PSP11 Common Stock in the merger. The per share information
assumes the cancellation of 47,824 PSP11 Common Stock Series C shares in
accordance with a preexisting agreement, the conversion of each remaining
share of PSP11 Common Stock Series B and C into 0.8641 share of PSP11 Common
Stock and the issuance of 1.18 shares of PSP11 Common Stock for each share
of AOPP common stock in the merger.
RELATIONSHIPS
The following charts show the relationships among PSP11, AOPP and PSI both
before and after the merger (assuming maximum cash elections). The properties
of PSP11 are managed by PSI, the largest shareholder of PSP11 and AOPP, and by
AOPP, under the supervision of PSP11's Board of Directors.
14
<PAGE>
BEFORE MERGER INTO PSP11
(pro forma to reflect proposed
AOPP transactions)
[Chart omitted here]
Description of graphic:
A diagram illustrating the ownership and certain other relationships before the
merger, pro forma to reflect proposed AOPP transactions: The Hughes Family owns
35% and public shareholders own 65% of the Common Stock of PSI. PSI (a REIT)
manges miniwarehouses (including those owned by PSP11) and owns and operates
miniwarehouses. PSI also owns some commercial properties (managed by American
Office Park Properties, L.P., the Operating Partnership), some of which are to
be exchanged for the 13 miniwarehouse properties owned by PSP11 (a REIT). PSI
owns 37% and public shareholders own 63% of PSP11. PSP11 owns 2 commercial
properties (managed by the Operating Partnership) and 13 miniwarehouses to be
exchanged with PSI. PSI owns 25%, Acquiport owns 32%, Institutional Investors
own 42% and other investors own 1% of AOPP (a REIT). AOPP is to merge into
PSP11. AOPP owns general partner and limited partner interests aggregating a 58%
interest and PSI owns a limited partner interest representing a 40% interest in
the Operating Partnership. The Operating Partnership owns and manages commercial
properties.
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER
RELATIONSHIPS
At December 31, 1997, B. Wayne Hughes and members of his family owned 35.4%
of PSI Common Stock (39.5% upon conversion of PSI Class B Common Stock).
Percentage ownership of PSP11 by PSI is the total combined outstanding shares of
the PSP11 Common Stock and the PSP11 Common Stock Series B and C owned by both
PSI and B. Wayne Hughes.
15
<PAGE>
AFTER MERGER INTO PSP11
(pro forma to reflect proposed AOPP transactions
and assuming maximum cash elections)
[Chart omitted here]
Description of graphic:
A diagram illustrating the ownership and certain other relationships after the
merger, pro forma to reflect proposed AOPP transactions and assuming maximum
cash elections: The Hughes Family owns 35% and public shareholders own 65% of
the Common Stock of PSI. PSI (a REIT) owns and manages miniwarehouses (including
the 13 miniwarehouses formerly owned by PSP11). PSI also owns some commercial
properties (managed by PS Business Parks, L.P., the Operating Partnership). PSI
owns 27%, Acquiport owns 29%, Institutional Investors own 37%, other investors
own less than 1% and public shareholders own 7% of PS Business Parks, Inc. PS
Business Parks, Inc. (a REIT) was PSP11 before the merger. PS Business Parks,
Inc. owns the 11 commercial properties formerly owned PSI (managed by the
Operating Partnership). PS Business Parks, Inc. owns general partner and limited
partner interests aggregating a 65% interest and PSI owns a limited partner
interest representing a 33% interest in the Operating Partnership. The Operating
Partnership owns and manages commercial properties.
The ownership of PSP11 after the merger assuming conversion of PSI's
interests in the Operating Partnership would be approximately 54% for PSI, 24%
for institutional investors, 18% for Acquiport, 4% for public shareholders and
less than 1% for other investors. The information in this table assumes that a
pending transaction with institutional investors is completed and that they
purchase $155,000,000 of common stock. There can be no assurance that the
pending transaction will be completed and, if completed, that the institutional
investors will purchase all $155,000,000 of common stock. See "American Office
Park Properties, Inc. - Proposed Stock Issuances to Institutional Investors."
16
<PAGE>
RISK FACTORS
The merger and the amendments to PSP11's articles of incorporation and
bylaws involve risk factors and detriments which should be considered by PSP11
shareholders, including the following:
NO ARM'S LENGTH NEGOTIATION OR INDEPENDENT REPRESENTATIVES
The merger has not been negotiated at arm's length, and PSI and its related
parties have significant relationships with PSP11. No independent persons were
hired to negotiate the terms of the merger on behalf of PSP11. If such persons
had been hired, the terms of the merger might have been more favorable to the
shareholders of PSP11. In addition, no person was asked to make an offer to buy
PSP11's properties. Such an offer could have generated an alternative
transaction to the merger that PSP11 shareholders would have considered
preferable to the merger.
CHANGE FROM FINITE LIFE TO INFINITE LIFE
The investment of PSP11 shareholders is being changed from holding an
interest in a specified portfolio of properties for a fixed period to holding an
investment in an ongoing, fully-integrated real estate company. After the
merger, PSP11 expects to change its property portfolio from time to time without
shareholder approval and does not expect to sell its properties within a fixed
period of time. The market value of the investment of PSP11 shareholders may or
may not reflect the full fair market value of PSP11's assets.
CHANGE FROM INVESTMENT IN MINI-WAREHOUSES TO COMMERCIAL PROPERTIES
After the merger, PSP11 intends to focus on the ownership and operation of
commercial properties, instead of mini-warehouses. Commercial properties
present certain risks not associated with mini-warehouses: commercial
properties are larger; there are fewer leases and for longer terms; and capital
expenditures tend to be higher. Furthermore, PSI and its affiliates operate
significantly less commercial space (5,900,000 square feet at September 30,
1997) than mini-warehouse space (67,800,000 square feet at September 30, 1997).
AOPP has recently acquired or proposes to acquire 14 properties containing
3,621,300 square feet of commercial space that it did not previously operate.
See "- Operating Risks."
CONTROL AND INFLUENCE BY PSI; OWNERSHIP LIMITATIONS AND ANTITAKEOVER PROVISIONS
After the merger, the ownership of PSP11 by public shareholders will be
reduced from approximately 63% to 11% while that of PSI will increase from
approximately 37% to 43% (70% assuming conversion of PSI's interest in the
Operating Partnership). The ownership of PSP11 by public shareholders will be
further reduced to 7% upon completion of pending AOPP transactions with the
ownership of PSP11 by PSI at 27% (54% assuming conversion of PSI's interest in
the Operating Partnership). Consequently, PSI will control matters submitted to
a vote of PSP11 shareholders, including the election of directors, amendment of
PSP11's articles of incorporation, dissolution and the approval of other
extraordinary transactions, such as a takeover attempt. Also, PSP11's articles
of incorporation restrict the number of shares that may be owned by any other
person and the Operating Partnership Agreement contains an anti-takeover
provision. Unless the restrictions in PSP11's articles of incorporation are
waived by PSP11's Board of Directors, no PSP11 shareholder (other than PSI) may
own more than 2% of the outstanding shares of PSP11 Common Stock. The principal
purpose of the foregoing limitations is to assist in preventing, to the extent
practicable, a concentration of ownership that might jeopardize the ability of
PSP11 to obtain the favorable tax benefits afforded a qualified REIT. An
incidental consequence of such provisions is to make a change of control
significantly more difficult (if not impossible) even if it would be favorable
to the interests of the public PSP11 shareholders. Such provisions will prevent
future takeover attempts which the PSP11 Board of Directors has not approved
even if a majority of the public PSP11 shareholders deem it to be in their best
interests or in which the public PSP11 shareholders may receive a premium for
their shares over the then market value.
The Operating Partnership Agreement provides that AOPP (PSP11 after the
merger) may not generally engage in a business consolidation unless the
interestholders of the Operating Partnership are entitled to receive the same
proportionate consideration as holders of AOPP common stock (PSP11 Common Stock
after the merger). In addition, AOPP (PSP11 after the merger) will not engage
in a business combination unless the transaction would have been approved had
interestholders of the Operating Partnership been able to vote together with the
AOPP shareholders. As a result of these provisions, following the merger, PSP11
may be precluded from engaging in a proposed business combination. See
"American Office Park Properties, Inc. - Operating Partnership."
17
<PAGE>
AOPP has acquired six properties from a subsidiary of a state pension plan
which was issued AOPP common stock. PSI and the subsidiary have agreed to vote
their respective shares of AOPP common stock to support specified nominees to
the Board of Directors of AOPP (PSP11 after the merger) until the expiration of
the voting agreement. This voting agreement will further enhance PSI's control
of PSP11 after the merger. See "American Office Park Properties, Inc. -
Agreement with Subsidiary of State Pension Plan."
LOWER LEVEL OF DISTRIBUTIONS AFTER THE MERGER
The level of distributions to holders of PSP11 Common Stock will be
significantly lower after than before the merger. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - AOPP Historical
- - Liquidity and Capital Resources - Distributions."
UNCERTAINTY REGARDING MARKET PRICE OF PSP11 COMMON STOCK
The market price of PSP11 Common Stock may decrease because of adverse
reactions to the merger based on the significant change in the nature of the
investment of PSP11 shareholders and in PSP11's business.
DECREASED LIQUIDITY
The merger may decrease the liquidity of the PSP11 Common Stock. This
decrease could result from cash elections by PSP11 shareholders.
TERMS OF EXCHANGE BASED ON APPRAISALS INSTEAD OF ARM'S LENGTH NEGOTIATION
The terms of the exchange of 13 of PSP11's properties for 11 of PSI's
properties are based on independent third party appraisals 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.
LIMITATION ON DISSENTERS' RIGHTS OF APPRAISAL
Under California law, PSP11 shareholders will be entitled to dissenters'
rights in connection with the merger only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PSP11 Common Stock. See
"Proposal One - The Merger - Dissenting Shareholders' Rights of Appraisal."
CONFLICTS OF INTEREST
RELATIONSHIPS AMONG PARTIES. Because of the relationships among Mr.
Hughes, PSI, AOPP and PSP11, there are significant conflicts of interest in
connection with the merger. PSI and Mr. Hughes have a significant ownership
interest in PSP11, owning approximately 37% of the total combined PSP11 Common
Stock and PSP11 Common Stock Series B and C. In addition, PSI, which is
controlled by Mr. Hughes, owns approximately 43% of AOPP (27% assuming
completion of pending AOPP transactions). See "Summary - Relationships."
STRUCTURING OF MERGER BY INSIDERS. The merger has been initiated and
structured by the chief executive officer of AOPP, who is a former executive
officer of PSI, and by individuals who are executive officers of each of PSI and
PSP11, and the merger has not been negotiated at arm's length. No independent
persons were hired to negotiate the terms of the merger on behalf of PSP11. If
such persons had been hired, the terms of the merger might have been more
favorable to PSP11 shareholders.
BENEFITS TO INSIDERS. The merger and the amendments to PSP11's articles of
incorporation and bylaws involve certain benefits to AOPP and its shareholders,
primarily PSI, which owns 43% of the AOPP common stock, including the following:
. Control of PSP11. After the merger, PSI's ownership of PSP11 will
increase from approximately 37% to 43% (27% upon completion of pending
AOPP transactions). This ownership will prevent any takeover of PSP11
not approved by PSI.
18
<PAGE>
. Avoid Market Risks of IPO. AOPP intends to become publicly-traded. The
merger avoids the market risks and costs of an initial public offering
and enables the surviving corporation to use PSP11's existing AMEX
listing.
. Avoid Unwinding Transaction. AOPP has acquired six properties from a
subsidiary of a state pension plan. The subsidiary has the option to
unwind the transaction if AOPP is not publicly traded within 18
months. The merger will eliminate this risk for AOPP.
. Avoid Repurchase of Shares. AOPP has an agreement to issue up to
$155,000,000 of common stock to a group of institutional investors.
The institutional investors have the right to require AOPP to
repurchase their shares if AOPP is not publicly traded within 18
months. The merger will eliminate this risk for AOPP.
. Lower Cost of Capital. AOPP believes that the cost of raising capital
as a publicly-traded corporation after the merger would be less than
in an initial public offering. AOPP estimates that underwriting
commissions are approximately 7% in an initial public offering
compared with 5% in a secondary offering. There can be no assurance as
to the ability or cost to PSP11 of raising capital after the merger.
. Liquidity. Currently, no public trading market exists for AOPP common
stock. Consequently, the AOPP shareholders' investment is illiquid.
Upon completion of the merger, they will own PSP11 Common Stock with
liquidity.
. Mini-warehouses to PSI. PSI, which is seeking to increase its
ownership of mini-warehouses, will acquire 13 mini-warehouse
properties from PSP11 in exchange for 11 commercial properties.
PSI'S CONSENT TO CERTAIN PROPERTY SALES. For a period of 10 years, PSP11
will be restricted from selling any of 13 designated properties without PSI's
consent. Since PSI would incur adverse tax consequences upon a sale of these
properties, there may be a conflict between the interests of PSI and the other
PSP11 shareholders as to the optimum time to sell these properties.
CASH ELECTION PAYMENTS LESS THAN RECENT AND PROPOSED SALES PRICES
The cash election payment in the merger of $20.50 per share is less than
the implied price of approximately $22.50 per share paid and to be paid in
recent and proposed stock sales by AOPP to third parties. See "American Office
Park Properties, Inc. - Agreement with Subsidiary of State Pension Plan" and "-
Proposed Stock Issuances to Institutional Investors."
LIMITATION ON FUNDING BY INSTITUTIONAL INVESTORS
Certain institutional investors are required to provide additional funding
to AOPP (PSP11 after the merger) only if the properties proposed to be acquired
with such funding meet certain acquisition criteria or are otherwise approved by
those institutional investors. See "American Office Park Properties, Inc. -
Proposed Stock Issuances to Institutional Investors."
CERTAIN INVESTORS HAVE SPECIAL RIGHTS
After the merger, certain investors will have rights in PSP11, such as the
right to approve nominees to PSP11's board of directors and the right to require
registration of their shares, not available to public PSP11 shareholders. See
"American Office Park Properties, Inc. - Agreement with Subsidiary of State
Pension Plan" and "- Proposed Stock Issuances to Institutional Investors."
TAX RISKS
TAX LIABILITY TO PSP11 IF MERGER TREATED AS TAXABLE EVENT. In connection
with the merger, Hogan & Hartson L.L.P., counsel to PSP11, has delivered an
opinion that for federal income tax purposes under current law the merger will
be treated as a reorganization within the meaning of Section 368(a) of the Code.
This opinion is based on certain representations made by PSP11, AOPP and certain
AOPP shareholders and on certain assumptions. Furthermore, this opinion is not
binding on the IRS. Therefore, the IRS may contest the qualification of the
merger as a
19
<PAGE>
reorganization under Section 368(a) of the Code. If such a contest were
successful, the merger would be a taxable transaction and AOPP would recognize
gain in an amount equal to the excess of the fair market value of the PSP11
Common Stock issued in the merger over the adjusted basis of the assets
transferred to PSP11. As the successor to AOPP, PSP11 would be primarily liable
for any such resulting tax liability.
TAX TO PSP11 SHAREHOLDERS WHO RECEIVE CASH. A PSP11 shareholder who
receives cash pursuant to the exercise of dissenters' rights generally will
recognize taxable gain or loss measured by the difference between the amount of
cash received and the adjusted basis of such PSP11 shareholder in the
surrendered PSP11 Common Stock.
The receipt of cash by a PSP11 shareholder pursuant to a cash election in
exchange for all or part of his or her PSP11 Common Stock will generally be
treated as a redemption, the federal income tax consequences of which can only
be determined on the basis of particular facts as to each shareholder at the
time of such redemption. These federal income tax consequences are further
described under the heading "Federal Income Tax Considerations - The Cash
Elections."
REDUCED CASH FLOW TO PSP11 SHAREHOLDERS IF AOPP FAILS TO QUALIFY AS A REIT.
AOPP has represented that it intends to make an election to qualify for taxation
as a REIT effective for 1997. PSP11 and AOPP believe that AOPP's election to
qualify for taxation as a REIT will be valid and that AOPP is organized and has
operated until the time of the merger in conformity with the requirements for
taxation as a REIT. If, for any reason, the IRS were subsequently to determine
that AOPP failed to meet the requirements for REIT status, AOPP could lose its
REIT qualification, causing PSP11 to lose its REIT qualification for the year of
the merger and for subsequent years. Among other requirements, a REIT is not
permitted to have at the end of any taxable year any undistributed earnings and
profits that are attributable to a "C corporation" taxable year. AOPP was
taxable as a "C corporation" prior to 1997, and believes that at the end of 1996
it did not have any undistributed "C corporation" earnings and profits.
However, neither AOPP nor PSP11 has sought an opinion of counsel or outside
accountants to the effect that there are no "C corporation earnings and profits"
at that time or as a result of the merger or to the effect that AOPP otherwise
will qualify for taxation as a REIT.
REDUCED CASH FLOW TO PSP11 SHAREHOLDERS IF PSP11 FAILS TO QUALIFY AS A
REIT. PSP11's qualification and taxation as a REIT depend upon both (i) the
satisfaction in the past by AOPP of the requirements for qualification and
taxation as a REIT and (ii) PSP11's ability to meet on a continuing basis,
through actual annual operating and other results, the various requirements
under the Code with regard to, among other things, the sources of its gross
income, the composition of its assets, the level of its distributions to
shareholders, and the diversity of its stock ownership. Hogan & Hartson L.L.P.,
in its opinion that PSP11 is organized in conformity with the requirements for
qualification as a REIT and PSP11's proposed method of operation following the
merger will enable PSP11 to continue to meet the requirements for qualification
as a REIT, has relied upon representations of PSP11 and AOPP with respect to
certain factual matters relating to the requirements for taxation as a REIT and
has not conducted an audit or investigation with respect to either PSP11's or
AOPP's past compliance with respect to these requirements and will not review
PSP11's compliance with these requirements on a continuing basis. Accordingly,
no assurance can be given that the actual results of the operations of PSP11 and
AOPP, the sources of their income, the nature of their assets, the level of
their distributions to shareholders and the diversity of their share ownership
for any given taxable year in the past or in the future will satisfy the
requirements under the Code for qualification and taxation as a REIT. In this
regard, the stock ownership limits set forth in PSP11's articles of
incorporation do not necessarily ensure that PSP11 will be able to satisfy the
requirement that it not be "closely held" for any given taxable year. For any
taxable year that PSP11 fails to qualify as a REIT and the relief provisions do
not apply, PSP11 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 PSP11 for distribution
to its shareholders or for reinvestment. As a result, failure of PSP11 to
qualify during any taxable year as a REIT could have a material adverse effect
upon PSP11 and its shareholders. Furthermore, unless certain relief provisions
apply, PSP11 would not be eligible to elect REIT status again until the fifth
taxable year that begins after the first year for which PSP11 fails to qualify.
FINANCING RISKS
DILUTION AND SUBORDINATION. After the merger, the interest of PSP11
shareholders in PSP11 can be diluted through the issuance of additional
securities. If PSP11 issues preferred or equity stock, the interest of PSP11
shareholders could be subordinated, and if PSP11 issues additional common stock,
the interest of PSP11 shareholders
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could be diluted. See "Proposal Two - Amendments to PSP11's Articles of
Incorporation - Increased Capitalization" for a discussion of the terms of the
preferred stock, common stock and equity stock of PSP11.
INCREASED RISK OF LOSS OF INVESTMENT FROM DEBT. After the merger, PSP11
may incur debt. The use of debt increases the risk of loss through foreclosure.
OPERATING RISKS
VALUE OF INVESTMENT REDUCED BY GENERAL RISKS OF REAL ESTATE OWNERSHIP.
After the merger, PSP11 will own and operate commercial properties. PSP11 will
continue to be subject to the risks of ownership of real estate-related assets
generally and of ownership of commercial properties in particular. These risks
include (i) lack of demand for space in a locale, (ii) changes in general
economic or local conditions, (iii) changes in supply of or demand for similar
or competing facilities in an area, (iv) the impact of environmental protection
laws, (v) changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or unattractive
and (vi) changes in tax, real estate and zoning laws. If PSP11's properties do
not generate revenue sufficient to meet operating expenses, including any debt
service, tenant improvements, leasing commissions, and other capital
expenditures, PSP11 may have to borrow additional amounts to cover fixed costs
and PSP11's cash available for distribution and ability to make expected
distributions to its shareholders will be adversely affected.
LEASE EXPIRATIONS. PSP11 is subject to the risk that, upon expiration,
leases may not be renewed, the space may not be relet, or the terms of renewal
or reletting (including the cost of required renovations) may be less favorable
than the current lease terms. Certain leases pertaining to PSP11's properties
grant their tenants early termination rights upon payment of a termination
penalty. PSP11 has estimated the expenditures for new and renewal leases for
1998 but no assurances can be given that PSP11 has correctly estimated such
expenses. Lease expirations will require PSP11 to locate new tenants and
negotiate replacement leases with such tenants. Replacement leases typically
require PSP11 to incur tenant improvements, other tenant inducements and leasing
commissions, in each case, which may be higher than the costs relating to
renewal leases. If PSP11 is unable to promptly relet or renew leases for all or
a substantial portion of expiring space, if the rental rates upon such renewal
or reletting are significantly lower than expected or if PSP11's reserves for
these purposes prove inadequate, PSP11's cash available for distribution and
ability to make expected distributions to shareholders could be adversely
affected.
FINANCIALLY DISTRESSED TENANTS. In the event of any lease default by a
tenant, PSP11 may experience delays in enforcing its rights as a landlord and
may incur substantial costs in protecting its investment. In addition, at any
time, a tenant of one of PSP11's properties may seek the protection of
bankruptcy laws, which could result in the rejection and termination of such
tenant's lease and thereby cause a reduction in cash available for distribution
to shareholders.
SIGNIFICANT COMPETITION AMONG COMMERCIAL PROPERTIES. Competition in the
market areas in which many of the properties PSP11 will own after the merger are
located is significant and has reduced the occupancy levels and rental rates of,
and increased the operating expenses of, certain of these properties.
Competition may be accelerated by any increase in availability of funds for
investment in real estate. Barriers to entry are relatively low for those with
the necessary capital and PSP11 will be competing for property acquisition and
tenants with entities that have greater financial resources than PSP11. Recent
increases in development of commercial properties are expected to further
intensify competition among operators in certain market areas in which PSP11
will operate.
REDUCED PROPERTY INCOME FROM CHANGES IN LAWS. Because increases in income
and service taxes are generally not passed through to tenants under leases, such
increases may adversely affect PSP11's cash flow and its ability to make
expected distributions to shareholders. PSP11's properties are also subject to
various federal, state, and local regulatory requirements, such as requirements
of the Americans with Disabilities Act of 1990 and state and local fire and
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. PSP11 believes that PSP11's properties are currently in
material compliance with all such requirements. However, there can be no
assurance that these requirements will not change or that new requirements will
not be imposed which would require significant unanticipated expenditures by
PSP11 and could have an adverse effect on PSP11's cash flow and ability to make
distributions.
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LACK OF CONTROL OF PROPERTIES BY PSP11 RESULTING FROM PARTNERSHIP AND JOINT
VENTURE PROPERTY OWNERSHIP STRUCTURES. After the merger, PSP11 will own
substantially all of its properties through the Operating Partnership (other
than those acquired in the exchange with PSI). In addition, PSP11 may also
participate with other entities in property ownership through joint ventures or
partnerships in the future. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that PSP11's partners or co-venturers might become bankrupt, that
such partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of PSP11 and that such partners or co-venturers may be in a position to take
action contrary to PSP11's instructions or requests or contrary to PSP11's
policies or objectives, including PSP11's policy with respect to maintaining its
qualification as a REIT. PSP11 will, however, seek to maintain sufficient
control of such partnerships or joint ventures to permit PSP11's business
objectives to be achieved. There is no limitation under PSP11's organizational
documents as to the amount of funds that may be invested in partnerships or
joint ventures.
REDUCED PROPERTY INCOME FROM ENVIRONMENTAL LIABILITIES. Under various
federal, state and local environmental laws, regulations and ordinances, an
owner or operator of real estate interests may be liable for the costs of
cleaning up, as well as certain damages resulting from, past or present spills,
disposals or other releases of hazardous or toxic substances or wastes on, in or
from a property. Certain environmental laws impose such liability without
regard to whether the owner knew of, or was responsible for, the presence of
hazardous or toxic substances or wastes at or from a property. An owner or
operator of real estate or real estate interests also may be liable under
certain environmental laws that govern activities or operations at a property
having adverse environmental effects, such as discharges to air and water as
well as handling and disposal practices for solid and hazardous or toxic wastes.
In some cases, liability may not be limited to the value of the property. The
presence of such substances or wastes, or the failure to properly remediate any
resulting contamination, also may adversely affect the owner's or operator's
ability to sell, lease or operate its property or to borrow using its property
as collateral.
PSP11 and AOPP have conducted preliminary environmental assessments of most
of their properties (and PSP11 intends to conduct such assessments in connection
with property acquisitions after the merger) to evaluate the environmental
condition of, and potential environmental liabilities associated with, such
properties. Such assessments generally consist of an investigation of
environmental conditions at the subject property (not including soil or
groundwater sampling or analysis), as well as a review of available information
regarding the site and publicly available data regarding conditions at other
sites in the vicinity. Although there can be no assurance, based on the recent
preliminary environmental assessments, PSP11 and AOPP believe they have funds
available to cover any liability from environmental contamination or potential
contamination, and PSP11 and AOPP are not aware of any environmental
contamination of their facilities material to the overall business, financial
condition or results of operation of PSP11 after the merger.
BENEFITS TO INSIDERS
The merger and the amendments to PSP11's articles of incorporation and
bylaws involve certain benefits to AOPP and its shareholders, primarily PSI,
which owns 43% of the AOPP common stock, including the following:
. Control of PSP11. After the merger, PSI's ownership of PSP11 will
increase from approximately 37% to 43% (27% assuming completion of
pending AOPP transactions). This ownership will prevent any takeover
of PSP11 not approved by PSI. See "Risk Factors - Control and
Influence by PSI; Ownership Limitations and Anti-takeover Provisions."
. Avoid Market Risks of IPO. AOPP intends to become publicly-traded. The
merger avoids the market risks and costs of an initial public offering
and enables the surviving corporation to use PSP11's existing AMEX
listing.
. Avoid Unwinding Transaction. AOPP has acquired six properties from a
subsidiary of a state pension plan. The subsidiary has the option to
unwind the transaction if AOPP is not publicly traded within 18
months. The merger will eliminate this risk for AOPP. See "American
Office Park Properties, Inc. - Agreement with Subsidiary of State
Pension Plan."
. Avoid Repurchase of Shares. AOPP has an agreement to issue up to
$155,000,000 of common stock to a group of institutional investors.
The institutional investors have the right to require AOPP to
repurchase their shares if AOPP is not publicly traded within 18
months. The merger will eliminate this
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risk for AOPP. See "American Office Park Properties, Inc. - Proposed
Stock Issuances to Institutional Investors."
. Lower Cost of Capital. AOPP believes that the cost of raising capital
as a publicly-traded corporation after the merger would be less than
in an initial public offering. AOPP estimates that underwriting
commissions are approximately 7% in an initial public offering
compared with 5% in a secondary offering. There can be no assurance as
to the ability or cost to PSP11 of raising capital after the merger.
. Liquidity. Currently, no public trading market exists for AOPP common
stock. Consequently, the AOPP shareholders' investment is illiquid.
Upon completion of the merger, they will own PSP11 Common Stock with
liquidity.
. Mini-warehouses to PSI. PSI, which is seeking to increase its
ownership of mini-warehouses, will acquire 13 mini-warehouse
properties from PSP11 in exchange for 11 commercial properties. See
"Proposal One - The Merger - Exchange of Properties."
. PSI Avoids Taxable Gain. For a period of 10 years, PSP11 will be
restricted from selling any of 13 designated properties without PSI's
consent. PSI would incur a taxable gain upon a sale. See "American
Office Park Properties, Inc. - Operating Partnership - Summary of
Operating Partnership Agreement - Tax Protection Provisions."
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PROPOSAL ONE - THE MERGER
GENERAL
The merger agreement provides for the following:
. AOPP will merge into PSP11, and each share of AOPP common stock will be
converted into 1.18 shares of PSP11 Common Stock (subject to a cash
election right described below in "- Cash Election Procedure").
. Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in cash
as follows:
. If holders of 20% or less of the outstanding PSP11 Common Stock elect
to receive cash in the merger, shares held by holders electing cash
will be converted into the right to receive $20.50 in cash for each
share of PSP11 Common Stock. To be effective a cash election must be
made by __________, 1998, in accordance with the accompanying cash
election form.
. If holders of more than 20% of the outstanding PSP11 Common Stock
elect to receive cash in the merger, shares held by such holders will
be converted into the right to receive $20.50 in cash on a pro rata
basis to the extent of 20% of the outstanding PSP11 Common Stock and
the balance of such shares will continue to be owned by PSP11
shareholders.
. If a PSP11 shareholder does not elect cash, he or she will continue
to own PSP11 Common Stock.
. Shares held by PSP11 shareholders who have properly exercised
dissenter's rights under California law will be purchased by PSP11 on
the terms described under "- Dissenting Shareholders' Rights of
Appraisal."
. Each share of PSP11 Common Stock Series B and each share of PSP11 Common
Stock Series C will be converted into .8641 share of PSP11 Common Stock
(subject to a cash election right described below in "- Cash Election
Procedure").
. PSP11 will exchange 13 predominantly mini-warehouse properties for 11
commercial properties owned by PSI.
Approval of the merger is conditioned upon approval of all of the
amendments to PSP11's articles of incorporation and bylaws, adoption of the Plan
and the election as directors of the nominees named herein. See "Proposal Two -
Amendments to PSP11's Articles of Incorporation - Increased Capitalization,"
"Proposal Three - Amendments to PSP11's Articles of Incorporation and Bylaws -
Infinite Life Entity," "Proposal Four - Amendments to PSP11's Articles of
Incorporation and Bylaws - Ownership Limitation," "Proposal Five - Amendment to
PSP11's Bylaws - Increase in Authorized Number of Directors," "Proposal Six -
Adoption of 1997 Stock Option and Incentive Plan" and "Proposal Seven - Election
of Directors."
BACKGROUND
GENERAL. THE MERGER HAS BEEN INITIATED AND STRUCTURED BY THE CHIEF
EXECUTIVE OFFICER OF AOPP, WHO IS A FORMER EXECUTIVE OFFICER OF PSI, AND BY
INDIVIDUALS WHO ARE EXECUTIVE OFFICERS OF BOTH PSI AND PSP11. THE SPECIAL
COMMITTEE OF THE PSP11 BOARD OF DIRECTORS HAS REVIEWED AND RECOMMENDED FOR
APPROVAL THE TERMS OF THE MERGER, AND THE PSP11 BOARD OF DIRECTORS, BASED ON
RECOMMENDATIONS OF THE SPECIAL COMMITTEE, WHICH THE PSP11 BOARD OF DIRECTORS HAS
ADOPTED, AND ON THE OPINION OF A FINANCIAL ADVISOR IN WHICH IT CONCURS, BELIEVES
THAT THE MERGER IS FAIR TO THE PUBLIC PSP11 SHAREHOLDERS AND RECOMMENDS THAT
PSP11 SHAREHOLDERS VOTE FOR THE MERGER. THE MERGER HAS NOT BEEN NEGOTIATED AT
ARM'S LENGTH AND ONE OF THE THREE MEMBERS OF THE PSP11 BOARD OF DIRECTORS HAS
SUBSTANTIAL CONFLICTS OF INTEREST.
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PSP11 was organized to succeed to the business of the PSP11 Partnership in
a reorganization transaction completed in December 1990. The PSP11 Partnership
was formed primarily to develop mini-warehouses, raising $42 million in a public
offering completed in 1984. All of the proceeds from the offering have been
invested. A predecessor of PSI was the sponsor of the PSP11 Partnership.
The PSP11 Partnership originally anticipated selling or financing its
properties from seven to 10 years after development, i.e., between 1993 and
1996. By 1990, significant changes had taken place in the financial and real
estate markets affecting the timing of any proposed sale or financing,
including: (i) the increased construction of mini-warehouses and business parks
from 1984 to 1988, which had increased competition, (ii) the general
deterioration of the real estate market (resulting from a variety of factors,
including the 1986 changes in tax laws), which had significantly affected
property values and decreased real estate sales activities, (iii) the reduced
sources of real estate financing (resulting from a variety of factors, including
adverse developments in the savings and loan industry) and (iv) the glut in the
real estate market caused by overbuilding and sales of properties acquired by
financial institutions.
In view of the events affecting the timing of the sale or financing of the
PSP11 Partnership's properties, the PSI predecessor concluded that the limited
partners of this partnership, as well as the limited partners of other
partnerships sponsored by the PSI predecessor, should be provided with a more
efficient method of realizing the value of their investment than the secondary
market for limited partnership interests and that some of the disadvantages of
operating in partnership form should be avoided. Accordingly, in 1990, the PSI
predecessor commenced planning the reorganization of the PSP11 Partnership and
other public limited partnerships sponsored by the PSI predecessor into
individual corporations taxed as REITs, and, between December 1990 and November
1991, the PSI predecessor completed such reorganization of the PSP11 Partnership
and 17 other public partnerships.
The reorganizations were implemented primarily to provide liquidity to
investors, to avoid the effects of legislation designed to require limited
partnerships to withhold state income taxes from distributions and to simplify
partnership administration. The reorganizations were not designed to alter the
business of the partnerships, but merely the form in which the partnerships were
operated, and were not intended to have any material impact on the timing of the
sale or financing of the PSP11 Partnership's properties.
In response to changes requested by the unaffiliated dealer manager of the
PSP11 Partnership's original offering of limited partnership interests, PSP11
added provisions to its bylaws to the effect that its shareholders be presented
with a proposal in 1997 to sell all or substantially all of its properties,
distribute the proceeds from such sale and liquidate PSP11. Later, in
settlement of litigation arising from the reorganization of PSP11, the bylaw
provisions were amended to expand the terms of the proposal to include a
possible financing of PSP11's properties. IF APPROVED BY THE SHAREHOLDERS OF
PSP11, THE MERGER WOULD OBVIATE PSP11'S OBLIGATION TO PRESENT A PROPOSAL TO THE
SHAREHOLDERS OF PSP11 FOR THE SALE OF ITS PROPERTIES. IF THE SHAREHOLDERS OF
PSP11 DO NOT APPROVE THE MERGER OR IF THE MERGER IS NOT COMPLETED BECAUSE OTHER
CONDITIONS ARE NOT SATISFIED, PSP11 INTENDS TO PRESENT A PROPOSAL TO THE
SHAREHOLDERS OF PSP11 FOR THE DISPOSITION OF ITS PROPERTIES AS CONTEMPLATED BY
ITS BYLAWS.
AOPP, which was reorganized in January 1997, intends to increase its asset
and capital base through the acquisition of real estate assets for cash or
capital stock and to become publicly traded either through the merger or an
initial public offering in order to have access to the public securities markets
and to increase the liquidity of AOPP shareholders. AOPP believes that the
merger avoids the market risks and certain costs of an initial public offering.
After the merger, the surviving corporation intends to continue to increase its
asset and capital base.
The merger has been structured as a merger of AOPP into PSP11 instead of a
merger of PSP11 into AOPP so that the surviving corporation could use PSP11's
existing AMEX listing and to facilitate the transfer of PSP11's mini-warehouses
to PSI and its commercial properties to the Operating Partnership under the
existing federal income tax laws.
PSP11 BOARD ACTIONS. The Board of Directors of PSP11 consists of B. Wayne
Hughes, the chief executive officer of PSI and PSP11, Vern O. Curtis and Jack D.
Steele.
At a meeting on September 11, 1996, which included individuals who are
officers of PSP11 and PSI, the Board of Directors of PSP11 appointed a special
committee, consisting of Vern O. Curtis and Jack D. Steele, both independent
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directors, to consider and make recommendations to the Board of Directors of
PSP11 regarding proposed mergers of PSP11 (and two other similar REITs) into
PSI. Messrs. Curtis and Steele are the members of the special committees that
considered the mergers of 17 other REITs into PSI from September 1994 - June
1997. Following the September 11 board meeting, the special committee (and the
special committees of two other similar REITs) held organizational meetings,
which were attended by individuals who are officers of PSP11 and PSI, and
discussed generally the properties of PSP11 (and the other REITs) and the timing
of the proposed mergers with PSI. Following the discussion, the special
committee approved the engagement of The Nicholson Group, Ltd. ("TNG"), on
behalf of PSI and PSP11, to appraise the properties of PSP11 and determined to
engage Hogan & Hartson L.L.P. as special counsel to represent and advise the
special committee. TNG and Hogan & Hartson L.L.P. had acted in similar
capacities in connection with the mergers of other affiliated REITs into PSI.
On December 5, 1996, the special committee held a telephonic meeting, which
was attended by individuals who are officers of both PSP11 and PSI. The
officers reported that the liquidation value per share of PSP11 Common Stock
appeared to be lower than the trading price of the PSP11 Common Stock at that
time. The special committee concluded that PSP11 should not therefore pursue
either a liquidation or a merger of PSP11 into PSI based on PSP11's liquidation
value per share. At the same meeting the mergers of two other similar REITs
into PSI were approved; the per share liquidation values of those REITs were
higher than their trading prices.
On April 9, 1997, following a meeting to approve the mergers of other
similar REITs into PSI, the Board of Directors of PSP11 expanded the
jurisdiction of the special committee to consider other transactions involving
PSP11, and the special committee met with the chief executive officer of AOPP to
discuss preliminarily a combination of AOPP and PSP11. The chief executive
officer described generally the business and properties of AOPP. It was noted
that through the transaction PSP11 would become a fully-integrated and self-
managed real estate company and AOPP would gain access to the public securities
markets. The members of the special committee expressed the view that a certain
percentage of PSP11 shareholders should have a cash option in any merger of AOPP
and PSP11.
On May 13, 1997, at a regularly scheduled meeting of the PSP11 Board of
Directors which was attended by individuals who are officers of both PSP11 and
PSI, the Board discussed generally the special committee's April 9 suggestion
for a cash option to the PSP11 shareholders.
On June 9, 1997, the special committee held a telephonic meeting, which was
attended by individuals who are officers of PSP11 and PSI. The special
committee discussed the engagement of a financial advisor and ratified the
engagement of Hogan & Hartson L.L.P. as special counsel.
On June 20, 1997, the special committee met with representatives of
Jefferies. Individuals who are officers of PSP11 and PSI were present for a
portion of the meeting. Following the meeting, the special committee engaged
Jefferies to render an opinion as to the fairness of the consideration to be
paid by PSP11 in the merger, from a financial point of view, to the PSP11 public
shareholders.
On July 3, 1997, individuals who are officers of PSP11 and PSI met with
representatives of Jefferies and presented a proposal to merge AOPP into PSP11
under which each share of AOPP common stock would be converted into 1.3778
shares of PSP11 Common Stock (an issuance of an aggregate of 5,424,300 shares of
PSP11 Common Stock). During the meeting, the consideration paid under the AOPP
proposal was compared to other alternatives. See "- Comparison of Cash Election
Payments to Other Alternatives."
On July 15, 1997, the special committee held two telephonic meetings. The
first meeting was attended by a representative of Hogan & Hartson L.L.P. and by
individuals who are officers of PSP11 and PSI. During this meeting, the
officers described AOPP's July 3 proposal, AOPP's percentage interest in the
surviving corporation and the cash election procedure. After this discussion,
the chief executive officer of AOPP joined the meeting and described AOPP's
business and acquisition plans.
The second telephonic meeting was attended by the Hogan & Hartson L.L.P.
representative, as well as by representatives of Jefferies. Individuals who are
officers of PSP11 and PSI attended a portion of the meeting. The special
committee noted that a merger of AOPP into PSP11 based on the exchange ratio in
AOPP's July 3 proposal would result in dilution to FFO per share of PSP11 Common
Stock and that the special committee did not want PSP11
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to enter into a merger that was dilutive to FFO per share of PSP11 Common Stock.
The officers of PSP11 and PSI indicated that they would consider the position of
the special committee.
On July 24, 1997, the special committee held a telephonic meeting, which
was attended by representatives of Jefferies and a representative of Hogan &
Hartson, L.L.P. Individuals who are officers of PSP11 and PSI attended a
portion of the meeting, presenting another merger proposal to the special
committee under which each share of AOPP common stock would be converted into
1.16 shares of PSP11 Common Stock (an aggregate of 4,446,607 shares of PSP11
Common Stock). The representatives of Jefferies described the benefits and
detriments of a merger between AOPP and PSP11 and described the materials they
had reviewed to date. The special committee questioned how capital expenditures
relating to AOPP's properties would impact the comparison of FFO per share of
PSP11 Common Stock with the FFO per share of AOPP common stock. The officers of
PSP11 and PSI indicated that they would provide additional information to the
special committee, including information on the operations of PSP11 and AOPP for
the first six months of 1997 (the first period following AOPP's reorganization
in early January 1997). See "American Office Park Properties, Inc. - General."
On July 30, 1997, the special committee held a telephonic meeting, which
was attended by representatives of Jefferies and a representative of Hogan &
Hartson, L.L.P. Individuals who are officers of PSI and PSP11 also attended a
portion of the meeting. These individuals noted that, as requested, they had
analyzed the impact of a merger of AOPP into PSP11 based upon an exchange ratio
of 1.16 (the exchange ratio in AOPP's July 24 proposal) on AOPP's results of
operations for the six months ended June 30, 1997 and the effect of capital
expenditures. They noted that this analysis was reviewed with representatives
of Jefferies. It was noted that, based on this analysis, such a merger was
estimated to be accretive to FFO per share of PSP11 Common Stock for the six
months ended June 30, 1997 and in future periods, even after taking into account
a reserve for capital expenditures of PSP11 and AOPP.
The officers of PSP11 and PSI proposed that the cash election amount be
$20.25 per share of PSP11 Common Stock, noting that this amount was higher than
the current trading price of PSP11 Common Stock, its average trading price
during recent periods, the estimated going-concern value and the estimated
liquidation value (after estimated costs of liquidation). The special committee
expressed the view that the cash election amount should also not be less than
the estimated liquidation value before estimated costs of liquidation. The
special committee also questioned the manner of disposing the mini-warehouses
that PSP11 would own after a merger with AOPP. The officers of PSP11 and PSI
indicated that they would consider the views and concerns of the special
committee on these points. See "- Comparison of Cash Election Payments to Other
Alternatives."
On August 12, 1997, at a regularly scheduled telephonic meeting of the
PSP11 Board of Directors, individuals who are officers of PSP11 and PSI
presented a proposal to merge AOPP into PSP11 under which each share of AOPP
common stock would be converted into 1.18 shares of PSP11 Common Stock (an
issuance of an aggregate of 4,727,400 shares of PSP11 Common Stock) and under
which there would be a cash election right to receive $20.50 per share of PSP11
Common Stock for up to 20% of the outstanding PSP11 Common Stock. Concurrently
with this proposed merger, PSP11 would exchange its 13 predominantly mini-
warehouse properties for 11 commercial properties owned by PSI. The Board
indicated that this transaction appeared to be beneficial to PSP11 and should be
pursued by the special committee.
On August 15, 1997, the special committee held a meeting, which was
attended by representatives of Jefferies and a representative of Hogan &
Hartson, L.L.P. Individuals who are officers of PSI and PSP11 attended a portion
of the meeting. These individuals reviewed the terms of the transaction, the
history of AOPP, the post-merger ownership of shares of PSP11, the historical
financial statements of PSP11 and AOPP and the accounting treatment of the
merger. Next, the Jefferies representatives presented Jefferies' analysis,
which included the following items: (1) an overview of the transaction, (2) an
overview of PSP11 and AOPP, (3) a summary of the matters considered by Jefferies
in reviewing the transaction, (4) recent trading history of PSP11 Common Stock,
(5) a summary of the benefits and detriments of the merger, (6) a comparison of
the financial terms of the merger to alternative transactions, (7) a
consideration of the conversion of the PSP11 Common Stock Series B and C into
PSP11 Common Stock and (8) an analysis of the exchange of properties between
PSP11 and PSI. At the conclusion of the presentation, the Jefferies
representatives indicated that, in the opinion of Jefferies, the consideration
to be paid by PSP11 in the merger is fair to the public shareholders of PSP11
from a financial point of view, subject to the limitations and qualifications
described under "- Fairness Opinion from Jefferies." During the discussion that
followed Jefferies' presentation, it was noted that FFO per share of PSP11
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Common Stock for the six months ended June 30, 1997 was $0.89. After giving pro
forma effect to the merger as if it had occurred on January 1, 1997, FFO per
share of PSP11 Common Stock for this period would be $0.96 (assuming no cash
elections) and $0.99 (assuming maximum cash elections). The merger was also
projected to be accretive to PSP11 shareholders in future periods, as well as
for the six months ended June 30, 1997 and for future periods after taking into
account a reserve for capital expenditures of PSP11 and AOPP. It was also noted
that the appraised value of the PSI properties to be received by PSP11 in the
exchange exceeded the value of the PSP11 properties to be given up by
approximately $500,000. After the discussion, the special committee decided to
meet again to consider the proposed merger. At this point, the president of
AOPP joined the meeting to review the activities of AOPP. See "Risk Factors,"
"- Potential Benefits of the Merger," "- Real Estate Portfolio Appraisal by
TNG," "- Real Estate Portfolio Appraisal by Wilson," "- Fairness Opinion from
Jefferies" and "- Comparison of Cash Election Payments to Other Alternatives."
On August 16, 1997, the special committee held a telephonic meeting during
which the members noted that they had considered the Jefferies presentation at
the August 15 meeting and other matters covered at previous meetings. The
special committee expressed the belief that the merger is fair to, and in the
best interests of, the public PSP11 shareholders, and determined to recommend to
the PSP11 Board of Directors that the merger be approved and to recommend that
PSP11 shareholders vote for the merger. Immediately following the meeting of
the special committee, Messrs. Curtis and Steele (with B. Wayne Hughes absent)
held a meeting of the PSP11 Board of Directors. Based on the foregoing
recommendations of the special committee, which were adopted by the PSP11 Board
of Directors, the PSP11 Board of Directors (i) expressed the belief that the
merger is fair to, and in the best interests of, the public PSP11 shareholders,
(ii) approved the merger, the amendments to PSP11's articles of incorporation
and bylaws and the Plan, subject to approval of the final form of opinion from
Jefferies, (iii) determined to recommend that PSP11 shareholders vote for the
merger, the amendments and the Plan and (iv) approved the filing with the
Commission of preliminary proxy materials.
On October 29, 1997, the special committee held a telephonic meeting, which
was attended by representatives of Jefferies and Hogan & Hartson L.L.P., by
individuals who are officers of PSI and PSP11 and by the president of AOPP. The
president of AOPP described the activities of AOPP since the last meeting,
primarily the proposed transaction with a subsidiary of a state pension plan and
the proposed stock issuances to institutional investors. The participants
discussed the timing of the transactions and the composition of the Board of
Directors of PSP11 after the merger. After the discussion, the special
committee decided to meet again after the representatives of Jefferies had
considered further these proposed transactions. In the ensuing weeks, Jefferies
reviewed the information from AOPP regarding the proposed transactions in the
context of the merger and its fairness opinion. See "American Office Park
Properties, Inc. - Agreement with Subsidiary of State Pension Plan," "- Proposed
Stock Issuances to Institutional Investors" and "AOPP's Recent and Proposed
Acquisitions."
On December 12, 1997, the special committee held a telephonic meeting,
which was attended by representatives of Jefferies and Hogan & Hartson L.L.P.
and by individuals who are officers of PSI and PSP11. The officers of PSI and
PSP11 described AOPP's proposed transaction with a subsidiary of a state pension
plan and proposed stock issuances to institutional investors, noting that the
institutional investors would purchase AOPP common stock (PSP11 common stock
after the merger) on a staged basis. The special committee discussed the
proposed transactions, including the conditions to the additional purchases of
stock by the institutional investors. During the discussion, the Jefferies
representatives indicated that, in the opinion of Jefferies, the consideration
to be paid by PSP11 in the merger continued to be fair to the public
shareholders of PSP11 from a financial point of view, subject to the limitations
and qualifications described under "- Fairness Opinion from Jefferies." After
the discussion, the special committee decided to take additional time to review
the information and terms regarding the proposed AOPP transactions in the
context of the merger. The special committee scheduled a meeting for the
following week to consider the changes to the proposed merger and to make a
recommendation to the PSP11 Board of Directors. See "American Office Park
Properties, Inc. - Agreement with Subsidiary of State Pension Plan," "- Proposed
Stock Issuances to Institutional Investors" and "AOPP's Recent and Proposed
Acquisitions."
On December 17, 1997, the special committee held a telephonic meeting,
which was attended by a representative of Hogan & Hartson L.L.P., during which
the members of the special committee noted that they had considered the changes
to the proposed merger covered at previous meetings and discussed the timing of
the proposed merger. The special committee expressed the belief that the merger
is fair to, and in the best interests of, the public PSP11 shareholders, and
determined to recommend to the PSP11 Board of Directors that the merger be
ratified and to recommend that PSP11 shareholders vote for the merger.
Immediately following the meeting of the special committee, Messrs. Curtis and
Steele (with B. Wayne Hughes absent) held a meeting of the PSP11 Board of
Directors. Based on
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the foregoing recommendations of the special committee, which were adopted by
the PSP11 Board of Directors, the PSP11 Board of Directors (i) expressed the
belief that the merger continued to be fair to, and in the best interests of,
the public PSP11 shareholders, (ii) ratified the merger, (iii) determined to
recommend that PSP11 shareholders vote for the merger, (iv) approved the merger
agreement subject to non-material changes based on advice of counsel and (v)
approved the filing with the Commission of amended preliminary proxy materials.
PUBLIC ANNOUNCEMENT OF MERGER AND COMMISSION FILINGS. On August 18, 1997,
PSP11 and AOPP signed the merger agreement (amended and restated on December 17,
1997) and publicly announced the general terms of the merger. On August 22,
1997, PSP11 filed preliminary proxy materials with the Commission. On January
___, 1998, PSP11 filed a registration statement with the Commission, which was
declared effective on January ___, 1998.
REASONS FOR THE MERGER
The reasons for the decision of the special committee and PSP11 Board of
Directors to recommend the merger include:
. The merger provides PSP11 shareholders with the choice of either (A)
retaining their investment in PSP11, which, after the merger, will be a
fully-integrated and self-managed real estate company focused on
commercial properties or (B) with respect to up to 20% of the
outstanding PSP11 Common Stock, receiving $20.50 per share in cash,
which is higher than the estimated liquidation value per share. See "-
Recommendation to PSP11 Shareholders and Fairness Analysis."
. The special committee and Board of Directors believe that the merger is
more advantageous to PSP11 shareholders than any of the alternatives.
See "- Alternatives to the Merger" and "- Recommendation to PSP11
Shareholders and Fairness Analysis."
. AOPP has agreed to merge with PSP11 at this time, subject to approval by
PSP11 shareholders and certain other conditions. See "- The Merger
Agreement - Conditions to Consummation of the Merger."
ALTERNATIVES TO THE MERGER
Prior to concluding that the merger should be proposed to PSP11
shareholders, the PSP11 Board of Directors and special committee considered
several alternatives to the merger. The alternatives considered by the PSP11
Board of Directors and special committee were liquidation, continuation of
operations and a merger with PSI. In order to determine which of the merger or
one of its alternatives would be more advantageous to PSP11 shareholders, the
PSP11 Board of Directors and special committee compared the potential benefits
and disadvantages of the merger with the potential benefits and detriments of
the alternatives. Set forth below are the conclusions of the PSP11 Board of
Directors and special committee regarding the comparison of the merger to the
alternatives.
LIQUIDATION
BENEFITS OF LIQUIDATION. An alternative to the merger would be to
liquidate PSP11's assets, distribute the net liquidation proceeds to its
shareholders and thereafter dissolve PSP11. Through such liquidation, PSP11
would provide for a final disposition of its shareholders' interests in the
corporation. PSP11 shareholders would receive cash liquidation proceeds.
Liquidating PSP11 would be consistent with its bylaws that its shareholders be
presented with a proposal for the sale of its properties and liquidation in
1997. If PSP11 liquidated its assets through asset sales to unaffiliated third
parties, its shareholders would not need to rely upon a real estate portfolio
appraisal of the fair market value of its real estate assets. Such assets would
be valued through arm's length negotiations between PSP11 and prospective
purchasers.
DISADVANTAGES OF LIQUIDATION. The special committee and Board of
Directors believe that the liquidation of PSP11 at this time is inadvisable.
The amount a PSP11 shareholder would receive if PSP11's properties were sold at
their appraised value and PSP11 were liquidated is not significantly different
from the average trading price of the PSP11 Common Stock prior to the
announcement of the merger. The merger provides PSP11 shareholders with the
choice of either (A) retaining their investment in PSP11, which, after the
merger, will be a fully-integrated and self-managed real estate company or (B)
with respect to up to 20% of the outstanding PSP11 Common Stock, receiving
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in cash $20.50 per share, which is higher than the estimated liquidation value
per share based on a real estate portfolio valuation of PSP11's properties. In
addition, for many PSP11 shareholders, the proceeds available for reinvestment
after liquidation would be reduced as a result of federal and state income taxes
(as they would be in the case of cash elections).
PSP11 shareholders should recognize that appraisals are opinions as of
the date specified and are subject to certain assumptions and may not represent
the true worth or realizable value of these properties. There can be no
assurance that if these properties were sold, they would be sold at the
appraised values; the sales prices might be higher or lower than the appraised
values.
LIQUIDATION PROCEDURES. As with a merger, a liquidation of PSP11
would require approval by the holders of a majority of the outstanding common
stock of PSP11. Upon the dissolution of PSP11, its properties would be sold and
any funds remaining after payment of debts, and liabilities would be distributed
to the shareholders of PSP11 in respect of their shares. PSI and its affiliates
would receive their share of the available funds in the liquidation. The
process for liquidating the assets of PSP11 would in large measure be within the
control of the Board of Directors. Liquidation may be accomplished through a
series of separate transactions with different purchasers or as a part of a
multi-property transaction.
The PSP11 Board of Directors may engage real estate brokers,
investment bankers, financial consultants and others to assist with the
disposition of PSP11's assets. These persons may assist with the identification
of prospective purchasers, arrangements for asset financing, and assistance with
the structure of the transaction. The Board of Directors, as fiduciaries to
PSP11 shareholders, remains responsible for determining the terms and conditions
of such transactions. One of the more significant considerations for the Board
of Directors would be the decision whether to insist upon payment in full upon
sale of a property or to accept a portion of the sale price at closing and the
balance through installment payments. Acceptance of a sale proposal providing
for deferred payments would extend the life of PSP11 until receipt of those
amounts by PSP11 and their distribution to its shareholders. Such arrangements
would also expose PSP11 to the risk that deferred payments might not be
collected in full and that PSP11 might be forced to foreclose on any collateral
given to secure payment of the deferred obligations. It is not possible to
predict the time period that would be required to liquidate PSP11 because it
would depend on market conditions at the time of liquidation.
CONTINUED OPERATION OF PSP11
BENEFITS OF CONTINUATION. Another alternative to the merger would be
to continue PSP11 in accordance with its existing business plan, with PSP11
remaining as a separate legal entity and with its own assets and liabilities.
Nothing requires the liquidation or merger of PSP11 at this time, since PSP11 is
operating profitably and does not need to liquidate or reorganize to satisfy
debt obligations or other current liabilities or to avert defaults, foreclosures
or other adverse business developments.
There has been improvement in the mini-warehouse markets. As the pace
of new mini-warehouse development has slowed from the peak levels of 1984-88,
there has been a corresponding improvement in the financial performance of
existing properties. This improvement is evidenced by the performance of
PSP11's mini-warehouses. For example, from 1994 to 1996, occupancy per square
foot remained stable at 92-93%, and realized monthly rents per square foot
increased from an average of $.67 to $.72. Despite recent increases in the
development of new mini-warehouses, the PSP11 Board of Directors believes that
the financial performance from existing facilities may continue to improve,
although not necessarily at the rate of improvement experienced in prior years.
Should such improvements continue, the value of PSP11's properties could be
expected to increase. See "Public Storage Properties XI, Inc. - Description of
PSP11's Properties."
A number of advantages could be expected to arise from PSP11's
continued operation. PSP11 shareholders would continue to receive regular
quarterly distributions of net cash flow arising from operations and the sale or
refinancing of PSP11's assets. Given the currently improving market conditions
for mini-warehouses, PSP11's Board of Directors believes that the level of these
distributions to the shareholders of PSP11 may increase. Continuing PSP11
affords its shareholders with the opportunity to participate in any future
appreciation in PSP11's properties. In addition, the decision to continue
PSP11, if elected, would mean that there would be no change in the nature of the
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investment of the shareholders of PSP11. This option avoids whatever
disadvantages might be deemed inherent in the merger. See "Risk Factors" for
discussion of various risks associated with the merger.
DISADVANTAGES OF CONTINUATION. The primary disadvantage with
continuing PSP11 is the failure of that strategy to secure the benefits that the
PSP11 Board of Directors expects to result from the merger. These benefits are
highlighted under "- Potential Benefits of the Merger." Through the merger,
PSP11 will become a fully-integrated and self-managed real estate company.
MERGER WITH PSI
GENERAL. Another alternative to the merger would be a merger with
PSI. Between September 1994 and June 1997, PSI has merged with 16 REITs which,
like PSP11, had been organized by PSI's predecessor to succeed to the business
of predecessor partnerships to the REITs. These mergers were based on the fair
market value of the REITs' assets. A merger between PSI and PSP11 was
considered but not pursued in significant part because the estimated net asset
value per share of PSP11 Common Stock of $19.32 per share ($20.50 per share
before liquidation expenses) was about the same as the trading price of the
PSP11 Common Stock before the announcement of the proposed merger between PSP11
and AOPP ($20 per share). Accordingly, a merger between PSP11 and PSI would not
have provided PSP11 shareholders with any premium to the trading price of their
shares and they may not have approved it. As described under "Benefits to
Insiders," the proposed merger between PSP11 and AOPP provides significant
benefits to PSI. AOPP, a subsidiary of PSI, will become publicly traded and, as
with a merger between PSP11 and PSI, PSI will acquire PSP11's mini-warehouses.
See "- Background," "- Estimate of PSP11 Liquidation Value," and "Benefits to
Insiders."
BENEFITS OF MERGER WITH PSI. A merger with PSI would provide PSP11
shareholders with an opportunity to invest in PSI, which generally owns the same
type of properties as PSP11, continually expands its asset and capital base and
provides its investors with greater liquidity than PSP11.
DISADVANTAGES OF MERGER WITH PSI. As described above, the estimated
net asset value per share of PSP11 Common Stock was about the same as the
trading price of the PSP11 Common Stock before the announcement of the proposed
merger between PSP11 and AOPP. Accordingly, a merger between PSP11 and PSI
would not have provided PSP11 shareholders with any premium to the trading price
of their shares.
Based upon this comparison of the potential benefits and disadvantages of
the merger with the other alternatives, the PSP11 Board of Directors and special
committee have concluded that the merger is more attractive to PSP11
shareholders than any of the alternatives.
NO SOLICITATION OF OTHER PROPOSALS
Neither the PSP11 Board of Directors nor the special committee solicited
any other proposals for the acquisition of PSP11 or its properties. The Board
of Directors agreed to the merger agreement, which includes a provision against
soliciting other offers to buy, because it believes that the potential benefits
to PSP11 shareholders described under "- Potential Benefits of the Merger" are
more likely to be achieved through the merger than in a transaction with another
party.
POTENTIAL BENEFITS OF THE MERGER
The PSP11 Board of Directors believes that the merger should result in the
following benefits to PSP11 and the public PSP11 shareholders:
. By combining with AOPP which has substantial experience with commercial
properties, PSP11 will become a fully-integrated and self-managed real
estate company with expertise in the acquisition, operation and leasing
of commercial properties. AOPP has operated commercial properties since
1986 and, at September 30, 1997, AOPP operated 91 commercial properties
containing approximately 5,900,000 square feet of rentable space. AOPP's
executive vice president, with overall responsibility for property
operations, has been in the commercial property business for more than
15 years. She and approximately 80 other personnel engaged in commercial
property operations for AOPP will
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render services for PSP11 after the merger. AOPP has recently acquired
or proposes to acquire 14 properties containing 3,621,300 square feet of
commercial space that it did not previously operate.
. The merger will increase PSP11's asset and capital base, providing PSP11
with interests in a larger number of properties than before the merger.
. As an "infinite life" entity PSP11 will be able to grow through the
issuance of additional securities, the reinvestment of cash flow and the
acquisition of additional properties.
. As a fully-integrated and self-managed real estate company, PSP11 should
be more attractive to institutional investors.
. PSP11 will be able to expand its holdings in commercial properties
without a proportionate increase in property management fees, which
would have resulted had its current commercial property management
agreement remained in effect.
. PSP11 will have sufficient size and financial position to seek a rating
of its securities from the national credit rating agencies. If PSP11's
securities were favorably rated, PSP11's ability to raise capital at a
lower cost will be enhanced.
DETRIMENTS OF THE MERGER
For a discussion of certain risks and detriments of the merger, see "Risk
Factors" beginning on page 17.
RECOMMENDATION TO PSP11 SHAREHOLDERS AND FAIRNESS ANALYSIS
CONCLUSIONS. Based upon an analysis of the merger, the PSP11 special
committee and Board of Directors have concluded (i) that the terms of the merger
are fair to PSP11 shareholders, (ii) after comparing the potential benefits and
detriments of the merger with alternatives, that the merger is more advantageous
to PSP11 shareholders than such alternatives and (iii) that PSP11 shareholders
should vote for the merger.
Although the PSP11 Board of Directors and the special committee reasonably
believe that the terms of the merger are fair to PSP11 shareholders and
recommend that PSP11 shareholders vote for the merger, PSI has significant
relationships with both PSP11 and AOPP and conflicts of interest with respect to
the merger. The merger has been initiated and structured by the chief executive
officer of AOPP, who is a former executive of PSI, and by individuals who are
executive officers of PSP11 and who are also affiliated with PSI. The special
committee, comprised of independent directors, has reviewed and approved the
terms of the merger. One of the three members of the PSP11 Board of Directors
has substantial conflicts of interest. See "Summary - Relationships" and
"Benefits to Insiders."
MATERIAL FACTORS UNDERLYING CONCLUSIONS OF SPECIAL COMMITTEE AND PSP11
BOARD OF DIRECTORS. The following is a discussion of the material factors
underlying the conclusions of the PSP11 Board of Directors and its special
committee. The PSP11 Board of Directors and special committee have not
quantified the relative importance of these factors.
1. Choice as to Form of Consideration. The merger provides PSP11
shareholders with the choice of either (A) retaining their investment in PSP11,
which, after the merger, will be a fully-integrated and self-managed REIT
focused on commercial properties or (B) with respect to up to 20% of the
outstanding PSP11 Common Stock, receiving $20.50 per share in cash, which is
higher than the amounts PSP11 shareholders would receive if PSP11's properties
were sold at their appraised values and PSP11 were liquidated. The Board of
Directors and special committee recognize that if holders of more than 20% of
the outstanding PSP11 Common Stock elect to receive cash, such holders will
receive cash as to only a portion of their investment. Accordingly, the benefit
of cash elections is significantly reduced by the limitation on cash elections.
2. Independent Portfolio Appraisal and Fairness Opinion. The
conclusions of the special committee and PSP11 Board of Directors are based
partially upon the portfolio appraisals prepared by TNG and by Charles R. Wilson
& Associates, Inc. ("Wilson") and Jefferies' fairness opinion. The special
committee and Board of Directors attributed significant weight to these items,
which they believe support their position, and do not know of any factors that
are reasonably likely to detract from the conclusions in the portfolio
appraisals of TNG and Wilson and Jefferies' fairness
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opinion. The special committee and Board of Directors believe that the
engagement of TNG and Wilson and Jefferies to provide the portfolio appraisals
and the fairness opinion, respectively, assisted the special committee and Board
of Directors in the fulfillment of their duties to PSP11 shareholders,
notwithstanding that each of these parties has received fees in connection with
their engagements and may receive fees in the future. See "- Real Estate
Portfolio Appraisal by TNG," "- Real Estate Portfolio Appraisal by Wilson" and
"- Fairness Opinion from Jefferies."
3. Voting Procedures and Dissenters' Rights. The special committee and
PSP11 Board of Directors believe that the voting process and the rights of
dissenting shareholders of PSP11 support their conclusions as to the merger.
The merger and the amendments to PSP11's articles of incorporation and bylaws
are required to be approved by a majority of the outstanding shares of PSP11
Common Stock and PSP11 Common Stock Series B and C, voting together as a class,
and the PSP11 Common Stock Series B and C will be voted with the holders of a
majority of the unaffiliated PSP11 Common Stock. PSP11 shareholders will have
the right to exercise dissenters' rights, although the special committee and
Board of Directors recognize that these rights may be exercised by PSP11
shareholders only if demands for payment are filed with respect to 5% or more of
the outstanding shares of PSP11 Common Stock and in such event AOPP has the
right to terminate the merger agreement.
4. Comparison of Cash Elections to Other Alternatives. The payments
that holders of up to 20% of the PSP11 Common Stock may elect to receive in the
merger of $20.50 per share compares favorably with (A) a range of estimated
going-concern values per share of PSP11 Common Stock ($16.66 to $20.17), (B) an
estimated liquidation value per share of PSP11 Common Stock ($19.32) and (C) the
book value per share of PSP11 Common Stock as of September 30, 1997 ($10.75).
The PSP11 Board of Directors and special committee recognize that this
comparison is subject to significant assumptions, qualifications and
limitations. See "- Comparison of Cash Election Payments to Other
Alternatives."
5. Lower Level of Distributions to PSP11 Shareholders After the Merger.
The level of distributions to PSP11 shareholders will be significantly lower
after the merger than before. The PSP11 Board of Directors and special
committee viewed the reduction in the level of distributions as a negative
factor in evaluating the merger. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - AOPP Historical - Liquidity and
Capital Resources - Distributions."
6. Conflicts of Interest. The merger has been initiated and structured
by the chief executive officer of AOPP, who is a former executive of PSI, and by
individuals who are executive officers of PSP11 and who are also affiliated with
PSI. Independent representatives were not engaged to negotiate these
arrangements on behalf of the public PSP11 shareholders, and the terms of the
merger are not the result of arm's length negotiations.
The special committee and PSP11 Board of Directors do not believe that the
absence of independent representatives to negotiate the merger undermines the
fairness of the merger because the merger has been reviewed and approved by the
special committee, comprised of independent directors. Based upon the use of
independent appraisal firms, the Jefferies fairness opinion and the
participation of the special committee, the PSP11 Board of Directors and special
committee considered that the engagement of such independent representatives was
not necessary or cost effective.
COMPARISON OF CASH ELECTION PAYMENTS TO OTHER ALTERNATIVES
GENERAL. To assist PSP11 shareholders in evaluating the merger, the PSP11
Board of Directors and special committee compared the consideration to be
received in the merger by PSP11 shareholders making cash elections (up to 20% of
the outstanding PSP11 Common Stock), i.e., $20.50 per share of PSP11 Common
Stock, to: (i) the trading price of the PSP11 Common Stock on the AMEX; (ii) an
estimate of the value of PSP11 on a liquidation basis assuming that its assets
were sold at their appraised fair market value and the net proceeds distributed
to the PSP11 shareholders in accordance with their share ownership in PSP11; and
(iii) estimates of the value of PSP11 on a going-concern basis assuming that
PSP11 were to continue as a stand-alone entity and its securities sold at the
end of either a five-year or 10-year holding period or its assets sold at the
end of a 10-year holding period. Due to the uncertainty in establishing these
values, the PSP11 Board of Directors and special committee have established a
range of estimated values for certain of the alternatives, representing a high
and low estimated value for the potential consideration. Since the value of the
consideration for alternatives to the merger is dependent upon varying market
conditions, no assurance
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can be given that the range of estimated values indicated establishes the
highest or lowest possible values. However, the PSP11 Board of Directors and
special committee believe that analyzing the alternatives in terms of ranges of
estimated value, based on currently available market data and, where
appropriate, reasonable assumptions made in good faith, establishes a reasonable
framework for comparing alternatives.
The results of these comparative analyses are summarized in the following
tables. PSP11 shareholders should bear in mind that the estimated values
assigned to the alternate forms of consideration are based on a variety of
assumptions that have been made by PSP11. These assumptions relate, among other
things, to: projections as to PSP11's future income, expenses, cash flow and
other significant financial matters; the capitalization rates that will be used
by prospective buyers when PSP11's assets are liquidated; and, appropriate
discount rates to apply to expected cash flows in computing the present value of
the cash flows that may be received with respect to shares of PSP11 Common
Stock. In addition, these estimates are based upon certain information
available to PSP11 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 PSP11 Board of Directors and special committee in good faith,
and, where appropriate, are based upon current and historical information
regarding PSP11 and current real estate markets and have been highlighted below
to the extent critical to the conclusions of the PSP11 Board of Directors and
special committee.
No assurance can be given that such consideration would be realized through
any of the designated alternatives, and PSP11 shareholders should carefully
consider the following discussions to understand the assumptions, qualifications
and limitations inherent in the presented valuations. The estimated values
presented in the following table are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
estimated values are based upon certain assumptions that relate, among other
things, to (i) projections as to the future revenues, expenses, cash flow and
other significant financial matters of PSP11, (ii) the capitalization rates that
will be used by prospective buyers when the assets of PSP11 are liquidated,
(iii) selling costs, (iv) appropriate discount rates to apply to expected cash
flows in computing the present value of the cash flows and (v) the manner of
sale of PSP11's properties. Actual results may vary from those set forth below
based on numerous factors, including interest rate fluctuations, tax law
changes, supply and demand for commercial properties, the manner in which the
properties are sold and changes in availability of capital to finance
acquisitions of commercial properties.
COMPARISON OF ALTERNATIVES
<TABLE>
<CAPTION>
Trading Prices of PSP11
Cash Election Payments in Common Stock prior to the Estimated Going Concern Estimated Liquidation
Merger per Share of PSP11 announcement of the Value per Share of PSP11 Value per Share of PSP11
Common Stock merger (2) Common Stock (3) Common Stock at Appraised Value (4)
<S> <C> <C> <C>
$20.50(1) $20 1/8 $19 3/8 $16.66 $20.17 $19.32
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________
(1) Limited to 20% of the outstanding PSP11 Common Stock. See "- Cash Election
Procedure."
(2) High and low sales prices on the AMEX composite tape for the second quarter
of 1997, the last full calendar quarter prior to the announcement of the
merger. On August 15, 1997, the last full trading day prior to the
announcement of the merger, the closing price of PSP11 Common Stock was $20.
(3) High and low values of three methods of estimating going-concern value as of
December 31, 1997 based upon a number of assumptions regarding the future
net operating income and distributions of PSP11 and the date of their
liquidation. See "- Going-Concern Value."
(4) Estimated value as of December 31, 1997 based upon TNG's real estate
appraisal, less estimated expenses of liquidation of approximately $1.18 per
share. See "- Liquidation Values."
TRADING PRICES OF PSP11 COMMON STOCK. The PSP11 Board of Directors and
special committee also considered that the trading price for PSP11 Common Stock
averaged $19.76, $19.76, $19.77 and $19.83 for the 20-day,
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60-day, 180-day and 360-day periods preceding the announcement of the merger and
that the closing price for PSP11 Common Stock on the last trading day prior to
the first announcement of the merger was $20.
GOING-CONCERN VALUE. The PSP11 Board of Directors and special committee
have estimated the going-concern value of PSP11 by analyzing projected cash
flows and distributions assuming that PSP11 were operated as an independent
stand-alone entity and its securities or assets sold at the end of the holding
period under three scenarios: Scenario #1 - a five-year holding period, with
shares of PSP11 liquidated in securities markets at an FFO multiple ranging from
8.5 to 10.5; Scenario #2 - a 10-year holding period, with shares of PSP11
liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5;
and Scenario #3 - a 10-year holding period with the property portfolios of PSP11
liquidated in private real estate markets at the terminal value projected by the
appraiser in the portfolio appraisals and the net proceeds resulting from the
liquidation of the properties and other remaining assets of PSP11 paid out to
the shareholders of PSP11 in liquidation distributions. Dividends and sale
proceeds per share of PSP11 Common Stock were discounted in the projections at
rates ranging from 12.25% to 12.75%.
Scenario #3 of the going-concern analysis assumes the properties of PSP11
are sold in a single transaction after a 10-year holding period. Should the
assets be liquidated over time, even at prices equal to those projected,
distributions to shareholders out of PSP11'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 PSP11 on a going-concern basis is not intended to
reflect the distributions payable to PSP11's shareholders if its assets were to
be sold at their current fair market values.
LIQUIDATION VALUES. Since one of the alternatives available to the PSP11
Board of Directors is to proceed with a liquidation of PSP11, and the
corresponding distribution of the net liquidation proceeds to the shareholders
of PSP11, the PSP11 Board of Directors and special committee have estimated the
liquidation value of PSP11 assuming that PSP11's real estate portfolio were sold
at its fair market value, based upon the TNG real estate portfolio appraisal.
This alternative assumes non-real estate assets are sold at book value (such
assets, excluding cash, representing less than 1% of the value of PSP11), PSP11
incurs selling costs at the time of liquidation (state and local transfer taxes,
real estate commissions and legal and other closing costs) of $2,205,000, and
the remaining net liquidation proceeds are distributed among the shareholders of
PSP11 under the terms of its articles of incorporation.
The liquidation analysis assumes that PSP11's properties are sold in a
single transaction at the appraised values. Should the assets be liquidated
over time, even at prices equal to those projected, distributions to PSP11
shareholders out of PSP11's cash flow from operations might be reduced because
PSP11's relatively fixed costs, such as general and administrative expenses, are
not proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales of PSP11's portfolio are assumed to occur
concurrently.
Applying these procedures, the PSP11 Board of Directors and special
committee arrived at the liquidation value set forth in the table. The real
estate portfolio appraisal sets forth, subject to the specified assumptions,
limitations and qualifications, TNG's professional opinion as to the market
value of PSP11's real estate portfolio as of May 1, 1997. While the portfolio
appraisal is not necessarily indicative of the price at which the assets would
sell, market value generally seeks to estimate the prices at which the real
estate assets would sell if disposed of in an arm's length transaction between a
willing buyer and a willing seller, each having access to relevant information
regarding the historical revenues and expenses of the properties. The real
estate portfolio appraisal assumes that PSP11's properties are disposed of in an
orderly manner and are not sold in forced or distressed sales where sellers
might be expected to dispose of their interests at substantial discounts to
their actual fair market value. See "- Real Estate Portfolio Appraisal by TNG."
DISTRIBUTION COMPARISON. The PSP11 Board of Directors and special
committee have considered the potential impact of the merger upon distributions
that would be made to PSP11 shareholders. Distributions to PSP11 shareholders
will be significantly lower after the merger than before. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - AOPP
Historical - Liquidity and Capital Resources - Distributions."
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A comparison of current distribution levels does not show how the merger
might affect a PSP11 shareholder's distribution level over a number of years.
EXCHANGE OF PROPERTIES
Under the merger agreement, PSP11 will exchange 13 predominantly mini-
warehouse properties for 11 commercial properties owned by PSI (the "PSI
Exchange Properties"). The exchange will occur concurrently with the merger of
AOPP into PSP11.
The terms of the exchange are based on portfolio appraisals of the
properties. PSP11's 13 properties have been appraised by TNG at $42,400,000 and
the PSI Exchange Properties have been appraised by Wilson at $42,900,000. See
"- Real Estate Portfolio Appraisal by TNG" and "- Real Estate Portfolio
Appraisal by Wilson."
Given the decision of the PSP11 Board of Directors to enter into the merger
with AOPP, which has only commercial properties, the exchange is consistent with
a change in the focus of PSP11's business to the ownership and operation of
commercial properties after the merger. The exchange is also consistent with
PSI's objective of increasing its ownership of mini-warehouses.
For information on the PSI Exchange Properties, see "PSI Exchange
Properties."
REAL ESTATE PORTFOLIO APPRAISAL BY TNG
TNG was engaged by PSP11 to appraise PSP11's real estate portfolio and has
delivered a written report of its analysis, based upon the review, analysis,
scope and limitations described therein, as to the fair market value of the
portfolio of PSP11's properties as of May 1, 1997 (the "TNG Appraisal"). PSP11
selected TNG to provide the TNG Appraisal because of its experience and
reputation in connection with appraising mini-warehouses and commercial
properties. The terms of the exchange of 13 of PSP11's properties for 11 of
PSI's properties under the merger agreement are based on the TNG Appraisal of
PSP11's properties and on the appraisal of PSI's properties described under "-
Real Estate Portfolio Appraisal by Wilson." The TNG 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-1 and should
be read in its entirety. Certain of the material assumptions, qualifications
and limitations to the TNG Appraisal are described below.
EXPERIENCE OF TNG. TNG was formed in 1997 by Lawrence R. Nicholson, MAI to
succeed to the business of Nicholson-Douglas Realty Consultants, which was
founded by Mr. Nicholson in 1993. Mr. Nicholson has specialized in the
appraisal of mini-warehouses and other commercial properties since 1980. TNG
has conducted real estate appraisals on a variety of property types and uses
throughout the United States for owners, banks and thrift organizations,
insurance companies and other financial institutions. During 1996, TNG
appraised over 350 properties.
SUMMARY OF METHODOLOGY. At PSP11's request, TNG evaluated PSP11's
portfolio of real estate. In valuing the properties, TNG considered the
applicability of all three commonly recognized approaches to value: the cost
approach, the income capitalization 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 PSP11's
properties.
The income approach estimates a property's capacity to produce income
through an analysis of the rental market, operating expenses and net income.
Net income may then be processed into a value estimate through either (or a
combination) of two methods: direct capitalization or yield capitalization,
i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of substitution,
i.e., that an informed purchaser would pay no more for a property than the cost
of acquiring an existing property with the same utility. The sales comparison
approach establishes what typical investors in the marketplace are willing to
pay for comparable properties.
The cost approach is based on the estimated market value of the site as if
vacant plus the depreciated replacement cost of the existing improvements. The
cost approach was not considered appropriate in the case of PSP11
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<PAGE>
since (a) today's investors do not rely upon the cost approach in making
investment decisions, and (b) the necessity of estimating total accrued
depreciation in buildings of the type and age of PSP11's properties diminishes
the validity of this approach.
While the TNG Appraisal was prepared for PSP11's entire portfolio, TNG
analyzed the individual PSP11 properties by (a) reviewing each property's
previous three years' operating statements, (b) reviewing information submitted
to the appraiser by on-site managers which included competitive rental and
occupancy surveys, subject facility descriptions, area trends and other factors,
which were verified by TNG through physical inspections, telephone calls and
other sources; and (c) developing information from a variety of sources about
market conditions for each individual property that included population,
employment and housing trends within the market.
To determine any significant differences in quality among the various
properties, TNG considered such variables as property income growth patterns and
potential, quality of location and construction, tenant appeal, property
appearance, security and potential competition.
TNG also interviewed management personnel responsible for PSP11's
properties to discuss competitive conditions, area economic trends affecting the
properties, historical operating revenues and expenses, and occupancy rates in
competitive facilities. These interviews included ascertaining information on
items of deferred maintenance, planned capital improvements and other factors
affecting the physical condition of the properties. Representatives of TNG
performed site inspections on all 15 of PSP11's properties during October 1996.
TNG then estimated the value of each property in the portfolio relying
heavily upon the income approach. Indicated values were developed using a
direct capitalization technique applying overall capitalization rates derived
directly from the marketplace. To define the occupancy and rental rates and
expense escalators to be used in developing cash flow projections, 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
1997. Further, TNG interviewed various sources 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 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 for
each property (assuming no indebtedness) were developed for a 10-year period
ending in the year 2007. 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 an occupancy level for
each property in the portfolio.
Estimated expenses were based upon each property's actual operating
history. The projected expenses were tested for reasonableness based upon a
comparison of the operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
property. Consideration was given to and adjustment made to reflect capital
expenditures and replacement reserves. Income and expense growth rates were
based on projection parameters currently being used by property investors as
well as upon local, regional and historical trends.
For mini-warehouse properties, growth rates for income and expenses were
3.5% per year. TNG then used a terminal capitalization rate of between 9.75%
and 9.9% to capitalize each property's 11th year net operating income into a
residual value at the end of the holding period, assuming normal cost of
disposing of the properties. The 10 yearly cash flows were then discounted to
present worth using a discount rate of 12.5%. In addition, TNG valued each
mini-warehouse property using the direct capitalization method by applying
capitalization rates between 9.25% and 9.40% to projected cash flows for the
next 12 months.
For PSP11's commercial properties, TNG reviewed each property's rent roll
and lease abstracts and concluded that, in light of the high occupancy rates,
stable operating levels and relative short-term duration of the leases at rates
37
<PAGE>
reasonably reflective of market rents, the direct capitalization and discounted
cash flow analysis techniques were appropriate. As such, growth rates for base
rental rates and expenses were 3.5% per year. Actual rental revenues for each
period were based on a contractual rental rates of the leases for such periods.
TNG then used a terminal capitalization rate between 10.0% and 10.5% to
capitalize each property's 11th year net operating income into a residual value
at the end of the holding period, assuming normal cost of disposing of the
properties. The 10-year cash flows were then discounted to present worth using
discount rates ranging from 12.0% to 12.5%. In addition, PSP11's commercial
properties were valued using the direct capitalization method by applying
capitalization rates between 9.50% and 10.0% to projected cash flows for the
next 12 months.
The indicated value based upon the discounted cash flow approach is
$47,680,000 for PSP11's portfolio of properties ($42,380,000 for the 13
predominantly mini-warehouse properties). The indicated value based upon the
direct capitalization approach is $49,200,000 ($43,600,000 for the 13
predominantly mini-warehouse properties).
In applying the sales comparison approach to the PSP11 properties, TNG
analyzed over 100 properties that were sold in 1994, 1995 and 1996. Using a
regression analysis, a statistically significant correlation was derived between
the comparables' net income and their sales price per square foot. Based upon
the net operating income per square foot of each of PSP11's properties, using
the regression analysis, the indicated value is $47,300,000 ($41,700,000 for the
11 mini-warehouses and two properties that combine mini-warehouse and commercial
space).
In addition, TNG reviewed capitalization rates and purchase prices paid in
recent and pending transactions of properties similar to PSP11's portfolio
involving both PSI and others and reconciled the purchase prices with the values
of PSP11's portfolio of properties.
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 of $48,000,000 to PSP11's portfolio of real property assets as of May 1,
1997 ($42,400,000 for the 13 predominantly mini-warehouse properties). The
resulting effective implied capitalization rate averaged approximately 9.34% for
the portfolio based on reported property operations (before non-recurring
expenses and after certain property tax adjustments) during the 12 months ended
April 30, 1997 (9.40% for the 13 predominantly mini-warehouse properties).
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISAL. The TNG
Appraisal reflects TNG's valuation of PSP11's properties as of May 1, 1997 in
the context of the information available on such date. Events occurring after
May 1, 1997 and before the closing of the merger could affect the properties or
assumptions used in preparing the TNG Appraisal. TNG has no obligation to
update the TNG Appraisal on the basis of subsequent events; however, TNG has
informed PSP11 that, as of the date of this proxy statement, TNG is not aware of
any event or change in conditions since May 1, 1997 that may have caused a
material change in the value of PSP11's portfolio of real estate since that
date.
The TNG Appraisal is subject to certain general and specific assumptions
and limiting conditions and are in conformity with the Departure Provision of
Uniform Standards of Professional Appraisal Practice. Among other limitations,
the TNG Appraisal (i) did not consider the effect of easements, restrictions and
other similar items on the value of PSP11's properties, (ii) assumed that the
properties comply with local building codes and zoning ordinances, and (iii) did
not involve the physical inspections of competing properties. See Appendix B-1
for a discussion of the specific assumptions, limitations and qualifications of
the TNG Appraisal.
COMPENSATION AND MATERIAL RELATIONSHIPS. TNG is being paid an aggregate
fee of $66,000 for preparation of the TNG Appraisal, which fee includes
reimbursement for all of TNG's related out-of-pocket expenses. TNG is also
entitled to indemnification against certain liabilities. The fee was negotiated
with TNG and payment is not dependent upon completion of the merger or any
specific valuation. As a leading appraiser of mini-warehouses and other types
of properties, TNG, and its predecessor, have prepared appraisals for PSI and
its affiliates and TNG is expected to continue to prepare appraisals for PSI and
PSP11.
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REAL ESTATE PORTFOLIO APPRAISAL BY WILSON
In connection with the June 1997 merger of four REITs (the "Merged REITs")
into PSI, Wilson was engaged to appraise the real estate portfolios of the
Merged REITs, and has delivered written reports of its analysis, based upon the
review, analysis, scope and limitations described therein, as to the fair market
value of the portfolio of properties of each of the Merged REITs. All of the
properties being exchanged by PSI with PSP11 were owned by one of the Merged
REITs and were covered by Wilson's appraisals of the portfolios of those
entities. The terms of the exchange of 13 of PSP11's properties for the PSI
Exchange Properties under the merger agreement are based on Wilson's appraisals
and on the TNG Appraisal. A compilation of appraisal information on the
commercial properties owned by the Merged Entities in June 1997 is set forth as
Appendix B-2 (the "Wilson Appraisal"). Wilson was selected to appraise the
properties of the Merged REITs because of its experience and reputation in
connection with appraising mini-warehouses and commercial properties, its
familiarity with the properties of the Merged REITs and Wilson's appraisal of
the properties of other REITs in connection with their mergers with PSI. The
Wilson Appraisal, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
analysis, should be read in its entirety. Certain of the material assumptions,
qualifications and limitations to the Wilson Appraisal are described below.
EXPERIENCE OF WILSON. Wilson was founded by Charles R. Wilson in 1976, who
has specialized in the appraisal of mini-warehouses and commercial facilities
since 1972. Wilson has conducted real estate appraisals on a variety of
property types and uses throughout the United States for owners, banks and
thrift organizations, insurance companies and other financial institutions.
Wilson has appraised over 300 mini-warehouses and commercial properties during
the 12 months ended March 1997.
Mr. Wilson founded Self Storage Data Services, Inc. in 1993 for the purpose
of tracking and publishing income and expense trends in the mini-warehouse
industry. That company's data base now contains over 23,600 facilities
nationwide. Mr. Wilson, recognized as a leading authority on mini-warehouses,
has spoken extensively and has written several articles on the subject of mini-
warehouses.
SUMMARY OF METHODOLOGY. In valuing the PSI Exchange Properties, Wilson
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. Wilson did not consider the cost approach to be applicable
to the PSI Exchange Properties.
Wilson analyzed each individual PSI Exchange Property by (a) reviewing each
PSI Exchange Property's previous three years' operating statements, (b)
reviewing information submitted to the appraiser by on-site managers which
included competitive rental and occupancy surveys, subject facility
descriptions, area trends and other factors, which were verified by Wilson
through physical inspections, telephone calls and other sources; (c) reviewing
existing lease terms; (d) developing information from a variety of sources about
market conditions for each individual property that included population,
employment and housing trends within the market; and (e) considering published
data on median income and expense benchmarks on comparable facilities.
To determine any significant differences in quality among the various
properties, Wilson considered such variables as property income growth patterns
and potential, quality of location and construction, tenant appeal, property
appearance, security and potential competition.
Wilson also interviewed management personnel responsible for the PSI
Exchange Properties to discuss competitive conditions, area economic trends
affecting the properties, historical operating revenues and expenses, lease
terms and occupancy rates in competitive facilities. These interviews included
ascertaining information on items of deferred maintenance, planned capital
improvements and other factors affecting the physical condition of the
properties. Wilson also reviewed surveys of local commercial properties
conducted by management. Representatives of Wilson performed site inspections
on all of the PSI Exchange Properties in March 1997.
Wilson then estimated the value of each PSI Exchange Property in the
portfolio relying heavily upon the income approach. Indicated values were
developed using a yield capitalization technique applying overall
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capitalization rates derived directly from the marketplace. To define the
occupancy and rental rates and expense escalators to be used in developing cash
flow projections, Wilson reviewed the acquisition criteria and projection
parameters in use in the marketplace by major commercial property investors,
owners and operators, appraisers and financing sources. In addition, Wilson
reviewed other published information concerning acquisition criteria in use by
property investors through the first quarter of 1997. Further, Wilson
interviewed various sources in local markets to identify sales of commercial
properties 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.
In applying a discounted cash flow analysis, projections of cash flow from
each PSI Exchange Property were developed for a 10-year period ending in the
year 2007 with a terminal residual value computed at the end of year 11. The
first year's scheduled gross income was estimated taking into consideration each
PSI Exchange Property's current rent structure and the rental rates of
competitive facilities. Also included in the income estimate were trends in
ancillary income from administrative charges and late fees, if any. Wilson then
made an analysis of each subject's occupancy history, current lease terms, took
into consideration the occupancy level of competitive facilities and estimated a
stabilized occupancy level for each PSI Exchange Property.
Estimated expenses were based upon each PSI Exchange Property's actual
operating history and industry comparable data; where appropriate, adjustments
were made to property taxes to estimate taxes which would be due after a sales
transaction. The projected expenses were tested for reasonableness based upon a
comparison of the operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
PSI Exchange Property. Consideration was given to and adjustment made to
reflect capital expenditures and replacement reserves.
Income and expense growth rates were based on projection parameters
currently being used by property investors as well as upon local, regional and
historical trends. Wilson estimated the gross potential income of each PSI
Exchange Property, taking existing leases and current market rates into account.
Wilson used a 3% annual growth rate for income and expenses. Wilson then used
terminal capitalization rates ranging from 10.5% to 11.0% to capitalize each PSI
Exchange Property's 11th year net income into a residual value at the end of a
10-year holding period, assuming normal cost of disposing of the properties.
The 10 yearly cash flows were then discounted to present worth using discount
rates ranging from 12.0% to 12.5% again depending upon local market and property
conditions. The indicated value based upon the income approach is $42,750,000
for the PSI Exchange Properties.
In applying the sales comparison approach to the PSI Exchange Properties,
the indicated value by the sales comparison approach is $43,660,000 for the PSI
Exchange Properties.
CONCLUSIONS AS TO VALUE. Wilson reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. Wilson gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the
commercial property market.
Based on the valuation methodology described above, Wilson assigned a
market value to the PSI Exchange Properties of $42,900,000.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISAL. The Wilson
Appraisal reflects Wilson's valuation of the PSI Exchange Properties as of March
17, 1997 in the context of the information available on such date. Events
occurring after March 17, 1997 and before the closing of the merger could affect
the properties or assumptions used in preparing the Wilson Appraisal. Wilson
has no obligation to update the Wilson Appraisal on the basis of subsequent
events; however, Wilson has informed PSP11, PSI and AOPP that, as of the date of
this proxy statement, Wilson is not aware of any event or change in conditions
since March 17, 1997 that may have caused a material change in the value of the
PSI Exchange Properties since that date.
The Wilson Appraisal is subject to certain general and specific assumptions
and limiting conditions and are in conformity with the Departure Provision of
Uniform Standards of Professional Appraisal Practice. Among other limitations,
the Wilson Appraisal (i) did not consider the effect of easements, restrictions
and other similar items on the value of the PSI Exchange Properties, (ii)
assumed that the PSI Exchange Properties comply with local building codes
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<PAGE>
and zoning ordinances, (iii) assumed that there are no new or planned facilities
except as noted in the Wilson Appraisal and (iv) did not involve the physical
inspections of competing properties. See Appendix B-2 for a discussion of the
specific assumptions, limitations and qualifications of the Wilson Appraisal.
COMPENSATION AND MATERIAL RELATIONSHIPS. Wilson was paid an aggregate fee
of $201,000 for appraising all of the properties of the Merged REITs, which fee
included reimbursement for all of Wilson's related out-of-pocket expenses.
Wilson is also entitled to indemnification against certain liabilities. Wilson
is being paid an additional fee of $1,500 for preparing the Wilson Appraisal,
which compiles appraisal information on the commercial properties owned by the
Merged REITs in June 1997. As a leading appraiser of mini-warehouses and
commercial properties since 1976, Wilson has continuously prepared appraisals
for PSI and its affiliates, including appraisals of the properties of prior
REITs in connection with their mergers with PSI, and is expected to continue to
prepare appraisals for PSI and PSP11.
FAIRNESS OPINION FROM JEFFERIES
The special committee retained Jefferies to opine on the fairness of the
"consideration to be paid by PSP11 in the merger" (as defined below), from a
financial point of view, to the public shareholders of PSP11. As part of its
investment banking business, Jefferies is regularly engaged in the evaluation of
capital structures, the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, financial restructurings and other financial services.
Jefferies delivered its oral opinion to the special committee on August 15,
1997, updated the opinion on December 12, 1997 and confirmed such opinion in
writing as of the date of this proxy statement (the "Fairness Opinion"), to the
effect that, as of such date and based on the matters described therein, the
consideration to be paid by PSP11 in the merger is fair to the public
shareholders of PSP11 from a financial point of view. For purposes of the
Fairness Opinion, the term "consideration to be paid by PSP11 in the merger"
includes the conversion ratio of the AOPP common stock, the conversion ratio of
the PSP11 Common Stock Series B and C and the financial terms of the exchange by
PSP11 of 13 properties for 11 properties owned by PSI. Jefferies did not
recommend to the special committee that any specific consideration would
constitute the appropriate consideration in the merger. Except as set forth
below, no limitations were imposed by the special committee on the scope of
Jefferies' investigations or procedures to be followed by it in rendering the
Fairness Opinion. Jefferies was not requested to opine as to, and the Fairness
Opinion did not address, the underlying business decision of the special
committee to proceed with or to effect the merger.
THE FULL TEXT OF THE FAIRNESS OPINION IS ATTACHED AS APPENDIX C TO THIS
PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. PSP11 SHAREHOLDERS ARE
URGED TO READ THE FAIRNESS OPINION CAREFULLY AND IN ITS ENTIRETY FOR THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND LIMITATIONS OF
THE REVIEW BY JEFFERIES IN ARRIVING AT THE CONCLUSIONS EXPRESSED THEREIN. THE
SUMMARY OF THE FAIRNESS OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS OPINION.
LIMITATIONS AND QUALIFICATIONS. In rendering the Fairness Opinion,
Jefferies noted that the consummation of the merger is conditioned upon the
approval of PSP11 shareholders, and that Jefferies is not recommending that
PSP11, the special committee, Board of Directors, any security holders of PSP11,
or any other person, should take any specific action in connection with the
merger. The Fairness Opinion also does not constitute a recommendation of the
merger over any alternative transactions which may be available to PSP11, and
does not address PSP11's underlying business decision to effect the merger. In
addition, the Fairness Opinion does not opine as to the market value or the
prices at which any of the securities of PSP11 may trade at any time.
SUMMARY OF MATERIALS CONSIDERED. In connection with the preparation of the
Fairness Opinion, Jefferies, among other things: (i) reviewed the merger
agreement (including any schedules and exhibits thereto); (ii) reviewed certain
financial and other information that was publicly available; (iii) reviewed
information furnished to Jefferies by PSP11 and AOPP, including certain internal
financial analyses, budgets, reports and other information prepared by the
respective managements of the companies; (iv) held discussions with various
members of senior management of PSP11 and AOPP concerning each company's
historical and current operations, financial conditions and prospects, as well
as the strategic and operating benefits anticipated from the merger; (v)
reviewed the TNG Appraisal and the Wilson
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Appraisal and discussed with management of PSP11, PSI and AOPP and with TNG and
Wilson the methodologies and procedures employed in preparing the TNG Appraisal
and the Wilson Appraisal; (vi) reviewed the form of preliminary proxy statement
to be filed with the Commission; (vii) reviewed the share price and trading
history of PSP11's publicly traded securities from August 12, 1996 to August 12,
1997; (viii) reviewed the valuations of publicly traded companies which
Jefferies deemed comparable to PSP11 and AOPP; (ix) prepared discounted cash
flow analyses of PSP11 and AOPP on a stand-alone basis; and (x) analyzed the FFO
and funds available for distribution ("FAD") per share of the combined company.
In addition, Jefferies conducted such other reviews, analyses and inquiries
relating to PSP11, AOPP and the properties that are the subject of the exchange
as it considered appropriate in rendering the Fairness Opinion.
ASSUMPTIONS. In Jefferies' review and analysis and in rendering the
Fairness Opinion, Jefferies relied upon, but did not assume any responsibility
to independently investigate or verify, the accuracy, completeness and fair
presentation of all financial and other information that was provided to it by
PSI, PSP11 or AOPP or that was publicly available (including, without
limitation, the information described above and the financial projections and
financial models prepared by PSP11 and AOPP regarding the estimated future
performance of the respective companies before and after giving effect to the
merger). The Fairness Opinion was expressly conditioned upon such information
(whether written or oral) being complete, accurate and fair in all respects.
With respect to the financial projections and financial models provided to
and examined by Jefferies, Jefferies noted that projecting future results of any
company is inherently subject to vast uncertainty. Jefferies assumed that such
projections and models were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the respective
managements of the companies as to the future performance of each company. In
addition, Jefferies noted that although it has performed sensitivity analyses
thereon, in rendering the Fairness Opinion, Jefferies has assumed that each
company will perform in accordance with such projections and models for all
periods specified therein. In addition, although such projections and models
did not form the principal basis for the Fairness Opinion, but rather
constituted one of many items that Jefferies employed, changes to such
projections and models could affect the Fairness Opinion. Jefferies also
assumed that the merger will be a tax free reorganization and will be treated,
for accounting purposes, as a reverse purchase.
The preparation of fairness opinions involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such opinions are not readily susceptible to
summary description. Accordingly, Jefferies believes its analyses must be
considered as a whole, and that considering any portion of such analyses or any
portion of the factors considered, without considering all analyses and current
factors, could create a misleading or incomplete view of the process underlying
the Fairness Opinion. In its analyses, Jefferies made numerous assumptions with
respect to industry performance, general business and other conditions, many of
which are beyond the control of PSP11 and AOPP. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
as set forth therein. In addition, analyses relating to the value of businesses
do not purport to be appraisals or to reflect the prices at which businesses
actually may be sold.
SUMMARY OF ANALYSIS. The following paragraphs summarize the significant
financial and comparative analyses performed by Jefferies in arriving at the
conclusions expressed in the Fairness Opinion. The information presented below
is based on the financial condition of PSP11 and AOPP as of September 30, 1997
and share price information of PSP11 Common Stock through the close of the
market on August 12, 1997. The analyses also considered the acquisition of six
properties from a subsidiary of a state pension plan in December 1997. In
addition, Jefferies analyzed the transaction with and without assuming the
proposed stock issuances to institutional investors. The following does not
purport to be a complete description of the analyses performed or the matters
considered by Jefferies in rendering the Fairness Opinion.
In conducting its analysis, Jefferies utilized certain projected operating
and financial information (including, among other things, rental income, total
revenue, net operating income, FFO and FAD) for PSP11, AOPP and the pro forma
combined entity. These projections were based on financial models provided by
the managements of PSP11 and AOPP, which incorporated numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond PSP11's and AOPP's control. With
respect to industry
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performance, general business and economic conditions, the assumptions reflected
modest increases in inflation and economic activity. In particular, the models
assumed that, in the absence of external growth, rental income for PSP11 would
increase by approximately 3.5% per year for its mini-warehouse facilities and by
a range of from 3% to 4% per year for its commercial facilities, and operating
expenses would increase by approximately 3.5% per year for its mini-warehouse
facilities and by a range of from 3% to 4% per year for its commercial
facilities, from 1998 through 2007. In addition, administrative expenses were
projected to increase by 3.0% per year and capital expenditures were projected
to equal approximately 3% to 4% of rental revenues. As a result of these
assumptions, FFO and FAD of PSP11 on a stand-alone basis were projected to
increase from 1998 through 2007 at a compound annual growth rate ("CAGR") of
approximately 3.6% and 3.9%, respectively. These projections for PSP11 were
prepared by management in conjunction with TNG, an unaffiliated third party
appraisal firm. For AOPP, the models assumed that rental income for its
commercial facilities, including properties recently acquired by AOPP from a
subsidiary of a state pension plan and other third parties, would increase by
approximately 4.3% per year and its property management operations would
increase by approximately 5.0% per year, while operating expenses would increase
by approximately 4.0% per year for its commercial facilities and by
approximately 5.0% per year for its property management operations, from 1998
through 2007. The projections also assumed that the properties acquired from the
capital raised from stock issuances to the institutional investors would
generate FFO in the twelve months after the stock is issued equal to 9.25% of
the proceeds from such stock issuance. The revenues and operating expenses of
these properties are projected to increase at a 4.5% annual rate thereafter. In
addition, capital expenditures were projected to equal approximately 9% of
rental revenues. As a result of these assumptions, FFO and FAD of AOPP on a
stand-alone basis were projected to increase from 1998 through 2007 at a CAGR of
approximately 5.0% and 5.2%, respectively. These projections for AOPP were
prepared by its management.
Jefferies reviewed the methodology and calculations of the proposed
conversion of all of the shares of PSP11 Common Stock Series B and C into
569,655 shares of PSP11 Common Stock in the merger. Based on the exchange ratio
of 1.18 shares of PSP11 Common Stock for each share of AOPP common stock
outstanding as of December 1, 1997, AOPP shareholders and limited partners of
the Operating Partnership would receive securities equivalent to 23,940,946
shares of PSP11 Common Stock, or approximately 90.9% of the PSP11 Common Stock
outstanding as of the effective date of the merger. Jefferies noted that AOPP's
resulting ownership position did in fact constitute a control position, but that
any control premium entitled to PSP11 was offset by the following intangible
attributes that the merger is expected to provide: (i) PSP11 will become a
fully-integrated and self-managed commercial real estate company with expertise
in acquisition, operation and leasing services; (ii) PSP11 will go from a
finite-life REIT to a growth-oriented, infinite-life REIT; (iii) PSP11's asset
and capital base will be increased and its status as a self-managed REIT,
concentrated within one asset class, should make it more attractive to
institutional and other investors; (iv) the combined entity will have the
increased sponsorship of PSI and thereby may have PSI's resources as a potential
source of liquidity; and (v) the combined entity will have greater growth
prospects, which should result in better valuation multiples than currently
exist for PSP11 on a stand-alone basis. In addition, Jefferies noted that the
PSP11 shareholders have the option to convert their shares of PSP11 Common Stock
into cash whereby, if 20% or less of the outstanding shares of PSP11 Common
Stock elect to receive cash, such holders would receive $20.50 in cash per share
of PSP11 Common Stock, and if holders of more than 20% of the outstanding PSP11
Common Stock elect to receive cash, then cash will be distributed on a pro rata
basis to such PSP11 shareholders. Jefferies also noted that in the 12 months
preceding the announcement of the merger, PSP11's Common Stock had a high
closing price of $20.50 per share, which was reached on only one day, August 21,
1996, during such 12-month period.
Comparable Company Analysis for PSP11. Jefferies compared certain
financial data and multiples of financial parameters accorded certain other
publicly traded REITs comparable to PSP11. Financial data generally compared
included total revenues, net operating income, FFO and FAD. Multiples compared
included equity capitalization to FFO and equity capitalization to FAD.
Jefferies looked at these parameters because of the equity market's reliance
upon these measures in analyzing REIT performance. Companies compared to PSP11
included PSI, Shurgard Storage Centers, Inc., Storage Trust Realty, Sovran Self-
Storage and Storage U.S.A., each of which is a self-managed and infinite-life
REIT. Jefferies compared the market value of each such company, as determined
by the closing price recorded for each company's common stock on December 5,
1997, with each company's historical and projected FFO and projected FAD.
Jefferies' calculations resulted in the following ranges of multiples for these
companies: a mean equity capitalization to historical 1996 FFO multiple of
13.3x; a mean equity capitalization to projected 1997 FFO multiple of 12.5x; a
mean equity capitalization to projected 1998 FFO multiple of 11.3x; a mean
equity capitalization to projected 1997 FAD multiple of 13.4x; and a mean equity
capitalization to projected 1998 FAD
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multiple of 12.1x. No specific portion of these multiples for the comparable
companies was allocated by Jefferies to the comparable companies' self-managed
and infinite-life status, and no adjustment to any multiples or values was made
as a result of such self-managed and infinite-life status in view of the fact
that PSP11 would be self-managed and infinite life following the merger.
Jefferies recognized that a self-managed and infinite-life structure should
generally have a positive impact on PSP11's multiples and values.
None of the companies utilized in the above analysis for comparative
purposes is identical to PSP11. Accordingly, a complete analysis of the results
of the foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors that could affect the value of the comparable companies as well as that
of PSP11. In addition, the multiples to estimated and projected FFO and FAD are
based on projections, in the case of the comparable companies, published by
research analysts unrelated to Jefferies and, in the case of PSP11, provided by
management. Accordingly, such projections may or may not prove to be accurate.
Liquidation Analysis of PSP11. Jefferies performed a series of liquidation
analyses on PSP11, noting that an option for the PSP11 shareholders was to
liquidate the assets of PSP11. Based on an appraisal value of $48.0 million as
determined by TNG, and assuming associated transaction costs of 4%, the
resulting liquidation value of PSP11, as of December 31, 1997, is $19.61 per
share. Jefferies also performed a discounted cash flow analysis on PSP11's
projected cash flows using a range of discount rates and a range of terminal
capitalization rates. Based on a five-year analysis, the range of resulting
equity values per share is between $18.09 and $19.98 using a range of discount
rates from 12% to 13% and a range of terminal capitalization rates from 9.5% to
10.5%. Based on a ten-year analysis, the range of resulting equity values per
share is between $18.43 and $20.39 using a range of discount rates from 12% to
13% and a range of terminal capitalization rates from 9.5% to 10.5%. Jefferies
selected such range of discount rates based on TNG's discount rate used to
calculate its appraisal value and selected such range of terminal capitalization
rates based on TNG's terminal capitalization rates ranging from 9.5% to 10.0% in
its appraisal.
Stock Sale Analysis of PSP11. Jefferies performed a series of stock sale
analyses on PSP11, noting that another option for the PSP11 shareholders would
be to hold their PSP11 Common Stock and sell at a later date. Jefferies
performed a discounted cash flow analysis on PSP11's projected cash flows using
a range of discount rates and a range of terminal FFO multiples. Based on a
five-year discounted cash flow analysis, the range of resulting equity values
per share is between $17.79 and $19.64 using a range of discount rates from 12%
to 13% and a range of terminal FFO multiples from 9.5x to 10.5x. Based on a
ten-year analysis, the range of resulting equity values per share is between
$18.24 and $20.17 using a range of discount rates from 12% to 13% and a range of
terminal FFO multiples from 9.5x to 10.5x. Jefferies selected such range of
discount rates based on TNG's discount rate used to calculate its appraisal
value and selected such range of terminal FFO multiples based on the general
trading level of former PSI-affiliated mini-warehouse REITs, current comparable
company trading valuations and the fact that PSP11 (i) is a finite-life REIT,
(ii) is not self-managed or fully-integrated, (iii) has limited historical and
projected growth potential and (iv) has a relatively small asset base.
Comparable Company Analysis for AOPP. Jefferies compared certain financial
data and multiples of financial parameters accorded certain other publicly
traded REITs comparable to AOPP. Financial data generally compared included
total revenues, net operating income, FFO and FAD. Multiples compared included
equity capitalization to FFO and equity capitalization to FAD. Jefferies looked
at these parameters because of the equity market's reliance upon these measures
in analyzing REIT performance. Companies compared to AOPP included Arden Realty
Group, Beacon Properties Corp., Bedford Properties Investors, Brandywine Realty
Trust, Cali Realty Corporation, Cornerstone Properties, Cousins Properties,
Crescent Real Estate Equities, Duke Realty Investments, Highwoods Properties,
Kilroy Realty Corp., Koger Equity, Inc., Parkway Properties, Prentiss Properties
Trust, Reckson Associates and Spieker Properties, Inc. Jefferies compared the
market value of each such company, as determined by the closing price recorded
for each company's common stock on December 5, 1997, with each company's
historical and projected FFO and projected FAD. Jefferies' calculations
resulted in the following ranges of multiples for these companies: a mean
equity capitalization to historical 1996 FFO multiple of 17.0x; a mean equity
capitalization to projected 1997 FFO multiple of 14.7x; a mean equity
capitalization to projected 1998 FFO multiple of 12.7x; a mean equity
capitalization to projected 1997 FAD multiple of 17.2x; and a mean equity
capitalization to projected 1998 FAD multiple of 15.2x.
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AOPP's implied value to holders of common stock and limited partnership
interests ranges from between approximately $558.2 million and $609.0 million
based on price to projected 1998 FFO multiples of 11.0x to 12.0x. AOPP's
implied equity value ranges from between approximately $529.8 million and $570.5
million based on price to projected 1998 FAD multiples of 13.0x to 14.0x. These
ranges of equity values for AOPP were compared to an assumed aggregate value of
the PSP11 Common Stock to be issued to AOPP in the merger of approximately
$535.7 million. This assumed aggregate value was based on a value of $22.375
per share of PSP11 Common Stock (the closing price on December 5, 1997).
Jefferies noted that AOPP's resulting ownership position did in fact constitute
a control position, but that any control premium entitled to PSP11 was offset by
the intangible attributes that the merger is expected to provide described
above.
None of the companies utilized in the above analysis for comparative
purposes is identical to AOPP. Accordingly, a complete analysis of the results
of the foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors that could affect the value of the comparable companies as well as that
of AOPP. In addition, the multiples to estimated and projected FFO and FAD are
based on projections, in the case of the comparable companies, published by
research analysts unrelated to Jefferies and, in the case of AOPP, provided by
management. Accordingly, such projections may or may not prove to be accurate.
Discounted Cash Flow Analysis of AOPP. Jefferies also performed discounted
cash flow analyses for AOPP based upon projections of AOPP's cash flow from
operations using a range of discount rates and a range of terminal
capitalization rates. Based on a five-year analysis, using discount rates
ranging from 12% to 13% and terminal capitalization rates ranging from 9.0% to
10.0%, these calculations indicated an implied aggregate equity value ranging
from approximately $545.6 million to $611.7 million for AOPP. Based on a ten-
year analysis, using discount rates ranging from 12% to 13% and terminal
capitalization rates ranging from 9.0% to 10.0%, these calculations indicated an
implied aggregate equity value ranging from approximately $529.8 million to
$592.6 million for AOPP. The range of equity values for AOPP was compared to an
assumed aggregate value of the PSP11 Common Stock to be issued to AOPP in the
merger of approximately $530.8 million. This assumed aggregate value was based
on a value of $22.375 per share of PSP11 Common Stock (the closing price on
December 5, 1997).
Pro Forma Merger Analysis. Jefferies compared the anticipated FFO and FAD
per share of PSP11 without giving effect to the merger to the FFO and FAD per
share of PSP11 and AOPP combined on a pro forma basis after giving effect to the
merger. Each scenario was based on the financial models and projections
provided by PSP11 and AOPP. Jefferies observed that, under both scenarios, the
merger could be expected to be accretive on an FFO per share basis in each year
of the projection period from 1998 through 2007. Assuming no cash elections,
FFO per share is accretive by $0.300 per share, or 16.4% in 1998 and accretive
by $0.389 per share, or 20.5% in 1999. Assuming no cash elections, FAD per
share is accretive by $0.025 per share, or 1.5% in 1998 and accretive by $0.185
per share, or 10.6% in 1999. Jefferies noted that the low level of accretion in
FAD per share in 1998 was due to the timing of increased capital expenditures
for AOPP that are anticipated in 1998. Jefferies noted that by using a
normalized level of capital expenditures for comparable commercial properties
(approximately equal to 9.0% of revenues), the result is significantly greater
accretion in 1998 for the combined entity on a FAD basis.
Review of Appraisals. In preparing the Fairness Opinion, Jefferies relied
upon (i) the TNG Appraisal of PSP11's properties which was prepared as of May 1,
1997 by TNG, an independent appraiser and (ii) the Wilson Appraisal of the PSI
Exchange Properties, which was prepared as of April 30, 1997 by Wilson, an
independent appraiser. Jefferies reviewed the TNG Appraisal and the Wilson
Appraisal, reviewed a sample of supporting documentation for them, and discussed
with TNG and Wilson their experience and qualifications and the appraisal
methodologies utilized.
Jefferies observed that the TNG Appraisal and the Wilson Appraisal were
certified by members of the Appraisal Institute and were conducted utilizing the
income approach to valuation, applying the discounted cash flow method to
establish a value for each individual property, and the sales comparison
approach.
BASED ON THE ANALYSES AND FACTORS SUMMARIZED ABOVE, JEFFERIES RENDERED THE
FAIRNESS OPINION; HOWEVER, THE SUMMARY SET FORTH ABOVE DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED AND THE FACTORS CONSIDERED BY
JEFFERIES IN RENDERING THE FAIRNESS OPINION.
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COMPENSATION. The special committee engaged Jefferies by means of an
engagement letter dated June 19, 1997. The engagement letter provides that for
its services, Jefferies would be paid a customary fee by PSP11. PSP11 also
agreed to reimburse Jefferies for certain expenses and to indemnify Jefferies
against certain liabilities arising out of or in connection with the performance
of its services under the engagement letter. In the ordinary course of
Jefferies' business, Jefferies may trade securities of PSP11 for its own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. The engagement letter included a consent
to disclosure of the Fairness Opinion in this proxy statement.
THE MERGER AGREEMENT
If the merger is approved by the shareholders of PSP11 and the other
applicable conditions to the merger are satisfied or waived, the merger will be
consummated pursuant to the merger agreement which is set forth in Appendix A
hereto, and is incorporated by reference into, this proxy statement. As a
result of the merger, all of the assets now held by AOPP will be held by PSP11
upon completion of the merger. The merger agreement contains representations
and warranties of PSP11, AOPP and PSI and certain other provisions relating to
the merger. The representations and warranties are extinguished by, and do not
survive, the merger. Under the merger agreement, PSP11 will also exchange 13
properties for 11 properties owned by PSI. See "- Exchange of Properties."
CONDITIONS TO CONSUMMATION OF THE MERGER. Consummation of the merger is
contingent upon standard conditions, including the following: (i) the merger
agreement and the merger shall have been approved and adopted by the requisite
vote of the shareholders of PSP11 and of AOPP; (ii) receipt by PSP11 of a legal
opinion of Hogan & Hartson L.L.P. that the merger will qualify as a
reorganization under Section 368(a) of the Code (which opinion has been received
and is described under "Federal Income Tax Considerations"); (iii) the shares of
PSP11 Common Stock issued in the merger shall be listed on the AMEX; (iv) the
PSP11 Board of Directors shall have received a fairness opinion from Jefferies
(which opinion has been received); (v) the Board of Directors of PSI shall have
approved the exchange of properties with PSP11 (which approval has been
obtained); (vi) demands for payment by holders of dissenting shares are filed
with respect to less than 5% of the outstanding shares of PSP11 Common Stock;
and (vii) completion of the exchange of properties between PSI and PSP11. The
obligation of PSP11 and AOPP to effect the merger is also subject to each party,
in its sole discretion, being satisfied as to title to, and the results of an
environmental audit of, the properties of the other and, in the case of PSP11,
the PSI Exchange Properties. Any of these conditions (other than the conditions
of approval by the shareholders of PSP11 and AOPP) may be waived by the board of
directors of the corporation benefiting from such condition.
AMENDMENT OR TERMINATION. The merger agreement provides for amendment or
modification thereof with respect to the merger by written agreement authorized
by the boards of directors of PSP11, AOPP and PSI, either before or after
shareholder approval, provided that any such amendment or modification made
after shareholder approval does not change any of the principal terms of the
merger or the merger agreement. The merger may be abandoned at any time before
or after shareholder approval by mutual written consent and may be abandoned by
the action of the board of directors of either party if, among other things, the
closing of the merger has not occurred on or before June 30, 1998.
CONSUMMATION. It is contemplated that the merger will be consummated by
filing the agreement of merger (attached as Exhibit A to the merger agreement)
with the California Secretary of State and by the exchange of property deeds
between PSP11 and PSI, as soon as practicable after its approval by the
shareholders of PSP11 and the satisfaction or waiver of various conditions
contained in the merger agreement. It is currently contemplated that the merger
will be consummated in the first quarter of 1998.
FRACTIONAL SHARES. No fractional shares of PSP11 Common Stock will be
issued in the merger. In lieu of any fractional share interests, each holder of
AOPP common stock or PSP11 Common Stock Series B and C who would otherwise be
entitled to a fractional share of PSP11 Common Stock will, upon surrender of the
certificate representing such common stock, receive a whole share of PSP11
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 PSP11 Common Stock such holder is entitled to
receive in the merger. In such event, the holder will be paid an amount in cash
(without interest), rounded to the nearest $.01, determined by
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multiplying (i) the per share closing price on the AMEX of the PSP11 Common
Stock at the time of effectiveness of the merger by (ii) the fractional
interest.
ASSUMPTION OF OUTSTANDING OPTIONS. At the effective time of the merger,
each outstanding option to purchase shares of AOPP common stock granted under
AOPP's 1997 Stock Option and Incentive Plan will be assumed by PSP11 and,
whether vested or unvested, will be converted into an option to acquire, on the
same terms and conditions applicable to the AOPP option, the number of shares of
PSP11 Common Stock that the holder of the AOPP option would have received in the
merger if the AOPP option had been exercised in full immediately prior to the
effective time of the merger, irrespective of whether the AOPP option was in
fact then exercisable. Currently, there are outstanding options to purchase an
aggregate of 258,958 shares of AOPP common stock under the Plan. The exercise
price per share of each converted option will be the aggregate exercise price of
the converted AOPP option divided by the number of shares of PSP11 Common Stock
purchasable upon exercise of the converted option. Converted options will
continue to be subject to the AOPP 1997 Stock Option and Incentive Plan, which
PSP11 will adopt and assume for the purpose of administering the plan with
respect to converted options. If the shareholders of PSP11 approve Proposal Six
to be considered at the annual meeting, an aggregate of 1,500,000 shares of
PSP11 Common Stock will be available for issuance under the Plan pursuant to
converted options and options and other awards granted after the merger is
approved to PSP11's employees, directors and service providers. See "Proposal
Six - Adoption of 1997 Stock Option and Incentive Plan."
RESTRICTIONS ON OTHER ACQUISITIONS. PSP11 has agreed not to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making of any
proposal with respect to a merger, consolidation, share exchange or similar
transaction involving PSP11, or any purchase of all or any significant portion
of its assets, or any equity interest in PSP11, 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 PSP11 Board of
Directors may furnish or cause to be furnished information and may participate
in such discussions and negotiations through its representatives with persons
who have sought the same if the failure to provide such information or
participation in the negotiations and discussions might cause the members of the
PSP11 Board of Directors to breach their fiduciary duty to PSP11 under
applicable law as advised by counsel. PSP11 has agreed to notify AOPP
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 PSP11, and to keep AOPP informed of the status and terms of any
such proposals and any such negotiations or discussions.
DISTRIBUTIONS. Pending the merger, PSP11 and AOPP are precluded from
declaring or paying any dividend on their capital stock or making any other
distribution to their shareholders other than regular quarterly distributions
and cash distributions required to satisfy REIT distribution requirements.
CASH ELECTION PROCEDURE
Each holder of record of PSP11 Common Stock may make a cash election to
have its shares of PSP11 Common Stock converted into the right to receive cash.
If the aggregate number of shares of PSP11 Common Stock as to which cash
elections are made is 20% or less than the number of shares of PSP11 Common
Stock outstanding as of the record date for the meeting of shareholders of
PSP11, all such shares as to which cash elections are made shall be converted
into the right to receive cash. If the aggregate number of such shares is more
than 20%, such shares shall be converted into the right to receive cash on a pro
rata basis, and the balance of such shares would continue to be owned by PSP11
shareholders, unless PSP11, in its sole discretion, elects to allow a greater
percentage of shares to be converted into the right to receive $20.50 in cash.
All cash elections are to be made on a cash election form. A cash election
form is being sent to PSP11 shareholders of record on __________, 1998. To be
effective, a cash election form must be properly completed and signed and must
be received by the depositary, American Stock Transfer & Trust Company,
accompanied by all stock certificates representing shares of PSP11 Common Stock
held by the person submitting such cash election form to which the cash election
form relates (or by a guarantee of delivery of such certificates in the form and
on the terms set forth in the cash election form) no later than 5:00 p.m. New
York City time on _________, 1998. Holders of record of shares of PSP11 Common
Stock who hold such shares as nominees, trustees or in other representative
capacities may submit multiple cash election forms, provided that such
representative certifies that each such cash election form covers
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all the shares of PSP11 Common Stock held by such representative for a
particular beneficial owner. Any cash election form may be revoked by written
notice received by the depositary prior to 5:00 p.m., New York City time, on
_________, 1998. In addition, all cash election forms will automatically be
revoked if the depositary is notified in writing that the merger has been
abandoned. If a cash election form is properly revoked, the certificate or
certificates (or any guarantee of delivery) in respect of the PSP11 Common Stock
to which the cash election form relates will be promptly returned by the
depositary. The depositary may determine whether or not elections to receive
cash have been properly made or revoked, and any such determination shall be
conclusive and binding.
HOLDERS OF SHARES OF PSP11 COMMON STOCK WHO WISH TO SUBMIT CASH ELECTION
FORMS SHOULD DELIVER THEIR STOCK CERTIFICATES WITH SUCH CASH ELECTION FORMS OR
PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY.
A HOLDER OF PSP11 COMMON STOCK MAY NOT MAKE A CASH ELECTION AS TO LESS THAN
ALL OF THE SHARES OF PSP11 COMMON STOCK OWNED BY SUCH SHAREHOLDER. ANY HOLDER
OF PSP11 COMMON STOCK WHO DOES NOT SUBMIT A PROPERLY COMPLETED AND SIGNED CASH
ELECTION FORM ACCOMPANIED BY THE APPLICABLE STOCK CERTIFICATES (OR PROVIDE FOR,
AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY) WHICH IS RECEIVED BY
THE DEPOSITARY PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON _________, 1998 WILL
RETAIN PSP11 COMMON STOCK. IF PSP11 OR THE DEPOSITARY DETERMINES THAT ANY
PURPORTED CASH ELECTION WAS NOT PROPERLY MADE, SUCH PURPORTED CASH ELECTION WILL
BE DEEMED TO BE OF NO FORCE AND EFFECT AND THE HOLDER OF PSP11 COMMON STOCK
MAKING SUCH PURPORTED CASH ELECTION WILL, FOR PURPOSES HEREOF, RETAIN PSP11
COMMON STOCK. NONE OF PSP11, AOPP, PSI OR THE DEPOSITARY WILL BE UNDER ANY
OBLIGATION TO NOTIFY ANY PERSON OF ANY DEFECT IN A CASH ELECTION FORM.
The federal income tax consequences of receiving cash and/or retaining
PSP11 Common Stock are different. See "Federal Income Tax Considerations - The
Merger."
Holders of PSP11 Common Stock Series B and C and holders of AOPP common
stock may also make cash elections in connection with the merger. In each case
such cash elections may not exceed 20% of the respective outstanding common
stock. Holders of all of the PSP11 Common Stock Series B and C and AOPP common
stock have indicated that they do not intend to make cash elections in the
merger.
CONSEQUENCES TO PSP11 IF THE MERGER IS NOT COMPLETED
If the merger is not completed, PSP11 will remain separate and will
continue to operate its properties and the amendments to its articles of
incorporation and bylaws will not be implemented. In such event, the PSP11
Board of Directors intends to make a proposal to the PSP11 shareholders for the
disposition of PSP11's properties.
COSTS OF THE MERGER
It is estimated that the total cash required to satisfy cash elections
(assuming maximum cash elections) and to pay costs and expenses of the merger
will be $8,300,000. These amounts will be paid from PSP11's working capital.
If the merger is completed, all costs incurred by PSP11 and AOPP in
connection with the merger will be paid by PSP11 as the surviving corporation.
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 each of PSP11, AOPP
and PSI will pay one-third of the cost of any expenses incurred in connection
with the printing of this proxy statement, the TNG Appraisal and preparation for
real estate closings and filing fees.
48
<PAGE>
The following is a statement of certain fees and expenses estimated to be
incurred in connection with the merger (exclusive of amounts paid as a result of
cash elections).
<TABLE>
<CAPTION>
Preclosing Transaction Costs
<S> <C>
Printing and mailing $ 70,000
Proxy solicitation 15,000
Legal 100,000
Real Estate Appraisals and
Fairness Opinions 235,000
Registration, listing
and filing fees 150,000
Accounting 150,000
Other 50,000
--------
Subtotal 770,000
--------
Closing Transaction Costs*
Transfer agent fees 15,000
Legal 5,000
Other 10,000
--------
Subtotal 30,000
--------
TOTAL $800,000
--------
______________
</TABLE>
* Would not be incurred if merger is not approved.
ACCOUNTING TREATMENT
The merger will be accounted for as a reverse purchase. Accordingly, for
accounting purposes, AOPP will be treated as the purchaser, and the assets and
liabilities of PSP11 will be accounted for at fair market value based upon
independent appraisals.
REGULATORY REQUIREMENTS
The merger is subject to compliance with federal and state securities law
requirements.
49
<PAGE>
COMPARISON OF PSP11 COMMON STOCK BEFORE AND AFTER THE MERGER AND THE AMENDMENTS
The information below compares certain attributes of the PSP11 Common Stock
before and after the merger. The effect of the merger and the amendments to
PSP11's articles of incorporation and bylaws on PSP11 shareholders who retain
their PSP11 Common Stock is set forth in italics below each caption.
<TABLE>
<CAPTION>
BEFORE THE MERGER AND THE AMENDMENTS AFTER THE MERGER AND THE AMENDMENTS
INVESTMENT OBJECTIVES AND POLICIES
<S> <C>
The principal investment The investment objectives of PSP11 will be to
objectives are to provide maximize FFO allocable to holders of PSP11
(i) quarterly cash Common Stock and to increase shareholder value
distributions from its through internal growth and acquisitions. FFO
operations and (ii) is a supplemental performance measure for equity
long-term capital gains REITs used by industry analysts. FFO does not
through appreciation in the take into consideration principal payments on
value of properties. debt, capital improvements, distributions and
Under its organizational other obligations of PSP11 after the merger.
documents, PSP11 is not Accordingly, FFO is not a substitute for the net
permitted to raise new cash provided by operating activities or net
capital or to reinvest income as a measure of the liquidity or
operating cash flow or sale operating performance of PSP11. An increase in
or financing proceeds. PSP11's FFO will not necessarily correspond with
PSP11 will terminate on an increase in distributions to holders of PSP11
December 31, 2038, unless Common Stock.
earlier dissolved. The PSP11 intends to continue its operations for an
predecessor of PSP11 indefinite period of time and will not be
anticipated selling or precluded from raising new capital, including
financing its properties senior securities that would have priority over
within seven to 10 years PSP11 Common Stock as to cash flow,
after development (i.e., distributions and liquidation proceeds, or from
between 1993 and 1996). reinvesting cash flow or sale or financing
proceeds in new properties, except to the extent
such reinvestment precludes PSP11 from
satisfying the REIT distribution requirements.
Therefore, PSP11 shareholders should expect to
be able to liquidate their investment only by
selling their shares in the market, and the
market value of the PSP11 Common Stock may not
necessarily equal or exceed the market value of
PSP11's assets or the net proceeds which might
be available for distribution upon liquidation
if PSP11 were to liquidate.
</TABLE>
Holders who retain PSP11 Common Stock rather than make cash elections
will be changing their investment from a "finite-life" to an "infinite-life"
entity, and they will be able to realize the value of their investment only by
selling the PSP11 Common Stock. After the merger and the amendments, the
interest of PSP11 shareholders can be diluted through the issuance of
additional securities, including securities that would have priority over
PSP11 Common Stock as to cash flow, distributions and liquidation proceeds.
PSP11 will be able to issue additional shares of common, preferred and equity
stock without shareholder approval, subject to the rules of the AMEX and
California law. There is no assurance that any such securities will be
issued. The preferred stock and the equity stock are issuable from time to
time in one or more series and would, if issued, have rights, including
dividend rights, conversion rights, voting rights, redemption price and
liquidation rights as may be determined by PSP11's Board of Directors. The
level of distributions to holders of PSP11 Common Stock will be significantly
lower after than before the merger. See "Risk Factors - Lower Level of
Distributions After the Merger," "- Uncertainty Regarding Market Price of PSI
Common Stock" and "- Financing Risks - Dilution and Subordination."
50
<PAGE>
BEFORE THE MERGER AND THE AMENDMENTS AFTER THE MERGER AND AMENDMENTS
OWNERSHIP BY PSI
<TABLE>
<S> <C>
PSI owns 37% of the capital PSI will own 43% of the PSP11 Common Stock (27%
stock of PSP11. assuming completion of pending AOPP
transactions) and 70% assuming conversion of
PSI's interest in the Operating Partnership (54%
assuming completion of pending AOPP
transactions).
</TABLE>
The merger will result in a shift in control of PSP11 from the public
shareholders to PSI. See "Risk Factors - Control and Influence by PSI; Ownership
Limitations and Antitakeover Provisions."
BORROWING POLICIES
<TABLE>
<S> <C>
PSP11 is not permitted to PSP11 will have broad powers to borrow in
borrow in connection with furtherance of its investment objectives. After
the acquisition of the merger, PSP11 will have approximately $27
properties. It is fully million of mortgage debt (assuming completion of
invested and would pending AOPP transactions).
distribute the proceeds
from a financing of
properties.
</TABLE>
After the merger, PSP11 will incur debt in the acquisition of properties
and reinvest proceeds from borrowings. The incurrence of debt increases the risk
of loss of investment.
TRANSACTIONS WITH AFFILIATES
<TABLE>
<S> <C>
Its bylaws restrict PSP11 After the merger, its bylaws will restrict PSP11
from entering into a from acquiring properties from its affiliates or
variety of business from selling properties to them unless the
transactions with transaction (i) is approved by a majority of
affiliates. The bylaws may PSP11 independent directors and (ii) is fair to
be amended by a majority PSP11 based on an independent appraisal or
vote of shareholders. fairness opinion.
</TABLE>
It will be easier for PSP11 to enter into transactions with its affiliates
than before the merger because shareholder approval will not be required.
PROPERTIES (Pro forma as of September 30, 1997)
<TABLE>
<S> <C>
15 wholly-owned Equity interests (directly, as well as through
predominantly general and limited partnership interests) in 66
mini-warehouse properties commercial properties with 7,782,000 net
with an aggregate of rentable square feet of space in 10 states. See
929,000 net rentable square "AOPP Recent and Proposed Acquisitions" for
feet of space in seven information on properties acquired by AOPP since
states, consisting of 11 September 30, 1997.
mini-warehouses, two
commercial properties and
two properties that combine
mini-warehouse and
commercial space. See
"Public Storage Properties
XI, Inc. - Description of
PSP11's Properties."
</TABLE>
Because after the merger PSP11 will own substantially more property
interests in more states than before, PSP11's results of operations will be less
affected by the profitability or lack of profitability of a single property and
it would be more difficult to liquidate PSP11 within a reasonable period of
time.
After the merger PSP11 will own and operate commercial properties instead
of mini-warehouses. Commercial properties present certain risks not associated
with mini-warehouses: commercial properties are larger; there are fewer leases
and for longer terms; and capital expenditures tend to be higher. See "Risk
Factors - Change in Nature of Investment" and "- Operating Risks."
After the merger PSP11 intends to acquire commercial properties and to
incur mortgage debt as appropriate. After the merger PSP11 has no plans for the
disposition of assets; under the merger agreement, PSP11 will exchange 13
predominantly mini-warehouse properties for 11 commercial properties owned by
PSI. See "- Exchange of Properties."
51
<PAGE>
BEFORE THE MERGER AND THE AMENDMENTS AFTER THE MERGER AND THE AMENDMENTS
TAXATION
PSP11 was organized to qualify for taxation as a REIT and intends to
continue to so qualify after the merger. As a REIT, PSP11 generally is
permitted to deduct distributions to its shareholders, which effectively
eliminates the "double taxation" (at the corporate and shareholder levels)
that typically results when a corporation earns income and distributes that
income to shareholders in the form of dividends. Distributions received by
PSP11 shareholders generally constitute portfolio income, which cannot offset
"passive" income and loss from other investments.
VOTING RIGHTS
PSP11 will continue to hold annual meetings, with each such meeting on a
date within 15 months of the prior annual meeting, at which the shareholders
elect the directors, with each shareholder entitled to cast as many votes as
there are directors to be elected, multiplied by the number of shares
registered in his or her name. Under California law, a majority vote of
shareholders is required for (i) the removal of directors, (ii) the
dissolution of the company, (iii) the amendment of certain provisions of the
organizational documents and (iv) the sale of all or substantially all of the
company's assets.
MANAGEMENT AND DUTIES
<TABLE>
<S> <C>
PSP11 is managed by its PSP11 will continue to be managed by its board
board of directors and of directors and executive officers. PSP11's
executive officers. authorized number of directors will range from
PSP11's authorized number five to nine with the exact number fixed at
of directors ranges from seven. A majority of the directors of PSP11
three to five with the will be independent directors.
exact number fixed at
three. Two of the
directors are independent
directors and the third
director is B. Wayne Hughes.
</TABLE>
Under California law, directors are accountable to a corporation and
its shareholders as fiduciaries and are required to perform their duties in
good faith, in a manner believed to be in the best interests of a corporation
and its shareholders and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances. The liability of the directors of PSP11 is limited pursuant to
the provisions of California law and their organizational documents, which
limit a director's liability for monetary damages to PSP11 or its shareholders
for breach of the director's duty of care, where a director fails to exercise
sufficient care in carrying out the responsibilities of office. Those
provisions would not protect a director who knowingly did something wrong, or
otherwise acted in bad faith, nor would they foreclose any other remedy which
might be available to PSP11 or its shareholders, such as the availability of
non-monetary relief. In addition, the organizational documents provide PSP11
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. PSP11 has taken advantage of
those provisions and has entered into agreements with its directors and
executive officers (and intends to enter into such agreements with new
directors and executive officers after the merger), indemnifying them to the
fullest extent permitted by California law. To the extent that the foregoing
provisions concerning indemnification apply to actions arising under the
Securities Act, PSP11 has been advised that, in the opinion of the Commission,
such provisions are contrary to public policy and therefore are not
enforceable.
MANAGEMENT COMPENSATION
<TABLE>
<CAPTION>
<S> <C>
The annual compensation of The annual base compensation of PSP11's
PSP11's executive officers executive officers and directors will be
and directors is $20,000. $410,000.
</TABLE>
Through the merger, PSP11 will become a fully-integrated and self-
managed real estate company and will no longer pay property management fees to
AOPP and PSI. However, the annual compensation of PSP11's executive officers
and directors will increase and will increase further as PSP11 engages
additional executive officers. See "Certain Relationships and Related Parties
- Compensation to Executive Officers and Directors."
52
<PAGE>
BEFORE THE MERGER AND THE AMENDMENTS AFTER THE MERGER AND THE AMENDMENTS
ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS
<TABLE>
<S> <C>
PSP11 shareholders must Subject to the rules of the AMEX and applicable
approve all additional provisions of California law, PSP11 intends to
issuances of capital stock. issue authorized capital stock without
shareholder approval.
</TABLE>
Given the ownership level of PSP11 Common Stock by PSI, PSP11's greater
flexibility to issue capital stock, including senior securities with special
voting rights and priority over PSP11 Common Stock, an anti-takeover provision
in the Operating Partnership Agreement and a voting agreement, after the
merger and the amendments, PSP11 should be in a better position to deter
attempts to obtain control in transactions not approved by its Board of
Directors, and PSP11 shareholders could be less likely to benefit from a
takeover not approved by PSP11's Board of Directors. Both before and after
the merger and the amendments, PSP11's organizational documents restrict the
number of shares that may be owned by any person other than PSI.
LIMITED LIABILITY OF INVESTORS
Under California law, shareholders are not generally liable for corporate
debts or obligations. The PSP11 Common Stock is nonassessable.
REVIEW OF SHAREHOLDER LISTS
Under applicable law, a shareholder is entitled, upon written demand, to
inspect and copy the record of shareholders, at any time during usual business
hours, for a purpose reasonably related to his or her interest as a
shareholder. To communicate with other shareholders regarding the merger
would be a valid purpose.
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Chapter 13 of the California General Corporation Law ("Chapter
13"), a holder of PSP11 Common Stock may, in some instances, be entitled to
require PSP11 to purchase his or her shares for cash at their fair market value
as of the day before the first announcement of the terms of the merger,
excluding any appreciation or depreciation in consequence of the merger. The
general terms of the merger were first announced on August 18, 1997. The
following is a brief summary of the procedures to be followed by a PSP11
shareholder in order to perfect his or her right, if any, to payments under
Chapter 13 and is qualified in its entirety by reference to the text of Chapter
13 attached to this proxy statement as Appendix D, to which reference is hereby
made for a definitive statement of the rights of dissenting shareholders and the
procedures to be followed.
Shares of PSP11 Common Stock will qualify as dissenting shares only if
demands for payment are filed with respect to 5% or more of the outstanding
shares of PSP11 Common Stock. This 5% requirement is applicable because PSP11
Common Stock is listed on the AMEX, a national securities exchange certified by
the California Commissioner of Corporations, as provided in Section 1300(b)(1)
of Chapter 13.
A dissenting shareholder who wishes to require PSP11 to purchase his or her
shares of common stock must:
(1) vote against the merger any or all of the shares of common stock
entitled to be voted (shares of common stock not voted are not considered
to be voted against the merger and will not be counted toward the 5%
minimum for dissenters' rights to exist); provided that if a PSP11
shareholder votes part of the shares entitled to be voted in favor of the
merger, and fails to specify the number of shares voted, it is conclusively
presumed under California law that such shareholder's approving vote is
with respect to all shares entitled to be voted;
(2) make written demand upon the corporation or its transfer agent at
the addresses listed below, which is received not later than the date of
the meeting of shareholders of the corporation, setting forth the number of
shares of common stock demanded to be purchased by PSP11 and a statement as
to claimed fair market value of such shares at August 15, 1997; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval of the merger by the shareholders of PSP11 described
below is mailed to such shareholders, to the respective corporation or its
transfer agent at the addresses listed below, the certificates representing
any shares in regard to which demand for purchase is being made, or to be
exchanged for certificates of appropriate denominations so endorsed, with a
statement that the shares are dissenting shares.
53
<PAGE>
The statement of fair market value in clause (2) above will constitute an
offer by the dissenting shareholder to sell his or her shares at a price equal
to such fair market value. Neither a vote against approval of the merger nor
the giving of a proxy directing a negative vote will be sufficient to constitute
the demand described in clause (2) above. A proxy which fails to include
instructions with respect to approval of the merger will be voted in favor of
the merger. Accordingly, shares covered by such a proxy will not be dissenting
shares. In addition, a vote in favor of the merger, or a failure to vote at
all, will nullify any previously filed written demand for payment.
If the holders of 5% or more of the outstanding shares of PSP11 Common
Stock have made demands for payment on or prior to the date of the shareholders'
meeting to approve the merger, and have voted against the merger at the meeting,
within 10 days after the date of the approval of the merger, PSP11 will mail to
each dissenting shareholder a notice of such approval together with a statement
of the price determined by PSP11 to represent the fair market value of
dissenting shares, a copy of certain sections of Chapter 13, and a brief
description of the procedure to be followed if the shareholder desires to
exercise dissenter's rights. The statement of price will constitute an offer by
PSP11 to purchase at the price stated therein any dissenting shares. If holders
of 5% or more of the outstanding shares of PSP11 Common Stock exercise
dissenters' rights, AOPP has the right to terminate the merger agreement.
If PSP11 and the dissenting shareholder agree that any shares of PSP11
Common Stock are dissenting shares and agree upon the price of the shares, the
dissenting shareholder will be entitled to the agreed price plus interest
thereon at the legal rate on judgments from the date of such agreement. Subject
to the provisions of the California General Corporation Law, payment of the fair
market value of the dissenting shares will be made within 30 days after such
agreement or within 30 days after any statutory or contractual conditions to the
merger are satisfied, whichever is later. If PSP11 denies that the shares are
dissenting shares or if PSP11 and the dissenting shareholder fail to agree upon
the fair market value of the shares, then the dissenting shareholder, within six
months after the date on which notice of approval of the merger by PSP11
shareholders is mailed to such shareholder, and not thereafter, may file a
complaint in the Superior Court of Los Angeles County, California, requiring the
court to determine whether the shares are dissenting shares, or the fair market
value of the dissenting shares, or both, or may intervene in any pending action
for the appraisal of any shares of PSP11 Common Stock. The court will direct
payment of the appraised value of the shares, together with interest thereon at
the legal rate on judgments from the date on which the judgment was entered, by
PSP11 to the dissenting shareholder upon the surrender of the certificates
representing such shares to PSP11. The costs of the proceeding shall be
apportioned as the court considers equitable, but if the appraisal exceeds the
price offered by PSP11, it shall pay the costs, and if the appraisal is more
than 125% of the price offered by it, it may be required to pay attorneys' and
other fees and interest at the legal rate on judgments from the date the
dissenting shareholder complied with Sections 1300-1302 of Chapter 13.
A dissenting shareholder may not withdraw demand for purchase of dissenting
shares without PSP11's consent. Written demands for payment and submissions for
endorsement must be addressed to Public Storage Properties XI, Inc., 701 Western
Avenue, Glendale, California 91201-2397, attention: Investor Services
Department or to PSP11's transfer agent, American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
Any reference to "dissenting shareholder" in this section "Dissenting
Shareholders' Rights of Appraisal" means the recordholder of dissenting shares
of PSP11 and includes a transferee of record.
A shareholder receiving cash upon the exercise of rights of appraisal may
recognize gain or loss for federal income tax purposes. See "Federal Income Tax
Considerations."
PSP11 shareholders are entitled, upon written demand, to inspect and copy
the record of PSP11 shareholders, at any time during usual business hours to
communicate with other PSP11 shareholders with respect to the merger.
54
<PAGE>
PROPOSAL TWO - AMENDMENTS TO PSP11'S ARTICLES OF
INCORPORATION - INCREASED CAPITALIZATION
GENERAL
In connection with the merger, PSP11 is proposing an amendment to its
articles of incorporation to modify its authorized capital stock as follows:
. Increase the number of authorized shares of PSP11 Common Stock from
2,828,929 to 100,000,000, up to 16,858,000 of which will be issued in
the merger.
. Authorize 50,000,000 shares of preferred stock, none of which will be
issued in the merger.
. Authorize 100,000,000 shares of equity stock, none of which will be
issued in the merger.
The related amendment would also eliminate all references to the PSP11
Common Stock Series B and C (because they would be inapplicable upon conversion
of the PSP11 Common Stock Series B and C into PSP11 Common Stock) and would
reclassify the PSP11 Common Stock Series A as common stock.
The merger is conditioned on approval of this amendment, and adoption of
this amendment is conditioned on approval and completion of the merger. If the
merger and this amendment are approved by the shareholders of PSP11, this
amendment will become effective on or about the completion of the merger. The
summary set forth below does not purport to be a complete description of this
amendment. PSP11 shareholders should review the entire text of this proposed
amendment, which is attached as Appendix E-1. The PSP11 Board of Directors
recommends that PSP11 shareholders vote FOR this proposed amendment.
COMMON STOCK
Holders of PSP11 Common Stock will continue to be entitled to receive
distributions on the PSP11 Common Stock when, as and if declared by the PSP11
Board of Directors, out of funds legally available therefor. Payment and
declaration of distributions on the PSP11 Common Stock and repurchases of the
PSP11 Common Stock by PSP11 would be subject to certain restrictions if PSP11
failed to pay dividends on any outstanding preferred stock. Upon any
liquidation, dissolution or winding up of PSP11 and after payment or provision
for payment of the debts and other liabilities of PSP11 and the preferential
amounts owing with respect to any outstanding preferred stock, holders of the
PSP11 Common Stock would be entitled to receive the remaining liquidation
proceeds. Holders of the PSP11 Common Stock will continue to have no preemptive
rights, except such as may be provided to certain shareholders by contract,
which means that public shareholders will have no right to acquire any
additional shares of PSP11 Common Stock that may be issued by PSP11 at a
subsequent date. See "American Office Park Properties, Inc. - Agreement with
Subsidiary of State Pension Plan" and "- Proposed Stock Issuances to
Institutional Investors."
Each outstanding share of PSP11 Common Stock will entitle the holder to one
vote on all matters presented to shareholders for a vote, with the exception
that shareholders will have cumulative voting rights with respect to the
election of the PSP11 Board of Directors, in accordance with California law.
Cumulative voting entitles each PSP11 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 PSP11 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 PSP11 shareholder chooses. All outstanding shares of
PSP11 Common Stock are, and the PSP11 Common Stock issued in the merger will be,
fully paid and non-assessable. The PSP11 Board of Directors may prohibit the
transfer, or effect redemptions of, the PSP11 Common Stock to aid PSP11 in
maintaining its qualification as a REIT. In addition, PSP11's articles of
incorporation are proposed to be amended in connection with the merger to impose
certain specific limitations on the acquisition, transfer and/or ownership of
PSP11's capital stock to assist in preserving PSP11's REIT status. See
"Proposal Four - Amendment to PSP11's Articles of Incorporation and Bylaws -
Ownership Limitation."
The proposed increase in the number of shares of PSP11 Common Stock from
2,828,929 to 100,000,000 exceeds the increase necessary to complete the merger.
Of the 2,828,929 presently authorized shares, 1,819,937 are
55
<PAGE>
outstanding as of the record date of the meeting and 707,071 shares are reserved
for issuance upon conversion of the PSP11 Common Stock Series B and C. A total
of approximately 16,858,000 additional shares would be necessary to complete the
merger (assuming no cash elections).
The balance of the available shares (approximately 81,322,000 shares) would
be available for conversion of Operating Partnership interests (approximately
7,649,000), underwritten offerings, mergers, acquisitions and other corporate
purposes. Up to 1,500,000 shares would be available for issuance pursuant to
awards under the Plan, if the PSP11 Shareholders approve the assumption and
adoption of the Plan. PSP11 currently has no agreements for the issuance of
additional shares of PSP11 Common Stock (other than in the merger).
Nevertheless, after the merger, based on discussions with AOPP management, PSP11
is likely to pursue a variety of transactions that may involve such an issuance
and expects that such transactions may occur from time to time during the next
year. No further shareholder approval would be solicited for any future
issuances of authorized shares, unless required by the rules of the AMEX or
applicable provisions of California law. The PSP11 Board of Directors believes
that it is in the best interests of PSP11 to have the PSP11 shareholders
authorize the increase at this time in order to have sufficient shares available
for issuance at the discretion of, and on terms set by, the PSP11 Board of
Directors to avoid the delay and expense that would be involved in holding a
special meeting of shareholders to vote on the authorization of new shares at a
later time when prompt action may be required.
PREFERRED STOCK AND EQUITY STOCK
To afford the maximum flexibility with respect to its future
capitalization, PSP11 is proposing amendments to its articles of incorporation
to authorize 50,000,000 shares of "preferred stock" and 100,000,000 shares of
"equity stock."
Both the preferred stock and the equity stock would be issuable from time
to time in one or more series and would, if issued and upon issuance, have
rights, including dividend, conversion, voting, redemption and liquidation
rights, as may be determined by the PSP11 Board of Directors. Neither the
preferred stock nor the equity stock would be issued in the merger. The
preferred stock and the equity stock would be issued for cash in public or
private offerings, in exchange for assets, in corporate recapitalizations or as
stock dividends, all on terms determined by the PSP11 Board of Directors. The
preferred stock would rank senior to the PSP11 Common Stock, and the equity
stock would rank junior to the preferred stock and senior to, junior to or on a
parity with the PSP11 Common Stock.
PSP11 currently has no agreements for issuance of the preferred stock or
the equity stock. Nevertheless, PSP11 is likely to pursue a variety of
transactions that may involve such an issuance, and expects that such
transactions may occur some time in the next year. It is currently not possible
to predict the precise terms of any such transactions. No further shareholder
approval would be sought in connection with these transactions, unless
shareholder approval were required under California law or by the rules of the
AMEX. Shareholder approval is being sought at this time in order to avoid the
delay and expense that would be involved in holding a special meeting of
shareholders to vote on a transaction at a later time when prompt action may be
required.
Although preferred stock or equity stock could be issued to deter or
discourage attempts to obtain control of PSP11 in transactions not approved by
the PSP11 Board of Directors, including transactions that some shareholders may
deem favorable, PSP11 currently has no plans or intentions regarding such
issuances. Issuance of shares of preferred stock and equity stock will require
approval of the PSP11 Board of Directors.
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PROPOSAL THREE - AMENDMENTS TO PSP11'S ARTICLES OF
INCORPORATION AND BYLAWS - INFINITE LIFE ENTITY
GENERAL
In connection with the merger, PSP11 is proposing the following amendments
to its articles of incorporation and bylaws to convert PSP11 from a "finite
life" to an "infinite life" entity:
Amendments to Articles of Incorporation:
----------------------------------------
. Eliminate the fixed term of PSP11.
. Eliminate the provision allowing officers and directors of PSP11 to
compete with PSP11 for investment opportunities.
Amendments to Bylaws:
--------------------
. Eliminate the requirement for shareholder approval for the disposition
of assets or the issuance of securities, except as required by
California law.
. Allow transactions with affiliates if approved by the independent
directors upon receipt of independent appraisals or fairness opinions.
. Modify the proposal for the disposition of PSP11's assets if the merger
is approved.
. Eliminate the restrictions on PSP11's investment objectives.
. Eliminate provisions that are inapplicable upon conversion of the PSP11
Common Stock Series B and C into PSP11 Common Stock.
. Delete certain definitions that are inapplicable, and modify certain
definitions to make them applicable, as a result of the other bylaw
amendments.
The merger is conditioned on approval of all of these amendments, and adoption
of these amendments is conditioned on approval and completion of the merger. If
the merger and these amendments are approved by the shareholders of PSP11, these
amendments will become effective on or about the completion of the merger. The
summary set forth below does not purport to be a complete description of these
amendments. PSP11 shareholders should review Appendix E-2, which sets forth the
entire text of the sections of the bylaws which are proposed to be modified (but
not deleted) and lists the sections of the articles of incorporation and bylaws
that are proposed to be deleted. The PSP11 Board of Directors recommends that
PSP11 shareholders vote FOR these proposed amendments.
FIXED TERM
PSP11's articles of incorporation provide for the automatic liquidation of
PSP11 on December 31, 2038, if it has not been liquidated before that date. The
PSP11 Board of Directors proposes that this provision be eliminated. If the
shareholders of PSP11 approve the elimination of this provision and the other
proposed amendments, PSP11 will be converted from a finite life REIT to an
infinite life REIT. If converted, PSP11 will operate as a going concern and not
as a company with a view to the liquidation of its assets within any fixed
period of time. PSP11 shareholders will only be able to realize the value of
their investment by selling the PSP11 Common Stock in the securities markets.
See "Risk Factors - Change from Finite Life to Infinite Life" and "- Uncertainty
Regarding Market Price of Common Stock."
COMPETITION FROM CORPORATE OFFICERS AND DIRECTORS
PSP11's articles of incorporation include a provision designed to permit
PSP11's officers and directors to compete with PSP11 for investment
opportunities. The PSP11 Board of Directors proposes that this provision be
deleted from PSP11's articles of incorporation because it believes that this
provision is inappropriate for an infinite life REIT. Accordingly, after the
merger, PSP11's officers and directors will be precluded from competing with
PSP11 for corporate opportunities. PSP11 believes that this deletion presents
no material risk or detriment to PSP11 shareholders.
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SHAREHOLDER VOTING
PSP11's bylaws require a shareholder vote for (i) the sale, exchange or
pledge of all of PSP11's assets and (ii) the issuance of securities by PSP11.
The PSP11 Board of Directors believes that, as the Board of an infinite life
REIT, the Board should be able to decide when PSP11 should sell or pledge assets
or issue securities, subject only to the limitations imposed by California law
or the rules of the AMEX. Accordingly, the PSP11 Board of Directors proposes
that this provision be eliminated. If the shareholders of PSP11 approve the
elimination of this provision, the ability of PSP11 shareholders to control
future transactions will be reduced. However, California law and the rules of
the AMEX will continue to require that certain corporate transactions, such as a
sale of all or substantially all of PSP11's assets and issuances of a material
amount of PSP11 Common Stock to PSP11's officers and directors, be approved by
the shareholders of PSP11.
TRANSACTIONS WITH AFFILIATES
PSP11's bylaws restrict PSP11 from entering into a variety of business
transactions with affiliates: purchases, sales, leases and loans. The PSP11
Board of Directors proposes to amend PSP11's bylaws to allow transactions with
affiliates provided that a purchase or sale transaction with an affiliate is (i)
approved by a majority of PSP11's independent directors and (ii) fair to PSP11
based on an independent appraisal or fairness opinion. If this proposal is
approved by the shareholders of PSP11, it will be easier for PSP11 to enter into
transactions with its affiliates, although the rules of the AMEX will require
shareholder approval for certain transactions with affiliates. The risks and
adverse effects of transactions may be accentuated by any affiliation between
the parties to the transactions because the affiliated parties may place their
own interests ahead of the corporation's interests. However, the PSP11 Board of
Directors believes that the requirement of independent director approval
provides sufficient protection for PSP11 shareholders.
PROPOSAL FOR SALE OR FINANCING OF PROPERTIES
PSP11's bylaws provide that during 1997 the shareholders of PSP11 will be
presented with a proposal for the sale or financing of PSP11's properties. The
PSP11 Board of Directors proposes to amend this provision so that it will be
inapplicable if the merger is completed. If the merger is not approved by the
shareholders of PSP11 or the other conditions to the merger are not satisfied,
the PSP11 Board of Directors intends to present the PSP11 shareholders with a
proposal for the sale or financing of PSP11's properties.
INVESTMENT POLICY
PSP11's bylaws contain a variety of restrictions on PSP11's investment
objectives: no investment in junior trust deeds, no reinvestment of cash flow,
no borrowings unless they meet certain criteria, no joint ventures unless they
meet certain criteria and no investments in limited partnership interests. The
PSP11 Board of Directors believes that this provision is inappropriate and
should be deleted from PSP11's bylaws given the change in PSP11's business that
will result from the merger. If the shareholders of PSP11 adopt this provision,
the flexibility of the PSP11 Board of Directors will be increased and the
ability of PSP11 shareholders to control future transactions will be reduced.
CONVERSION OF PSP11 COMMON STOCK SERIES B AND C
PSP11's bylaws contain certain provisions that are inapplicable upon
conversion of the PSP11 Common Stock Series B and C: restrictions on voting the
Common Stock Series B and C, restrictions on repurchases of shares until
conversion of the PSP11 Common Stock Series B and C and restrictions on the use
of proceeds from the sale of PSP11's properties until conversion of the PSP11
Common Stock Series B and C. In the merger, the PSP11 Common Stock Series B and
C will be converted into PSP11 Common Stock. Accordingly, the PSP11 Board of
Directors is proposing the deletion of these provisions. PSP11 believes that
this deletion presents no material risk or detriment to PSP11 shareholders.
CHANGES TO DEFINITIONS
The PSP11 Board of Directors is also proposing to delete certain
definitions in PSP11's bylaws that are inapplicable as a result of the other
bylaw amendments: "General Partners," "Partnership," "Partnership Agreement,"
"Public Storage Properties REIT," "Purchase Price," "REIT - Qualifying Income"
and "Reorganization." The PSP11 Board of Directors is also proposing to modify
the definition of "Independent Directors" in PSP11's bylaws to refer to the
directors' relationship with PSP11 and its affiliates instead of PSI. PSP11
believes that these changes present no material risk or detriment to PSP11
shareholders.
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PROPOSAL FOUR - AMENDMENTS TO PSP11'S ARTICLES OF INCORPORATION
AND BYLAWS - OWNERSHIP LIMITATION
In connection with the merger, PSP11 is proposing (i) an amendment to
PSP11's articles of incorporation to provide that no holder of PSP11 capital
stock may own more than a certain specified percentage of outstanding PSP11
capital stock in order to assist in the preservation of PSP11's REIT status, and
(ii) an amendment to PSP11's bylaws to eliminate the ownership limitation on the
PSP11 Common Stock contained in the bylaws in view of the addition of the
ownership limitation to PSP11's articles of incorporation. The merger is
conditioned on approval of these amendments, and adoption of these amendments is
conditioned on approval and completion of the merger. If the merger and these
amendments are approved by the PSP11 shareholders, the amendments will become
effective on or about the completion of the merger. The summary set forth below
does not purport to be a complete description of the amendments. PSP11
shareholders should review Appendix E-3, which sets forth the entire text of the
proposed amendment to the articles of incorporation relating to the ownership
limitation and lists the sections of the bylaws relating to the ownership
limitation that are proposed to be deleted. The PSP11 Board of Directors
recommends that PSP11 shareholders vote FOR these proposed amendments.
For PSP11 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, PSP11 proposes
to amend its articles of incorporation to provide certain restrictions on the
shares of capital stock that any shareholder may own.
The articles of incorporation will be amended to 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 PSP11 Common Stock and (B) 9.9% of the outstanding shares of each class or
series of shares of preferred stock or equity stock of PSP11 and will further
provide that all shares of stock of PSP11 be imprinted with a legend setting
forth such restriction. The amendment will 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 PSI) upon completion of,
and after giving effect to, the merger. Thus, this limitation will not affect
the ownership of PSP11 Common Stock held by PSI at the conclusion of the merger.
Furthermore, the limitation does not apply with respect to shares of stock of
PSP11 deemed to be owned by a person as a result of such person's ownership of
shares of PSI (however, such ownership will be taken into account in determining
whether a subsequent acquisition or transfer of shares of PSP11 (but not PSI)
violates the ownership limit). The ownership limitation is intended to assist
in preserving PSP11's REIT status in view of PSI's substantial ownership
interest in PSP11 and the Hughes family's substantial ownership interest in PSI.
There can be no assurance, however, that such ownership limit will enable PSP11
to satisfy the requirement that a REIT not be "closely held" within the meaning
of Section 856(h) of the Code for any given taxable year, in part as a result of
the provision described above providing that the ownership limitation generally
does not apply to shares of PSP11 deemed to be owned as a result of a person's
ownership of shares of PSI. See "Federal Income Tax Considerations - Effect of
the Merger and Cash Elections on Federal Income Tax Treatment of PSP11 as a
REIT."
The proposed amendment to the articles of incorporation would provide that
the PSP11 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 PSP11 would not be "closely held"
within the meaning of Section 856(h) of the Code (without regard to whether the
event in question takes place during the second half of a taxable year) and
would not otherwise fail to qualify as a REIT, after giving effect to an
acquisition by such person of beneficial ownership of the maximum amount of
capital stock permitted as a result of the exception to be granted, and taking
into account the existing and permitted ownership by other persons of the stock
of PSP11 (taking into account any other exceptions granted) and (B) such person
provides to the PSP11 Board of Directors such representations and undertakings
as the PSP11 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 PSP11's capital stock if such ownership or
acquisition (i) would cause more than 50% in value of PSP11'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 PSP11's stock
being beneficially owned by
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less than 100 persons (determined without reference to any rules of
attribution), or (iii) would otherwise result in PSP11's failing to qualify as a
REIT.
The proposed amendment would also provide that the PSP11 Board of Directors
may terminate the application of the ownership limitations upon determining that
it is no longer in the best interest of PSP11 to attempt to, or continue to,
qualify as a REIT or that compliance with such limitation is no longer required
in order to qualify as a REIT.
The proposed amendment to the articles of incorporation would provide that
if after the merger any holder of PSP11 capital stock purports to transfer
shares to a person or there is a change in the capital structure of PSP11 and
either the transfer or the change in capital structure would result in PSP11
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 PSP11 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 articles of
incorporation 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. Each purported transferee shall be
deemed to have waived any claims such purported transferee may have against the
trustee and PSP11 arising from the disposition of the shares, except for claims
arising from the trustee's gross negligence, willful misconduct, or failure to
make payments when required by the proposed amendment.
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PROPOSAL FIVE - AMENDMENT TO PSP11'S BYLAWS -
INCREASE IN AUTHORIZED NUMBER OF DIRECTORS
In connection with the merger, PSP11 is proposing an amendment to its
bylaws to change the authorized number of directors from a range of three to
five to a range of five to nine, with the exact number of directors to be
initially fixed at seven.
The merger is conditioned on approval of this amendment, and adoption of
this amendment is conditioned on approval of the merger. If the merger and this
amendment are approved by the shareholders of PSP11, this amendment will become
effective upon such approval. The summary set forth below does not purport to
be a complete description of this amendment. PSP11 shareholders should review
the entire text of this proposed amendment, which is attached as Appendix E-4.
The PSP11 Board of Directors recommends that PSP11 shareholders vote FOR this
proposed amendment.
PSP11's bylaws currently provide for a board of directors of a variable
size ranging from a total of three directors to a total of five directors, with
the exact number of directors set at three until changed, within the range
specified above, by an amendment adopted by the PSP11 Board of Directors or by
the PSP11 shareholders. Under PSP11's bylaws and California law, the range for
the permissible number of directors may be changed only by an amendment adopted
by the PSP11 shareholders. PSP11 is proposing an amendment to its bylaws to
provide for a board of directors ranging in size from five to nine directors,
with the exact number of directors to be initially set at seven (until changed,
within the specified range, by an amendment adopted by the PSP11 Board of
Directors or by the PSP11 shareholders). The proposed amendment would authorize
the election of seven directors of PSP11 as set forth under "Proposal Seven -
Election of Directors" and would also provide the PSP11 Board of Directors with
the flexibility to add additional qualified individuals to the PSP11 Board of
Directors. Any such additional directors may be either independent directors or
employees of PSP11. However, a majority of PSP11's directors will continue to
be independent directors.
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PROPOSAL SIX - ADOPTION OF 1997 STOCK OPTION
AND INCENTIVE PLAN
GENERAL
As described in "Proposal One - The Merger - The Merger Agreement -
Assumption of Outstanding Options," PSP11 will, in connection with the merger,
assume options outstanding under AOPP's 1997 Stock Option and Incentive Plan. At
the effective time of the merger, each AOPP option, whether vested or unvested,
will be converted into an option to acquire, on the same terms and conditions
applicable to the AOPP option, the number of shares of PSP11 Common Stock that
the holder of the AOPP option would have received in the merger if the AOPP
option had been exercised in full immediately prior to the Effective Time,
irrespective of whether the AOPP option was in fact then exercisable.
PSP11 also proposes to assume and adopt AOPP's 1997 Stock Option and
Incentive Plan, as a new plan of PSP11, for the purpose of covering and
administering converted options and making awards after the merger is approved
to employees, non-employee directors, consultants and service providers (as
described below) of PSP11 and the Operating Partnership, including employees of
AOPP who become employees of PSP11 after the merger. If this proposal is
approved by shareholders of PSP11 at the annual meeting, 1,500,000 shares of
PSP11 Common Stock, including shares of PSP11 Common Stock that will be subject
to converted AOPP options, will be available under the Plan. After the annual
meeting, all references in the Plan to AOPP will be deemed to refer to PSP11.
If the proposal to approve and adopt the Plan is approved, the persons who
would receive future grants of awards under the Plan and the timing, nature and
amount of awards to grantees would be determined from time to time by the Audit
Committee or other authorized committee of the PSP11 Board of Directors based on
a number of factors, including position, responsibilities, and contribution to
PSP11's performance and objectives. Grants to non-employee directors, however,
will be made automatically in accordance with certain formula provisions of the
Plan.
Approval of the merger is conditioned on approval of the Plan and adoption
of the Plan is conditioned on approval of the merger. The principal provisions
of the Plan are summarized below. The summary does not purport to be complete
and is qualified in its entirety by the terms of the Plan, the entire text of
which (in its pre-merger form) is attached hereto as Appendix F and incorporated
herein by reference. The PSP11 Board of Directors recommends that PSP11
shareholders vote FOR approval of the assumption and adoption of the Plan.
REASONS FOR THE PLAN
If adopted the purpose of the Plan will be to promote the best interests of
PSP11 and its shareholders by providing eligible participants with an
opportunity to acquire or increase a direct proprietary interest in PSP11's
operations and success. The PSP11 Board of Directors believes that the Plan will
advance the interests of PSP11 by (i) enhancing PSP11's ability to attract and
retain highly qualified officers, key employees, service providers and non-
employee directors and (ii) providing such persons with stronger incentives to
improve the business results and earnings of PSP11 by virtue of their ongoing
stake in the success of PSP11's business. The PSP11 Board of Directors also
believes that PSP11's ability to retain and motivate employees of AOPP who
become employees of PSP11 after the merger will be enhanced by making available
to those employees compensation programs comparable to those that were available
to them prior to the merger.
The Plan provides for the grant of incentive stock options ("ISOs"),
intended to qualify as such under Section 422 of the Code, and nonstatutory
stock options, which do not so qualify. The Plan also provides for the grant of
restricted stock and restricted stock units. There is no specified termination
date for the Plan, but it may be terminated by the Board of Directors at any
time. However, no ISOs may be granted under the Plan after January 28, 2007.
DESCRIPTION OF THE PLAN
ADMINISTRATION. The Plan will be administered by the Audit Committee (or
other committee designated by the Board of Directors of PSP11 from time to
time). The committee must at all times consist of no fewer than two members of
the Board of Directors of PSP11, and each member of the committee must qualify
in all respects as a "non-
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employee director" as defined in Rule 16b-3 under the Exchange Act and as an
"outside director" as defined in Treasury Regulation (S) 1.162-27(e)(3). Subject
to the limitations set forth in the Plan, the committee has the authority to
determine, among other things: (i) the eligible persons to whom options,
restricted stock and restricted stock units will be granted, (ii) the type or
types of grants to be made, (iii) the number of shares subject to each grant,
and (iv) the terms and conditions of the options, restricted stock and
restricted stock units. For grants to non-employee directors, the Plan is
intended to be a "formula plan," and accordingly, the committee will have no
discretion in establishing the material terms of such grants. Subject to the
express provisions of the Plan, the committee will have the full authority to
administer and interpret the Plan.
ELIGIBILITY.
Discretionary Grants. The committee will have discretion to grant options,
restricted stock and/or restricted stock units under the Plan to (i) employees
(including officers and directors) of PSP11, the Operating Partnership and of
any "subsidiary" or "parent" of PSP11 (within the meaning of Section 424 of the
Code), as designated from time to time by the committee and (ii) any consultant
or advisor to PSP11, any manager of PSP11's properties or affairs, any other
similar service provider or affiliate of PSP11, any corporation or other entity
in which PSP11 owns at least a 90% economic interest, and any employee of any of
the foregoing. Subject to restrictions set forth in the Plan, an eligible
person may receive successive grants of options, restricted stock and/or
restricted stock units.
Formula Plan for Non-Employee Directors. Subject to PSP11 shareholder
approval of the Plan, (i) after this annual meeting of PSP11's shareholders,
each non-employee director then duly elected and serving will automatically be
granted, as of the date of this annual meeting, a nonstatutory stock option to
purchase 5,000 shares of PSP11 Common Stock and (ii) thereafter, each new non-
employee director will, upon the date of his or her initial election by the
Board of Directors of PSP11 or the shareholders of PSP11 to serve as a non-
employee director, automatically be granted a nonstatutory option to purchase
5,000 shares of PSP11 Common Stock. In addition, subject to PSP11 shareholder
approval of the Plan, after each annual meeting of PSP11's shareholders
commencing with the next annual meeting, each non-employee director then duly
elected and serving will automatically be granted, as of the date of such annual
meeting, a nonstatutory stock option to purchase 1,000 shares of PSP11 Common
Stock. The committee has no discretion to alter the foregoing provisions of the
Plan governing options granted to non-employee directors. Two non-employee
directors are currently eligible to receive option grants under the Plan.
SHARES SUBJECT TO THE PLAN. Following the annual meeting, 1,500,000
authorized but unissued shares of PSP11 Common Stock will be reserved for
issuance pursuant to future awards made under the Plan and the exercise of all
converted AOPP options. In the event any change is made to the PSP11 Common
Stock subject to the Plan (whether by reason of recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend, or other increase, decrease or change in such shares),
the Board of Directors will adjust proportionately and accordingly the number
and kinds of shares that may be purchased. Any such adjustment in an
outstanding option, however, will be made without a change in the total price
applicable to the unexercised portion of the option but with a corresponding
adjustment in the per share option price. (Shares of PSP11 Common Stock
underlying any option that expires unexercised, or any award of restricted stock
or restricted stock units that is forfeited, will again be available for
issuance pursuant to the Plan.)
OPTIONS.
General. All options granted under the Plan are intended to be treated as
nonstatutory stock options, unless the committee specifically designates a stock
option as an ISO within the limitations of the Plan. The option exercise price
of options granted under the Plan will be determined by the committee in
accordance with the Plan. For both ISOs and nonstatutory options, the exercise
price per share will be equal to 100% of the fair market value (determined in
accordance with the Plan) of a share of common stock upon the date of grant (but
not less than the par value per share). No person may receive an ISO if, at the
time of grant, such person owns directly or indirectly more than 10% of the
total combined voting power of PSP11, unless the option price is at least 110%
of the fair market value of the common stock and the exercise period of such ISO
is limited to five years. There is also a $100,000 limit on the value of stock
(determined at the time of grant) with respect to which ISOs granted to an
optionee may first become exercisable in any calendar year. The maximum number
of shares subject to options that can be granted under the Plan to any executive
officer, other employee or service provider of PSP11 or any subsidiary is
800,000 shares during the first ten years of the
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Plan and 250,000 shares per year thereafter. Shares underlying any option that
expires unexercised will again be available for grant under the Plan.
Vesting. Unless otherwise provided in the agreement evidencing the grant
of an option, each option granted under the Plan will vest in three equal annual
installments beginning on the first anniversary of the date of grant, subject to
acceleration of vesting under certain circumstances or in the discretion of the
committee. Each option granted to a non-employee director under the Plan will
vest in three equal annual installments beginning on the first anniversary of
the date of grant. Subject to certain limitations, options will remain
exercisable for ten years from the date of grant. Options will expire prior to
their scheduled termination upon the thirtieth day after termination of the
optionee's employment with PSP11, the Operating Partnership or a service
provider, or termination of the optionee's service relationship with PSP11
(other than, for individuals, by reason of death or "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code)). Special
rules will govern the vesting and expiration of options following the death or
"permanent and total disability" of an optionee. The committee may extend the
period during which an option (other than an option granted to a non-employee
director) may be exercised (but not later than the date the option would
otherwise expire).
Transferability. Options granted under the Plan will be exercisable only
by the optionee or his or her permitted transferees during the optionee's
lifetime. Options will be transferable by the optionee only as provided in the
agreement evidencing the grant or as may be provided by will or the laws of
descent and distribution.
Payment of Option Price. Payment for shares purchased under the Plan may
be made in cash or cash equivalents, by exchanging shares of PSP11 Common Stock
valued at their fair market value on the date of exercise, or by a combination
of the foregoing. An optionee also may pay the exercise price by directing that
certificates for the shares purchased upon exercise be delivered to a licensed
broker acceptable to PSP11 as agent for the optionee and that the broker tender
to PSP11 cash or cash equivalents equal to the option exercise price plus the
amount of any taxes that PSP11 may be required to withhold in connection with
the exercise of the option.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The committee may grant to
eligible persons (but not to non-employee directors) shares of PSP11 Common
Stock (or units representing shares of common stock) subject to vesting based on
the passage of time, the achievement by the grantee or PSP11 of specified
performance objectives, or other conditions deemed appropriate by the committee.
The committee will establish the conditions to vesting, and the period of time
during which the conditions will apply, at the time of grant.
Any applicable performance objectives will be established in writing by the
committee prior to March 31 of the year in which the grant is made and while the
outcome is substantially uncertain. Performance objectives will be based on
stock price, market share, sales, earnings per share, return on equity or costs,
and may include positive results, maintaining the status quo or limiting
economic losses. Until vesting conditions are satisfied, restricted stock or
restricted stock units may not be transferred by the employee. In its
discretion, the committee may shorten or terminate vesting conditions or waive
any other restrictions applicable to the award.
If the termination of a grantee's employment with PSP11, the Operating
Partnership or a service provider, or the termination of a grantee's service
relationship with PSP11, occurs before restricted stock has vested, the award
will be forfeited unless the committee, in its discretion, determines otherwise.
Special rules will apply to the vesting of an award upon the death or "permanent
and total disability" of a grantee. Any shares of restricted stock that are
forfeited will again be available for award under the Plan. The maximum number
of shares of restricted stock, or shares represented by restricted stock units,
that can be granted under the Plan to any eligible person is 250,000 shares per
year.
The committee may, in the agreement evidencing a grant of restricted stock
or restricted stock units, provide that the grantee will be entitled to vote and
to receive dividends on the shares of common stock subject to the award. Upon
vesting of an award of restricted stock or restricted stock units, including the
satisfaction, lapse or waiver of all applicable restrictions and conditions, the
grantee will be entitled to receive a stock certificate representing the vested
shares. The shares will be issuable to the grantee free of charge, other than
payment of the par value of such shares.
64
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF PSP11 GRANTS UNDER THE PLAN
The grant of an option will not be a taxable event for the optionee or
PSP11.
An optionee will not recognize taxable income upon exercise of an ISO, and
any gain realized upon a disposition of shares of stock received pursuant to the
exercise of an ISO will be taxed as long-term capital gain if the optionee holds
the shares for at least two years after the date of grant and for one year after
the date of exercise. However, the excess of the fair market value of stock
subject to an ISO on the exercise date over the option exercise price will be
included in the optionee's alternative minimum taxable income in the year of
exercise (except that, if the optionee is subject to certain securities law
restrictions, determination of the amount included in alternative minimum
taxable income will be deferred, unless the optionee elects within 30 days
following exercise to have income determined without regard to such
restrictions) for purposes of the alternative minimum tax. An optionee may be
entitled to a credit against regular tax liability in future years for minimum
taxes paid with respect to the exercise of ISOs. PSP11 will not be entitled to
any business expense deduction with respect to the exercise of an ISO, except as
discussed below.
For the exercise of an option to qualify for the foregoing tax treatment,
the optionee generally must be an employee of PSP11 or a subsidiary from the
date the option is granted through a date within three months before the date of
exercise of the option. In the case of an optionee who is disabled, the three-
month period for exercise following termination of employment is extended to one
year. In the case of an employee who dies, both the time for exercising ISOs
after termination of employment and the holding period for stock received
pursuant to the exercise of the option are waived.
If all of the foregoing requirements are met except the special holding
period rules mentioned above, the optionee will recognize ordinary income upon
the disposition of the stock in an amount generally equal to the excess of the
fair market value of the stock at the time the option was exercised over the
option exercise price (but not in excess of the gain realized on the sale). The
balance of the realized gain, if any, will be capital gain. PSP11 will be
allowed a business expense deduction to the extent the optionee recognizes
ordinary income.
If an optionee exercises an ISO by tendering shares of PSP11 Common Stock
with a fair market value equal to part or all of the option exercise price, the
exchange of shares will be treated as a nontaxable exchange (except that this
treatment would not apply if the optionee had acquired the shares being
transferred pursuant to the exercise of an ISO and had not satisfied the special
holding period requirements summarized above). If the exercise is treated as a
tax free exchange, the optionee would have no taxable income from the exchange
and exercise (other than minimum taxable income as discussed above) and the tax
basis of the shares exchanged would be treated as the substituted basis for the
shares received. If the optionee used shares received pursuant to the exercise
of an ISO (or another statutory option) as to which the optionee had not
satisfied the applicable holding period requirement, the exchange would be
treated as a taxable disqualifying disposition of the exchanged shares.
Upon exercising a nonstatutory option, an optionee will recognize ordinary
income in an amount equal to the difference between the exercise price and the
fair market value of the stock on the date of exercise (except that, if the
optionee is subject to certain restrictions imposed by the securities laws, the
measurement date will be deferred, unless the optionee makes a special tax
election within 30 days after exercise to have income determined without regard
to the restrictions). If PSP11 complies with applicable reporting requirements,
it will be entitled to a business expense deduction in the same amount and at
the same time as the optionee recognizes ordinary income. Upon a subsequent
sale or exchange of shares acquired pursuant to the exercise of a nonstatutory
option, the optionee will have taxable gain or loss, measured by the difference
between the amount realized on the disposition and the tax basis of the shares
(generally, the amount paid for the shares plus the amount treated as ordinary
income at the time the option was exercised).
If the optionee surrenders shares of PSP11 Common Stock in payment of part
or all of the exercise price for nonstatutory options, no gain or loss will be
recognized with respect to the shares surrendered (regardless of whether the
shares were acquired pursuant to the exercise of an ISO) and the optionee will
be treated as receiving an equivalent number of shares pursuant to the exercise
of the option in a nontaxable exchange. The basis of the shares surrendered
will be treated as the substituted tax basis for an equivalent number of option
shares received and the new shares will be
65
<PAGE>
treated as having been held for the same holding period as had expired with
respect to the transferred shares. The difference between the aggregate option
exercise price and the aggregate fair market value of the shares received
pursuant to the exercise of the option will be taxed as ordinary income. The
optionee's basis in the additional shares will be equal to the amount included
in the optionee's income.
An award of restricted stock units will create no immediate tax
consequences for the employee or PSP11, and an award of restricted stock will
create no immediate tax consequences for the employee or PSP11 unless the
employee makes an election pursuant to Section 83(b) of the Code. The employee
will, however, realize ordinary income when restricted stock or restricted stock
units become vested, in an amount equal to the fair market value of the
underlying shares of PSP11 Common Stock on the date of vesting less any
consideration paid by the employee for such stock. If the employee makes an
election pursuant to Section 83(b) of the Code with respect to a grant of
restricted stock, the employee will recognize income at the time the restricted
stock is awarded (based upon the value of such stock at the time of award),
rather than when the restricted stock becomes vested. PSP11 will be allowed a
business expense deduction for the amount of any taxable income recognized by
the employee at the time such income is recognized (assuming PSP11 complies with
applicable reporting requirements).
The foregoing provides only a general description of the federal income tax
consequences of transactions contemplated by the Plan. Participants should
consult a tax advisor as to their individual circumstances.
NEW PLAN BENEFITS
The following table sets forth the aggregate benefits or amounts that would
have been received by or allocated to the non-employee directors of PSP11 for
the last completed fiscal year if the Plan had been in effect.
1997 STOCK OPTION AND INCENTIVE PLAN
<TABLE>
<CAPTION>
NAME AND POSITION (1) DOLLAR VALUE NUMBER OF SHARES
- ------------------------------------------------------------------
<S> <C> <C>
Non-Executive Director Group $0 (2) 10,000 (3)
- ------------------------------------------------------------------
</TABLE>
(1) Benefits or amounts for persons other than those in the Non-Executive
Director Group are not determinable, either as of the date hereof or for
the last completed fiscal year had the Plan then been in effect.
(2) The exercise price of options granted to Non-Executive Directors will be
the fair market value of the underlying shares on the date of grant.
(3) Based on the number of eligible Non-Executive Directors as of December 31,
1997.
66
<PAGE>
PROPOSAL SEVEN - ELECTION OF DIRECTORS
Seven directors, constituting the entire Board of Directors of PSP11, are
to be elected at the annual meeting of shareholders, to hold office until the
next annual meeting of the PSP11 shareholders and until their successors are
elected and qualified. Approval of the merger and the bylaw amendment
increasing the authorized number of directors are conditioned on the election of
the director nominees, and the election of the director nominees is conditioned
on approval of the merger and the bylaw amendment increasing the authorized
number of directors. When the accompanying proxy is properly executed and
returned to PSP11 before the voting, the persons named in the proxy will vote
the shares represented by the proxy as indicated on the proxy. If any nominee
below becomes unavailable for any reason or if any vacancy on PSP11's Board of
Directors occurs before the election, the shares represented by any proxy voting
for that nominee will be voted for the person, if any, designated by PSP11's
Board of Directors to replace the nominee or to fill the vacancy on the Board.
However, PSP11's Board of Directors has no reason to believe that any nominee
will be unavailable or that any vacancy on PSP11's Board of Directors will
occur. The following persons are nominees for directors of PSP11:
<TABLE>
<CAPTION>
Name Age
---- ---
<S> <C>
Ronald L. Havner, Jr. 39
Harvey Lenkin 61
Vern O. Curtis 63
Jack D. Steele 74
James H. Kropp 48
Arthur M. Friedman 61
Alan K. Pribble 55
</TABLE>
Ronald L. Havner, Jr., a certified public accountant, became Chairman,
Chief Executive Officer, President, Chief Financial Officer and Secretary of
AOPP in December 1996. Mr. Havner was Senior Vice President and Chief Financial
Officer of PSI and Vice President of PSP11 and certain other REITs affiliated
with PSI until December 1996.
Harvey Lenkin has been President of PSP11 since its inception in 1990. Mr.
Lenkin has been employed by PSI for 20 years and has been President and a
director of PSI since November 1991. He became a director of AOPP in December
1997. He has been President since 1990 of Public Storage Properties XX, Inc.
("PSP20"), an affiliated REIT. From 1989-90 until the respective dates of
merger, Mr. Lenkin was President of 18 affiliated REITs that were merged into
PSI between September 1994 and June 1997, and he was also a director of one of
those affiliated REITs. Mr. Lenkin is a director of the National Association of
Real Estate Investment Trusts (NAREIT).
Vern O. Curtis, Chairman of the Audit Committee, is a private investor.
Mr. Curtis has been a director of PSP11 since its inception in 1990. Mr. Curtis
has also been a director of PSP20 since 1990. Mr. Curtis is also a director of
the Pimco Funds, Pimco Commercial Mortgage Securities Trust, Inc. and Fresh
Choice, Inc. From 1989-90 until the respective dates of merger, he was a
director of the same affiliated REITs that merged into PSI between September
1994 and June 1997 as Mr. Lenkin. Mr. Curtis was Dean of Business School of
Chapman College from 1988 to 1990 and President and Chief Executive Officer of
Denny's, Inc. from 1980 to 1987.
Jack D. Steele, a member of the Audit Committee, has been a director of
PSP11 since its inception in 1990. Mr. Steele has also been a director of PSP20
since 1990. He is also a director of M.C. Gill and CRG Compensation Resource
Group. Mr. Steele is a business consultant. From 1989-90 until the respective
dates of merger, he was a director of the same affiliated REITs that merged into
PSI between September 1994 and June 1997 as Mr. Lenkin. Mr. Steele was Chairman
- - Board Services of Korn/Ferry International from 1986 to 1988 and Dean of
School of Business and Professor at the University of Southern California from
1975 to 1986.
James H. Kropp has been Director of Investment Management and Banking of
Christopher Weil & Company, Inc. ("CWC"), a securities broker-dealer and
registered investment adviser, since April 1995. CWC has rendered, and is
expected to continue to render, financial advisory and securities brokerage
services for PSI and its affiliates. Mr.
67
<PAGE>
Kropp was a director of AOPP from December 1996 until December 1997. From July
1994 to November 1994, he was Executive Vice President and Chief Financial
Officer of Hospitality Investment Trust, a REIT. From 1989 to July 1994, he was
Managing Director of MECA Associates USA, a real estate advisory and asset
management company serving institutional property owners.
Arthur M. Friedman, a Certified Public Accountant, has been an independent
business and tax consultant since September 1995. He was a partner of Arthur
Andersen from 1968 until August 1995. During his 38-year career in public
accounting, he specialized in tax consultation. He was a member of the Andersen
Board of Partners from 1980-1988.
Alan K. Pribble was employed by Wells Fargo Bank, N.A. for 30 years until
his recent retirement in June 1997. He was a Senior Vice President of Wells
Fargo from 1984 until June 1997. In 1992, Mr. Pribble opened a commercial
finance division for Wells Fargo and was involved in its operations until June
1997. From 1988 until 1992, he was a Senior Vice President and Regional
Manager, and from 1984 until 1988, Mr. Pribble was a Senior Credit Officer, for
Wells Fargo.
DIRECTORS' AND COMMITTEE MEETINGS
PSP11's Board of Directors held six meetings during 1996 and seven meetings
during 1997 and the Audit Committee held one meeting during 1996 and one meeting
during 1997. Each of the directors, except for B. Wayne Hughes, attended at
least 75% of the meetings held by PSP11's Board of Directors or, if a member of
a committee of PSP11's Board of Directors, held by both PSP11's Board of
Directors and all committees of PSP11's Board of Directors on which he served,
during 1996 and 1997. The primary functions of the Audit Committee are to meet
with PSP11's outside auditors, to conduct a pre-audit review of the audit
engagement, to conduct a post-audit review of the results of the audit, to
monitor the adequacy of internal financial controls of PSP11, to review the
independence of the outside auditors and to make recommendations to the Board of
Directors regarding the appointment and retention of auditors. PSP11 does not
have a compensation or a nominating committee. If PSP11's shareholders approve
the merger and the Plan, the Audit Committee will also administer the Plan.
COMPENSATION OF DIRECTORS
Each of PSP11's directors, other than B. Wayne Hughes, currently receives
director's fees of $2,000 per year plus $200 for each meeting attended. In
addition, each of the members of the Audit Committee receives $100 for each
meeting of the Audit Committee attended. The policy of PSP11 is to reimburse
directors for reasonable expenses. After the merger, each of PSP11's directors,
other than Ronald L. Havner, Jr., will receive director's fees of $10,000 per
year plus $200 for each meeting attended. In addition, if the PSP11
shareholders approve the Plan, the non-employee directors would receive
automatic grants of options thereunder, and Ronald L. Havner, Jr. would be
eligible to receive discretionary grants of options and/or restricted stock
thereunder.
COMPENSATION OF EXECUTIVE OFFICERS
Set forth below is certain compensation relating to B. Wayne Hughes,
PSP11's current Chief Executive Officer. PSP11 has no executive officer who
earned $100,000 or more in 1996 or 1997 for services rendered to PSP11.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Principal Position Year Salary
--------------------------- ---- ------
<S> <C> <C>
B. Wayne Hughes 1997 $1,000
Chairman of the Board and 1996 1,000
Chief Executive Officer 1995 1,000
</TABLE>
See "Certain Relationships and Related Party Transactions - Compensation to
Executive Officers and Directors" for the compensation of executive officers
following the merger.
68
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
PSP11 does not have a compensation committee. Mr. Hughes, PSP11's current
chief executive officer, is a current member of PSP11's Board of Directors. Mr.
Hughes is a director and the chief executive officer of PSP20 (and during 1996
and all or part of 1997, Mr. Hughes was a director and the chief executive
officer of Public Storage Properties XIV, Inc. ("PSP14"), Public Storage
Properties XV, Inc. ("PSP15"), Public Storage Properties XVI, Inc. ("PSP16"),
Public Storage Properties XVII, Inc. ("PSP17"), Public Storage Properties XVIII,
Inc. ("PSP18") and Public Storage Properties XIX, Inc. ("PSP19"), and during
part of 1996, Mr. Hughes also was a director and the chief executive officer of
Public Storage Properties IX, Inc. ("PSP9"), Public Storage Properties X, Inc.
("PSP10"), Public Storage Properties XII, Inc. ("PSP12"), PS Business Parks,
Inc. ("PSBP"), Partners Preferred Yield, Inc. ("PPY"), Partners Preferred Yield
II, Inc. ("PPY2") and Partners Preferred Yield III, Inc. ("PPY3")). Mr. Hughes
also is the chief executive officer and a director of PSI, of which Harvey
Lenkin, PSP11's current president, is the president and a director (and until
June 1996, Mr. Hughes was also a director and the chief executive officer of
Storage Properties, Inc. ("SPI"), of which Mr. Lenkin was the president and a
director). Neither PSI nor PSP20 has (nor did PSP9, PSP10, PSP12, PSP14, PSP15,
PSP16, PSP17, PSP18, PSP19, PSBP, PPY, PPY2, PPY3 or SPI have) a compensation
committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - MANAGEMENT AGREEMENTS.
PSP11 has management agreements with PSI and AOPP. Under the management
agreements, PSP11 pays PSI a fee of 6% of the gross revenues of PSP11's mini-
warehouses ($327,000 in 1996 and $370,000 in 1997) and pays AOPP a fee of 5% of
the gross revenues of PSP11's commercial properties ($67,000 in 1996 and $71,000
in 1997). PSP11 believes that the terms of the management agreements are as
favorable as would be obtained from unrelated third parties. After the merger,
PSP11's properties will be "self-managed."
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The salaries paid by PSP11 to PSP11's executive officers, including B.
Wayne Hughes, the chief executive officer, in each of 1996 and 1997 for services
related to PSP11 were equal to an aggregate of $16,000, which was the amount
specified in PSP11's prospectus and proxy statement dated October 5, 1990
relating to the reorganization of the PSP11 Partnership. This specified
compensation can be changed at any time with the approval of PSP11's independent
directors, but PSP11's independent directors concluded that this specified
compensation was substantially less than the amount that PSP11 would be required
to pay for similar services and accordingly, it was not in PSP11's interest to
change this specified compensation. In view of the amount of this specified
compensation, such compensation is not related to performance.
See "Certain Relationships and Related Party Transactions - Compensation to
Executive Officers and Directors" for the compensation of executive officers
following the merger.
BOARD OF DIRECTORS
B. Wayne Hughes
Vern O. Curtis
Jack D. Steele
69
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The graph set forth below compares the yearly change in PSP11's
cumulative total shareholder return on its Common Stock Series A for the five-
year period ended December 31, 1997 to the cumulative total return of the
American Stock Exchange Market Value Index "AMEX Index" and the National
Association of Real Estate Investment Trusts Equity Index ("NAREIT Equity
Index") for the same period (total shareholder return equals price appreciation
plus dividends). The stock price performance graph assumes that the value of
the investment in PSP11's Common Stock Series A and each index was $100 on
December 31, 1992 and that all dividends were reinvested. The stock price
performance shown in the graph is not necessarily indicative of future price
performance.
Comparison of Cumulative Total Return
Public Storage Properties XI, Inc., AMEX Index and NAREIT Equity Index
December 31, 1992 - December 31, 1997
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD PUBLIC STORAGE NAREIT
(FISCAL YEAR COVERED) PROPERTIES XI, INC. AMEX EQUITY
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
<S> <C> <C> <C>
Measurement Pt. 12/31/92 $100.00 $100.00 $100.00
FYE 12/31/93 144.71 119.52 119.65
FYE 12/31/94 145.41 108.63 123.45
FYE 12/31/95 181.28 137.32 142.30
FYE 12/31/96 225.72 146.10 192.48
FYE 12/31/97 266.55 177.20 231.47
</TABLE>
70
<PAGE>
APPROVAL OF THE PROPOSALS
GENERAL
This proxy statement and the enclosed proxy are first being mailed on or
about _________, 1998 to the shareholders of PSP11 in connection with the
solicitation by the PSP11 Board of Directors for use at the annual meeting (and
at any adjournment) to consider and vote upon the merger, the amendments to
PSP11's articles of incorporation and bylaws, the Plan and the election of
directors.
If a proxy in the accompanying form is properly executed and returned
before the voting, the shares represented thereby will be voted in the manner
specified on the proxy. If no specification is made with respect to the merger,
the amendments, the Plan or the election of directors, unspecified shares held
by PSP11 shareholders will be voted in favor of the merger, the amendments and
the Plan and for the election as directors of the nominees named herein. The
persons designated as proxies reserve full discretion to cast votes for other
persons if any of the nominees become unavailable to serve. A proxy is
revocable by delivering a subsequently signed and dated proxy or other written
notice to the Secretary of PSP11 at any time before its exercise. A proxy may
also be revoked if the person executing the proxy is present at the annual
meeting and chooses to vote in person.
Holders of record at the close of business on January 22, 1998 of the PSP11
Common Stock and PSP11 Common Stock Series B and C will be entitled to receive
notice of and to vote at the meeting. On such date, there were outstanding
1,819,937 shares of PSP11 Common Stock and 707,071 shares of PSP11 Common Stock
Series B and C. Each share of PSP11 Common Stock and PSP11 Common Stock Series
B and C outstanding on the record date is entitled to one vote on the merger,
the amendments and the Plan. With respect to the election of directors, each
holder of PSP11 Common Stock and PSP11 Common Stock Series B and C on the record
date is entitled to cast as many votes as there are directors to be elected
multiplied by the number of shares registered in the holder's name on the record
date. The holder may cumulate votes for directors by casting all votes for one
candidate or by distributing votes among as many candidates as the holder
chooses. The seven candidates who receive the most votes will be elected
directors of PSP11. Presence, in person or by proxy, of a majority of the
shares of PSP11 Common Stock and of PSP11 Common Stock Series B and C, counted
together as a single class, constitutes a quorum. As of the record date, PSI
and Mr. Hughes beneficially owned 223,712 shares of PSP11 Common Stock and
707,071 shares of PSP11 Common Stock Series B and C (approximately 36.8% of the
total combined outstanding shares of PSP11 Common Stock and PSP11 Common Stock
Series B and C) and the directors and executive officers of PSP11, excluding Mr.
Hughes, beneficially owned an additional 800 shares of PSP11 Common Stock.
The affirmative vote of a majority of the shares of PSP11 Common Stock and
of PSP11 Common Stock Series B and C outstanding and entitled to vote on the
record date, counted together as a single class, is required to approve the
merger, the amendments and the Plan. Accordingly, for these purposes, an
abstention or a broker non-vote will have the same effect as a vote against the
merger, the amendments and the Plan. The shares of PSP11 Common Stock Series B
and C will be voted with the majority of shares of PSP11 Common Stock held by
unaffiliated owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of shares of PSP11 Common Stock
and PSP11 Common Stock Series B and C by Mr. Hughes (a beneficial owner of more
than 5% of the outstanding shares of PSP11 Common Stock and PSP11 Common Stock
Series B and C) is set forth in the second table below.
The following table sets forth information as of January 1, 1998 with
respect to the other person known to PSP11 to be the beneficial owner of more
than 5% of the outstanding shares of PSP11 Common Stock and PSP11 Common Stock
Series B and C:
71
<PAGE>
<TABLE>
<CAPTION>
Shares of PSP11 Common Stock and
PSP11 Common Stock Series B and C
Beneficially Owned(1)
---------------------------------
Number
Name and Address of Shares(2)(3) Percent
- ---------------- --------------- -------
<S> <C> <C>
PSI A: 223,712(4) A: 12.3%
701 Western Avenue, Suite 200 B: 184,453(4) B: 100.0%
Glendale, California 91201-2397 C: 522,618(4) C: 100.0%
------- -- -----
930,783(4)(5) 36.8%
</TABLE>
______________
(Footnotes are set forth following the next table).
The following table sets forth information as of January 1, 1998 concerning
the beneficial ownership of PSP11 Common Stock and PSP11 Common Stock Series B
and C of each director of PSP11 (including Mr. Hughes, the chief executive
officer), each nominee for director of PSP11 and all directors and executive
officers of PSP11 as a group:
<TABLE>
<CAPTION>
Shares of PSP11 Common Stock and
PSP11 Common Stock Series B and C
Beneficially Owned(1)
---------------------------------
Number
Name of Shares(2)(3) Percent
- ---- --------------- -------
<S> <C> <C>
B. Wayne Hughes A: 424.0(6) A: (7)
B: 36,890.6(6) B: 20.0%
C: 104,523.6(6) C: 20.0%
--------- ----
141,838.2(5)(6) 5.6%
Vern O. Curtis A: 500.0 (7)
Jack D. Steele A: 100.0(8) (7)
Ronald L. Havner, Jr. -- --
Harvey Lenkin -- --
James H. Kropp -- --
Arthur M. Friedman -- --
Alan K. Pribble A: 2,000 A: 0.1%
All Directors and Executive Officers A: 1,224.0(6)(8)(9) A: (7)
as a Group (eight persons) B: 36,890.6(6) B: 20.0%
C: 104,523.6(6) C: 20.0%
--------- -----
142,638.2(5)(6)(8)(9) 5.6%
</TABLE>
_______________
(1) Except as otherwise indicated and subject to applicable community
property and similar statutes, the persons listed as beneficial owners
of the shares have sole voting and investment power with respect to the
shares.
(2) Capital letters "A", "B" and "C" denote share information with respect
to PSP11 Common Stock and PSP11 Common Stock Series B and C,
respectively.
(3) PSP11's articles of incorporation provide that the PSP11 Common Stock
Series B and C will convert automatically into PSP11 Common Stock on a
share-for-share basis when (A) the sum of (1) all
72
<PAGE>
cumulative dividends and other distributions from all sources paid with
respect to the PSP11 Common Stock (including liquidating distributions,
but not including payments made to redeem such stock other than in
liquidation) and (2) the cumulative PSP11 Partnership distributions
from all sources with respect to all PSP11 Partnership units (including
the general partners' 1% interest) equals (B) the product of $20
multiplied by the number of then outstanding "Original Series A
Shares." The term "Original Series A Shares" means the shares of PSP11
Common Stock issued in the reorganization of the PSP11 Partnership into
PSP11. In the merger, each share of PSP11 Common Stock Series B and C
is being converted into .8641 share of PSP11 Common Stock.
(4) Includes (i) 223,288 shares of PSP11 Common Stock, 147,562.4 shares of
PSP11 Common Stock Series B and 418,094.4 shares of PSP11 Common Stock
Series C owned by PSI as to which PSI has sole voting and dispositive
power and (ii) 424 shares of PSP11 Common Stock, 36,890.6 shares of
PSP11 Common Stock Series B and 104,523.6 shares of PSP11 Common Stock
Series C which PSI has an option to acquire (together with other
securities) from B. Wayne Hughes as trustee of the B.W. Hughes Living
Trust and as to which PSI has sole voting power (pursuant to an
irrevocable proxy) and no dispositive power.
(5) Includes PSP11 Common Stock and PSP11 Common Stock Series B and C.
(6) Includes 424 shares of PSP11 Common Stock, 36,890.6 shares of PSP11
Common Stock Series B and 104,523.6 shares of PSP11 Common Stock Series
C owned by B. Wayne Hughes as trustee of the B.W. Hughes Living Trust
as to which Mr. Hughes has sole dispositive power and no voting power;
PSI has an option to acquire these shares and an irrevocable proxy to
vote these shares (see footnote (4) above).
(7) Less than 0.1%.
(8) Shares held by a bank custodian of a simplified employee pension for
the benefit of Mr. Steele.
(9) Includes shares held of record or beneficially by members of the
immediate family of officers of PSP11 and shares held by custodians of
individual retirement accounts for the benefit of officers of PSP11 (or
members of their immediate families).
As of January 1, 1998, the directors and nominees for directors of PSP11
and the executive officers of PSP11 owned shares of AOPP common stock and
options to purchase shares of AOPP common stock under the Plan (which options
will be assumed by PSP11 in the merger) as follows: Ronald L. Havner, Jr.
40,125.29 shares and 125,962.92 options; Harvey Lenkin 50.8 shares and 10,158.3
options; James H. Kropp 7,110.8 shares; and the other executive officers of
PSP11 152.4 shares and 18,284.94 options. As of January 1, 1998, Mary Jayne
Howard, who will be an executive officer of PSP11 after the merger, owned 50.8
shares of AOPP common stock and options to purchase 40,633.2 shares of AOPP
common stock.
SOLICITATION OF PROXIES
PSP11 will pay the cost of soliciting proxies. In addition to solicitation
by mail, certain directors, officers and regular employees of PSP11 and its
affiliates may solicit the return of proxies by telephone, telegraph, personal
interview or otherwise. PSP11 may also reimburse brokerage firms and other
persons representing the beneficial owners of PSP11 Common Stock for reasonable
expenses in forwarding proxy solicitation materials to such beneficial owners.
Shareholder Communications Corporation may be retained to assist PSP11 in
solicitation of proxies at an estimated cost of $15,000.
73
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
GENERAL
PSP11 is a REIT organized as a California corporation that was formed to
succeed to the business of the PSP11 Partnership, in a reorganization
transaction completed on December 31, 1990. PSP11 owns 15 properties located in
seven states, including 11 mini-warehouses, two commercial properties and two
properties that combine mini-warehouse and commercial space. All of these
facilities are operated under the "Public Storage" name. The PSP11 Common Stock
is traded on the AMEX under the symbol "PSM".
PSP11's properties are managed by PSI and AOPP. PSP11's operations are
under the general supervision of its three-member board of directors, consisting
of an executive officer of PSI and two other directors. PSP11's bylaws provide
that PSP11 shareholders be presented with a proposal in 1997 for the sale of its
properties. See "Summary Relationships" and "Proposal One --The Merger--
Background."
Under the merger agreement, PSP11 will exchange its 11 mini-warehouses and
two properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI. After the merger, PSP11 intends to focus on
the ownership and operation of commercial properties. See "Proposal One The
Merger Exchange of Properties."
PSI, AOPP, PSP11 and the various owners of mini-warehouses and commercial
properties for which PSI and AOPP perform property management services have
agreed with PSCC, Inc. under which PSCC, Inc. provides these parties with
certain administrative and cost-sharing services. PSCC is owned by PSP11 and
the other owners of mini-warehouses and commercial properties. After the
merger, PSP11 will continue to be a party to this agreement.
DESCRIPTION OF PSP11'S PROPERTIES
PSP11 holds fee ownership of a total of 15 properties: 11 mini-warehouses,
two commercial properties and two properties that combine mini-warehouse and
commercial space. Mini-warehouses are designed to offer accessible storage
space for personal and business use at a relatively low cost. A user rents a
fully enclosed space which is for the user's exclusive use and to which only the
user has access on an unrestricted basis during business hours. On-site
operation is the responsibility of resident managers who are supervised by area
managers. Some mini-warehouses also include rentable uncovered parking areas
for vehicle storage. Leases for mini-warehouse space may be on a long-term or
short-term basis, although typically spaces are rented on a month-to-month
basis. Rental rates vary according to the location of the property and the size
of the storage space which ranges generally from 25 to 400 square feet.
Users of space in mini-warehouses include both individuals and large and
small businesses. Individuals usually employ this space for storage of, among
other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
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<PAGE>
The following table contains information as of September 30, 1997 about
PSP11's properties. After the merger, only the two commercial properties would
continue to be owned by PSP11.
<TABLE>
<CAPTION>
Size of Parcel Net Rentable Number of
Location (Acres) Square Feet Spaces Date Opened
- ------------------------------------------------------------------------------------------------------------------------
ARIZONA
<S> <C> <C> <C> <C>
Phoenix, Black Cyn. Hwy. (1) 3.33 71,000 366 July 1985
Phoenix, Grand Ave. (1) 6.68 111,000 417 May 1985
Tempe, Broadway Rd. 1.47 45,000 403 October 1984
CALIFORNIA
Colma, El Camino Real 2.72 51,000 494 December 1984
Pasadena, Arroyo Parkway I (2) 2.61 110,000 935 February 1985
So. San Francisco, Produce (3) 1.67 41,000 23 March 1986
CONNECTICUT
Branford, U.S. Route 2.76 37,000 327 November 1984
KANSAS
Overland Park, I-435 (3) 4.34 62,000 42 April 1985
NEW YORK
Long Island, Southern Blvd. 4.00 60,000 545 June 1986
NEVADA
Las Vegas, Charleston Blvd. 1.76 54,000 442 October 1984
Las Vegas, Tropicana Ave. 1.93 66,000 531 November 1984
TEXAS
Arlington, Pioneer Pkwy. 2.50 61,000 544 July 1985
Austin, Ben White Blvd. 2.62 53,000 453 February 1986
Houston, Antoine Dr. 2.75 62,000 558 October 1984
Jacinto City, I-10 1.88 45,000 393 November 1984
</TABLE>
- ---------------
(1) Facility combines mini-warehouse and commercial space.
(2) Property subject to a pending partial condemnation action by the City of
Pasadena. Action will result in reduction in size and reconfiguration of
the property.
(3) Commercial facility.
As of the date of this proxy statement, each of PSP11's properties is
generating sufficient revenues to cover its operating expenses. None of PSP11's
properties is subject to any material mortgage, lien, or any encumbrance other
than liens for taxes and assessments not yet due or payable, utility easements
or other immaterial liens or encumbrances. Each of PSP11's properties will
continue to be used for its current purpose. At present, PSP11 has no plans for
any material renovation or improvement of its properties except as noted in the
property table above. However, PSP11 budgets for regular maintenance, repair
and upgrade to its properties. PSP11 believes each of its properties is
adequately covered by insurance.
Competition exists in all of the market areas in which PSP11's mini-
warehouses and commercial properties are located, and the barriers to entry are
relatively low for competitors with the necessary capital. However, PSP11
believes that the current overall demand for mini-warehouse and commercial space
is strong, and as reflected in the tables below the overall performance of
PSP11's mini-warehouses and commercial properties has generally improved.
PSP11's mini-warehouses, which will no longer be owned by PSP11 after the
merger, are operated as part of the "Public Storage" system by PSI, the largest
operator of mini-warehouses in the United States.
75
<PAGE>
Set forth below is a schedule showing the overall occupancy rate and
realized rent for PSP11's mini-warehouses for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 93% 92% 92% 92% 93%
Realized monthly rent per occupied
square foot (1) $ .67 $ .70 $ .72 $ .72 $ .74
</TABLE>
Set forth below is a table showing the overall occupancy rate and realized
rent for PSP11's commercial facilities for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 94% 94% 96% 99% 97%
Realized monthly rent per occupied
square foot (1) $ .78 $ .76 $ .80 $ .80 $ .84
</TABLE>
- ---------------
(1) Realized monthly rent per occupied square foot represents the actual revenue
earned per occupied square foot. PSP11 believes this is a more relevant
measure than the posted rental rates, since posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
Additional information is set forth below with respect to the
Pasadena/Arroyo Parkway I and Overland Park properties because they are the only
properties with a book value of at least 10% of PSP11's total assets or that
have accounted for more than 10% of its aggregate gross revenues. No other
single property is materially important to PSP11.
PASADENA/ARROYO PARKWAY I. This mini-warehouse is located in Pasadena,
California, immediately south of the central business district and approximately
eight miles northeast of downtown Los Angeles. No tenant occupies 10% or more
of the rentable area. Competition exists in the market area in which this
property is located. However, PSP11 believes that current demand for mini-
warehouse space in the Los Angeles market area is strong, and as reflected in
the table below the performance of this property has improved.
Set forth below is a schedule showing the average occupancy rate and
realized rent per square foot for the property for the years indicated:
<TABLE>
<CAPTION>
Monthly
Average Realized
Occupancy Rent Per
Rate Square Foot
---------- -----------
<S> <C> <C>
1996 93% $.94
1995 90 .90
1994 92 .87
1993 92 .83
1992 91 .79
</TABLE>
OVERLAND PARK. This commercial property is located in Overland Park,
Kansas, a suburban community approximately ten miles south of downtown Kansas
City, Missouri. The property offers a combination of office space and
industrial space. The property is visible and accessible from Interstate 435
near Metcalf Avenue, which leads to downtown Kansas City. No tenant occupies
10% or more of the rentable area. Competition exists in the market area in
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<PAGE>
which this property is located. However, PSP11 believes that current demand for
commercial space in the Kansas City market area is strong, and as reflected in
the table below the performance of this property has generally improved.
Set forth below is a schedule showing the average occupancy rate and
realized rent per square foot for the property for the years indicated:
<TABLE>
<CAPTION>
Monthly
Average Realized
Occupancy Rent Per
Rate Square Foot
---------- -----------
<S> <C> <C>
1996 99% $.77
1995 93 .74
1994 90 .75
1993 90 .79
1992 91 .72
</TABLE>
A schedule showing the total annual base rent and percentage of total
income relating to leases according to their expiration dates is set forth
below:
<TABLE>
<CAPTION>
Year of Total Amount Percentage of
Expiration* Base Rent Total Income
- ---------------- ------------ --------------
<S> <C> <C>
1997 $347,000 48.53%
1998 226,000 31.61
1999 104,000 14.55
2000 31,000 4.34
2001 7,000 0.97
-------- ------
Total $715,000 100.00%
======== ======
</TABLE>
- ---------------
* Assumes that none of the renewal options included in the leases will be
exercised.
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<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
GENERAL
AOPP was originally organized in 1986 as a California corporation to serve
as the manager of the commercial properties owned by PSI and its related
entities. In January 1997, AOPP was reorganized to succeed to the commercial
properties business of PSI, becoming a fully-integrated, self-administered and
self-managed REIT. AOPP conducts substantially all of its business as the sole
general partner of the Operating Partnership.
In January 1997, as part of the reorganization, PSI and its consolidated
partnerships transferred 35 commercial properties to AOPP and the Operating
Partnership. During April 1997, PSI transferred an additional four commercial
properties to the Operating Partnership. At September 30, 1997, AOPP and the
Operating Partnership owned 42 properties located in 10 states. The Operating
Partnership also managed an additional 49 properties owned by PSI and its
related entities (including the 11 PSI Exchange Properties). As of December 31,
1997, AOPP owned a 35% partnership interest in the Operating Partnership. The
balance of the Operating Partnership is owned by PSI, its consolidated
partnerships and certain third parties.
Since September 30, 1997, AOPP has acquired six properties from the
Acquiport Corporations (collectively, "Acquiport"), subsidiaries of the New York
State Common Retirement Fund, and two properties from other third parties. AOPP
has agreements in principle to acquire three properties from other third parties
and has an agreement to issue up to $155,000,000 of common stock to a group of
institutional investors. There can be no assurance that any of these agreements
will be implemented or completed. See "- Agreement with Subsidiary of State
Pension Plan," "- Proposed Stock Issuances to Institutional Investors" and
"AOPP's Recent and Proposed Acquisitions."
AGREEMENT WITH SUBSIDIARY OF STATE PENSION PLAN
GENERAL. In December 1997, AOPP and the Operating Partnership issued to
Acquiport an aggregate of 4,482,852 shares of AOPP common stock and limited
partnership interests convertible into AOPP common stock, and Acquiport, through
a merger and contribution, transferred to AOPP and the Operating Partnership a
total of six commercial properties located in California and $1,000,000 in cash.
These properties were valued at $118,655,000 based on arm's length negotiation
between AOPP and Acquiport resulting in an issuance price of $26.47 per share of
AOPP common stock or an equivalent of $22.43 per share of PSP11 Common Stock at
the exchange ratio for the merger of 1.18. It is contemplated that all of these
properties will be held by the Operating Partnership. All of Acquiport's
limited partnership interests have been converted into AOPP common stock. The
agreement also requires AOPP (PSP11 after the merger of AOPP into PSP11) to
purchase a seventh property from Acquiport, provided that certain conditions
with respect to such property are met within one year of the acquisition of the
six properties. After the merger of AOPP into PSP11, the agreements between
AOPP and Acquiport will be enforceable against PSP11. See "AOPP's Recent and
Proposed Acquisitions."
After the merger of AOPP into PSP11, Acquiport would own approximately 46%
of the PSP11 Common Stock (28% upon conversion of all interests in the Operating
Partnership) or, if the full $155,000,000 of common stock are issued to a group
of institutional investors, 29% of the PSP11 Common Stock (18% upon conversion
of all interests in the Operating Partnership).
UNWINDING TRANSACTION. Acquiport has the option to unwind the transaction
if AOPP is not publicly traded within 18 months. Under the agreement, AOPP may
become publicly traded through the merger, an initial public offering of at
least $25 million or other mutually agreeable means. After the merger of AOPP
into PSP11, Acquiport will no longer have the right to unwind the transaction.
REPRESENTATION ON THE BOARD; VOTING AGREEMENT. Acquiport has the right to
designate one nominee, and PSI has the right to designate two nominees, to the
board of directors of AOPP. After the merger, the size of the Board of Directors
of PSP11 will be increased to seven members: two nominees of psi and five
independent directors mutually acceptable to PSI and Acquiport. Acquiport and
PSI have agreed to vote their respective shares of AOPP common stock (PSP11
Common Stock after the merger) to support such nominees to the Board. This
voting agreement will further enhance PSI'S control of PSP11 after the merger.
78
<PAGE>
This voting agreement expires at the later of the following dates: (i)
when Acquiport's interest in AOPP (PSP11 after the merger) or PSI's interest in
AOPP is less than 20%, assuming conversion of all interests in the Operating
Partnership or (ii) four years after the date of the transaction with the state
pension plan.
REGISTRATION RIGHTS. AOPP (PSP11 after the merger) has granted certain
registration rights to Acquiport in connection with the shares of AOPP common
stock (PSP11 Common Stock after the merger) acquired by Acquiport.
Approximately one year after AOPP is publicly traded, AOPP (PSP11 after the
merger) will be required to file and maintain a "shelf" registration statement
under the Securities Act for the shares of common stock acquired by Acquiport.
Acquiport will also have the right to demand that AOPP (PSP11 after the merger)
cooperate with Acquiport in underwritten offerings, provided such right may be
invoked not more often than once per year, nor more than twice during the term
of the registration agreement and generally for not less than $50,000,000 of
shares. During any such offering, AOPP (PSP11 after the merger) may be required
to refrain from issuing any securities for six months after completion of such
offering. Acquiport will also have the right, with respect to most
registrations of AOPP common stock (PSP11 Common Stock after the merger) by the
applicable corporation, to include shares owned by Acquiport in such
registrations.
Under the registration rights agreement, AOPP (PSP11 after the merger) will
pay all expenses relating to registrations and Acquiport will pay all
underwriting discounts and commissions relating to the sale of its stock. The
registration rights agreement contains other terms (including for
indemnification of the state pension plan and Acquiport) that are generally
customary to registration rights agreements of its type. The registration
rights agreement will expire when the shares owned by Acquiport are freely
tradable without restriction, except that the right to include shares in other
registrations will continue until Acquiport owns less than $25,000,000 of stock
and the right to demand cooperation in underwritten offerings will generally
continue until Acquiport owns less than $50,000,000 of stock.
FUTURE ISSUANCES OF COMMON STOCK. Until December 31, 1998, AOPP (PSP11
after the merger) has agreed to make reasonable efforts to allow Acquiport to
purchase shares in most underwritten offerings of common stock in order to
maintain its proportionate holdings. Also, if AOPP (PSP11 after the merger)
proposes to issue shares of common stock at less than $22.88 in the case of
PSP11, Acquiport will have the right to purchase a number of shares on the same
proposed terms sufficient for Acquiport to maintain its percentage interest in
AOPP (PSP11 after the merger). This right will terminate when AOPP (PSP11 after
the merger) raises $155,000,000 of common stock in one or more public offerings.
REPRESENTATIONS, WARRANTIES, COVENANTS AND INDEMNITIES. The agreement for
the acquisition of properties by AOPP contains various representations,
warranties, covenants and indemnities generally customary for a transaction of
this type. these provisions will be enforceable against PSP11 after the merger.
PSI'S COVENANT NOT TO COMPETE. PSI has agreed with AOPP (PSP11 after the
merger) and Acquiport not to compete in the ownership and operation of
commercial properties of the type owned and operated by AOPP (PSP11 after the
merger). PSI's agreement will not apply to commercial properties currently
owned by PSI. After the merger, PSI's agreement may also be waived as to a
particular transaction by the independent directors of PSP11.
PSI's agreement will expire when Acquiport's interest or PSI's interest in
AOPP (PSP11 after the merger) is less than 7.5%, assuming conversion of all
interests in the Operating Partnership. PSI's agreement will also expire three
years after the merger or when the aggregate net common equity of AOPP (PSP11
after the merger) and the Operating Partnership exceeds $1 billion.
OTHER PROVISIONS. Prior to AOPP becoming publicly traded through the
merger or otherwise, (i) AOPP has agreed to certain restrictions on its
operations and to issue shares to Acquiport to enable it to maintain its
percentage interest in AOPP and (ii) PSI has granted AOPP certain rights upon a
proposed sale by PSI of shares in AOPP. Also, prior to AOPP becoming publicly
traded through the merger or otherwise, if AOPP grants certain shareholder
rights to other investors, it is required to grant similar rights to Acquiport.
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<PAGE>
PROPOSED STOCK ISSUANCES TO INSTITUTIONAL INVESTORS
AOPP has reached an agreement with a group of institutional investors
(ABKB/LaSalle Securities Limited Partnership, Cohen & Steers Capital Management,
Inc., Morgan Stanley Asset Management, Harvard Private Capital Realty, Inc.,
Stanford University, State of Michigan Retirement Systems and The Fidelity REIT
Collective Pool, State Employees' Retirement Fund of the State of Delaware, J.W.
McConnell Family Foundation and Fidelity Real Estate Investment Portfolio) under
which AOPP would issue up to 5,740,741 shares of AOPP common stock at $27 per
share in cash (an aggregate of up to $155,000,000) or an equivalent of $22.88
per share of PSP11 Common Stock at the exchange ratio for the merger of 1.18.
There can be no assurance that the transaction between AOPP and the
institutional investors will be completed. The agreement between AOPP and the
institutional investors and the merger are not conditioned on each other.
However, the agreement with the investors will require AOPP to use all
commercially reasonable efforts to effect the merger (including the property
exchange with PSI) and, after the merger, any agreement between AOPP and the
institutional investors will be enforceable against PSP11.
The institutional investors are expected to purchase up to $50,000,000 of
AOPP common stock at an initial funding with the balance of the shares purchased
at subsequent fundings through July 31, 1998. The institutional investors will
be obligated to purchase additional shares only if the properties to be
purchased with the sales proceeds meet certain acquisition criteria relating to
their projected net operating income yield or the properties are approved by the
institutional investors. There can be no assurance that these criteria will be
met or that, even if they are met, any additional shares will be purchased.
The institutional investors will have the right to require that AOPP
repurchase the shares of common stock acquired by the institutional investors if
AOPP is not publicly traded within 18 months. After the merger, the
institutional investors will no longer have this right.
Upon completion of the merger, the institutional investors will have the
right to require PSP11 as the surviving corporation in the merger to file and
maintain a "shelf" registration statement under the Securities Act for the
shares of PSP11 Common Stock acquired by the institutional investors in the
merger if necessary for such shares to be freely tradable. As soon as possible
after any purchase by the institutional investors of additional shares, AOPP (or
PSP11 after the merger) will be required to file a registration statement for
the resale of these additional shares. If the merger does not occur before
April 30, 1998, or in other limited circumstances, the institutional investors
will have the right to require that AOPP file registration statements for the
sale of their shares on up to three occasions and to include with respect to
most registrations of AOPP common stock shares owned by the institutional
investors in such registrations.
Until January 31, 1999, AOPP (PSP11 after the merger) will agree to make
reasonable efforts to allow the institutional investors to purchase shares in
most underwritten offerings of common stock in order to maintain their
proportionate holdings. Also, if AOPP (PSP11 after the merger) proposes to
issue shares of common stock at less than the institutional investors' purchase
price, the institutional investors will have the right to purchase a number of
shares on the same proposed terms sufficient for the institutional investors to
maintain their percentage interest in AOPP (PSP11 after the merger). This right
will terminate when AOPP (PSP11 after the merger) raises $155,000,000 of common
stock in one or more public offerings. AOPP will also agree to certain
additional restrictions on its capital raising activities until the merger.
The agreement with the institutional investors contains various
representations, warranties, covenants, indemnities and conditions customary for
a transaction of this type. These provisions, as well as the agreement to issue
shares at subsequent fundings, will be enforceable against PSP11 after the
merger.
DESCRIPTION OF AOPP'S PROPERTIES
At September 30, 1997, AOPP had interests in 42 commercial facilities,
consisting of approximately 3,911,700 square feet of rentable space. AOPP holds
fee ownership of all but one of these properties, which is ground leased. At
September 30, 1997, AOPP also managed 49 commercial properties (approximately
1,882,000 square feet of rentable space) in which it has no ownership interest.
Of these 49 properties, the 11 PSI Exchange Properties (approximately 729,000
square feet of rentable space) are owned by PSI and are to be transferred to
PSP11 in connection with the merger. The majority of the remaining 38
properties (approximately 1,153,000 square feet of rentable space) are
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<PAGE>
adjacent to, and part of the same legal parcel as, mini-warehouses operated by
PSI. PSP11 will manage these properties after the merger.
AOPP's commercial properties generally include both industrial and office
space. Industrial space is used for, among other things, light manufacturing
and assembly, storage and warehousing, distribution and research and development
activities. Most of the office space is occupied by tenants who are also
renting industrial space. AOPP's commercial properties typically consist of one
to ten one-story buildings located on three to 12 acres and contain from
approximately 10,000 to 200,000 square feet of rentable space (more than 50,000
square feet in the case of the free-standing properties). An AOPP commercial
property is typically divided into units ranging in size from 500 to 10,000
square feet. Leases generally range from one to five years and some tenants
have options to extend the original terms of their leases. The larger
facilities have on-site management. Parking is open or covered, and the ratio
of spaces to rentable square feet ranges from one to four per thousand square
feet, depending upon the use of the property and its location. Office space
generally requires a greater parking ratio than most industrial uses.
AOPP's policy of acquiring commercial properties may be changed by its
Board of Directors without shareholder approval. However, the AOPP Board of
Directors has no intention to change this policy. Although AOPP currently
operates properties in 13 states, AOPP may expand its operations to other
states. Properties are acquired both for income and potential capital
appreciation; there is no limitation on the amount that can be invested in any
specific property and there is no limitation on mortgage debt. AOPP's policies
are expected to be adopted by PSP11 after the merger.
As of September 30, 1997, AOPP had equity interests in 42 properties in 11
states and managed an additional 49 properties in nine states. The following
table contains information as of September 30, 1997 about the facilities owned
or managed by AOPP:
<TABLE>
<CAPTION>
Equity Interest in Facilities Managed Facilities
----------------------------- -------------------------
Number of Net Rentable Number of Net Rentable
Facilities Square Feet Facilities Square Feet
------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Arizona 4 369,300 2 87,400
Arkansas 1 91,100 -- --
California
Northern 3 378,000 13 263,400
Southern 13 1,019,700 12 602,200
Florida -- -- 1 63,000
Kansas -- -- 1 61,800
Maryland 3 419,000 3 97,400
North Carolina -- -- 1 18,200
Oklahoma 2 139,700 -- --
Oregon 2 101,600 -- --
Tennessee 2 138,000 -- --
Texas 8 823,800 11 413,400
Virginia 3 402,700 5 274,900
Washington 1 27,900 -- --
---- ----------- ---- -----------
Total 42 3,911,700 49 1,881,700
---- ----------- ---- -----------
</TABLE>
As of the date of this proxy statement, each of the properties in which
AOPP has an equity interest is generating sufficient revenues to cover its
operating expenses. None of these properties is subject to any material
mortgage lien or any encumbrance other than liens for taxes and assessments not
yet due or payable, utility easements or other immaterial liens or encumbrances.
Each of the properties will continue to be used for its current purpose. AOPP
believes that each of the properties is adequately covered by insurance. No
single property has a book value of 10% or more of AOPP's total assets or has
accounted for 10% or more of AOPP's aggregate gross revenues or is materially
important to AOPP.
Competition exists in all of the market areas in which AOPP's commercial
properties are located, barriers to entry are relatively low for competitors
with the necessary capital, and PSP11 will be competing with entities that have
81
<PAGE>
greater financial resources than PSP11. However, AOPP believes that the current
overall demand for commercial space is strong, and as reflected in the table
below the overall performance of AOPP's properties has generally improved. More
than 10% of AOPP's net rentable square feet of space are located in each of the
Southern California, Texas and Washington D.C. metro area markets. The economy
of each of those markets has been strengthening.
The table below reflects the performance of properties that AOPP has
operated for each of the periods presented:
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 95% 95% 96% 96% 96%
Realized monthly rent per occupied
square foot (1) $ .66 $ .68 $ .70 $ .70 $ .73
</TABLE>
- ---------------
(1) Realized monthly rent per occupied square foot represents the actual revenue
earned per occupied square foot.
For information on properties acquired by AOPP since September 30, 1997 and
proposed to be acquired, see "AOPP's Recent and Proposed Acquisitions."
OPERATING PARTNERSHIP
GENERAL. The properties in which AOPP has an equity interest generally
will be owned by the Operating Partnership in order, among other things, (i) to
enable PSI (and its consolidated partnerships), in contributing interests in the
properties, to defer until a later date the tax liabilities that they otherwise
would have incurred if they had received AOPP Common Stock and (ii) to enable
AOPP to acquire interests in additional properties in transactions that could
defer the contributors' tax consequences.
Substantially all of AOPP's assets will be held by, and its operations
conducted through, the Operating Partnership. As of September 30, 1997, AOPP
owned a 23% partnership interest in the Operating Partnership. As a result of
the merger, PSP11 will replace AOPP as the sole general partner of the Operating
Partnership and will control the Operating Partnership. As the general partner
of the Operating Partnership, PSP11 will have the exclusive power under the
Operating Partnership Agreement to manage and conduct the business of the
Operating Partnership. The PSP11 Board of Directors will direct the affairs of
the Operating Partnership by managing PSP11's affairs. The Operating
Partnership will be responsible for, and pay when due, its share of all
administrative and operating expenses of the properties it owns.
PSP11's interest in the Operating Partnership will entitle it to share in
cash distributions from, and in the profits and losses of, the Operating
Partnership in proportion to PSP11's economic interest in the Operating
Partnership (apart from tax allocations of profits and losses to take into
account pre-contribution property appreciation or depreciation). Substantially
all of the balance of the economic interest in the Operating Partnership is held
by PSI and its consolidated partnerships as limited partners.
SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT. The following summary of
the Operating Partnership Agreement is qualified in its entirety by reference to
the Operating Partnership Agreement, which is filed as an exhibit to the
Registration Statement of which this proxy statement is a part.
Issuance of Additional Partnership Interests. AOPP (PSP11 after the
merger), as the general partner of the Operating Partnership, is authorized to
cause the Operating Partnership from time to time to issue to partners of the
Operating Partnership or to other persons additional partnership interests in
one or more classes, in one or more series of any of such classes, with such
designations, preferences and relative, participating, optional, or other
special rights, powers and duties (which may be senior to the existing
partnership interests), as will be determined by AOPP (PSP11 after the merger),
in its sole and absolute discretion, provided however, that no such partnership
interests will be issued to AOPP (PSP11 after the merger) unless (i) the
agreement to issue the additional partnership interests arises in connection
with the issuance of shares of AOPP (PSP11 after the merger), which shares have
designations, preferences and other rights, all such that the economic interests
are substantially similar to the designations, preferences and other
82
<PAGE>
rights of the additional partnership interests that would be issued to AOPP
(PSP11 after the merger) and (ii) AOPP (PSP11 after the merger) agrees to make a
capital contribution to the Operating Partnership in an amount equal to the
proceeds raised in connection with the issuance of such shares of AOPP (PSP11
after the merger).
Capital Contributions. No partner is required to make additional capital
contributions to the Partnership, except that AOPP (PSP11 after the merger) as
the general partner, is generally required to contribute the net proceeds of the
sale of equity interests in AOPP (PSP11 after the merger) to the Operating
Partnership. No partner is required to pay to the Operating Partnership any
deficit or negative balance which may exist in its capital account.
Distributions. AOPP (PSP11 after the merger), as general partner, is
required to distribute at least quarterly the "available cash" (as defined in
the Operating Partnership Agreement) generated by the Operating Partnership for
such quarter. Distributions are to be made (i) first, with respect to any class
of partnership interests having a preference over other classes of partnership
interests, and (ii) then, in accordance with the partners' respective percentage
interests. Commencing in 1998, the Operating Partnership's policy is to make
distributions to its partners that are equal to the per share distribution made
by the general partner with respect to its common stock, and in any case the per
unit and per share distributions will be equal during partnership years 1998,
1999 and 2000.
Redemption of Partnership Interests. Subject to certain limitations
described below, each limited partner other than AOPP (PSP11 after the merger)
has the right to require the redemption of such limited partner's partnership
interests at any time or from time to time beginning on the date that is one
year after the date on which such limited partner is admitted to the Operating
Partnership (unless otherwise contractually agreed by the general partner). At
September 30, 1997, the limited partnership interests are redeemable for an
aggregate of $188,500,000 (assuming a price of $24.19 per share) in cash or
approximately 7,794,000 shares of AOPP Common Stock.
Unless AOPP (PSP11 after the merger), as general partner, elects to assume
and perform the Operating Partnership's obligation with respect to a redemption
right, as described below, a limited partner that exercises its redemption right
will receive cash from the Operating Partnership in an amount equal to the
market value (as defined in the Operating Partnership Agreement) of the
partnership interests redeemed. In lieu of the Operating Partnership redeeming
the partner for cash, AOPP (PSP11 after the merger), as the general partner, has
the right to elect to acquire the partnership interests directly from a limited
partner exercising its redemption right, in exchange for cash in the amount
specified above or by issuance of one share of AOPP (PSP11 after the merger)
common stock for each unit of limited partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of AOPP (PSP11 after the merger) common stock would be prohibited under
the applicable articles of incorporation or if the general partner believes that
there is a risk that delivery of shares of common stock would cause the general
partner to no longer qualify as a REIT, would cause a violation of the
applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
Management. The Operating Partnership is organized as a California limited
partnership. PSP11, as the sole general partner of the Operating Partnership
after the merger, will generally have full, exclusive and complete
responsibility and discretion in managing and controlling the Operating
Partnership. The limited partners of the Operating Partnership will have no
authority to transact business for, or participate in the management activities
or decisions of, the Operating Partnership except as provided in the Operating
Partnership Agreement and as permitted by applicable law. However, the consent
of the limited partners holding a majority of the interests of the limited
partners (including limited partnership interests held by AOPP (PSP11 after the
merger)) generally will be required to amend the Operating Partnership
Agreement. Further, the Operating Partnership Agreement cannot be amended
without the consent of each partner adversely affected if, among other things,
the amendment would alter the partner's rights to distributions from the
Operating Partnership (except as specifically permitted in the Operating
Partnership Agreement), alter the redemption right, or impose on the limited
partners an obligations to make additional capital contributions. The consent
of all limited partners will be required to (i) take any action that would make
it impossible to carry on the ordinary business of the Operating Partnership,
except as otherwise provided in the Operating Partnership Agreement; or (ii)
possess Operating Partnership property, or assign any rights in specific
Operating Partnership property, for other than an Operating Partnership purpose
except as otherwise provided in the Operating Partnership Agreement. In
addition, without the consent of any adversely affected Limited Partner, the
General Partner may not perform any act that would subject a limited partner to
liability as a general partner in any jurisdiction or any other liability except
as provided in the Operating Partnership Agreement or under California law.
Extraordinary Transactions. The Operating Partnership Agreement provides
that AOPP (PSP11 after the merger) may not generally engage in any business
combination, defined to mean any merger, consolidation or other
83
<PAGE>
combination with or into another person or sale of all or substantially all of
its assets, or any reclassification, or any recapitalization (other than certain
stock splits or stock dividends) or change of outstanding shares of common
stock, unless (i) the limited partners of the Operating Partnership will
receive, or have the opportunity to receive, the same proportionate
consideration in the transaction as shareholders of AOPP (PSP11 after the
merger) (without regard to tax considerations); or (ii) limited partners of the
Operating Partnership (other than the General Partner) holding at least 60% of
the interests in the Operating Partnership held by limited partners (other than
the General Partner) vote to approve the business combination. In addition, AOPP
(PSP11 after the merger), as general partner of the Operating Partnership, has
agreed in the Operating Partnership Agreement with the limited partners of the
Operating Partnership that it will not consummate a business combination in
which AOPP (PSP11 after the merger) conducted a vote of shareholders unless the
matter is also submitted to a vote of the partners. The foregoing provision of
the Operating Partnership Agreement would under no circumstances enable or
require AOPP (PSP11 after the merger) to engage in a business combination which
required the approval of shareholders if the shareholders of AOPP (PSP11 after
the merger) did not in fact give the requisite approval. Rather, if the
shareholders did approve a business combination, AOPP (PSP11 after the merger)
would not consummate the transaction unless (i) AOPP (PSP11 after the merger) as
general partner first conducts a vote of partners of the Operating Partnership
on the matter, (ii) AOPP (PSP11 after the merger) votes its interest in the same
proportion as the shareholders of AOPP (PSP11 after the merger) voted on the
matter (disregarding shareholders who do not vote), and (iii) the result of such
vote is that had such Operating Partnership vote been a vote of shareholders,
the business combination would have been approved by the shareholders. As a
result of these provisions of the Operating Partnership, a third party may be
inhibited from making an acquisition proposal that it would otherwise make, or
AOPP (PSP11 after the merger), despite having the requisite authority under its
articles of incorporation, may not be authorized to engage in a proposed
business combination.
Tax Protection Provisions. The Operating Partnership Agreement provides
that, for a period of 10 years, the Operating Partnership may not sell any of 13
designated properties in a transaction that will produce taxable gain for the
contributing partner without the prior written consent of PSI. The Operating
Partnership is not required to obtain PSI's consent if PSI and its affiliated
partnerships do not continue to hold at the time of the sale at least 30% of
their original interest in the Operating Partnership. Since PSI's consent is
required only in connection with a taxable sale of one of the 13 designated
properties, the Operating Partnership will not be required to obtain PSI's
consent in connection with a "like-kind" exchange or other nontaxable
transaction involving one of these properties.
Indemnification. The Operating Partnership Agreement provides that AOPP
(PSP11 after the merger) and its officers and directors will be indemnified and
held harmless by the Operating Partnership for any act performed for, or on
behalf of, the Operating Partnership, or in furtherance of the Operating
Partnership's business unless it is established that (i) the act or omission of
the indemnified person was material to the matter giving rise to the proceeding
and either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the indemnified person had reasonable cause to believe that the act
or omission was unlawful. The termination of any proceeding by judgment, order
or settlement does not create a presumption that the indemnified person did not
meet the requisite standard of conduct set forth above. The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the indemnified person acted in a manner contrary to that
specified above. Any indemnification so made shall be made only out of the
assets of the Operating Partnership.
Duties and Conflicts. The Operating Partnership Agreement allows PSP11
after the merger to operate the Operating Partnership in a manner that will
enable PSP11 to satisfy the requirements for being classified as a REIT. The
Partnership Agreement provides that all business activities of PSP11 after the
merger, including all activities pertaining to the acquisition, management and
operation of properties, must be conducted through the Operating Partnership
unless such activities must be conducted through another party (including PSP11)
in order to maintain or facilitate PSP11's continued qualification as a REIT.
Term. The Operating Partnership will continue in full force and effect
until December 31, 2096 or until sooner dissolved upon the withdrawal of the
general partner (unless the limited partners elect to continue the Operating
Partnership), or by the election of the general partner, or in connection with a
merger or by the sale or other disposition of all or substantially all of the
assets of the Operating Partnership.
84
<PAGE>
PSI EXCHANGE PROPERTIES
The following table contains information as of September 30, 1997 about the
PSI Exchange Properties, which are managed by AOPP. After the merger, these
properties would be owned by PSP11. See "American Office Park Properties, Inc.
- -- Description of AOPP's Properties."
<TABLE>
<CAPTION>
Net Rentable Number of Date
Location Square Feet Spaces Opened
-------- ------------ ---------- ------
<S> <C> <C> <C>
CALIFORNIA
Kearny Mesa, Murphy Cny- R&D 85,000 33 April 1988
Kearny Mesa, Murphy Cny- Office 74,000 73 April 1988
San Diego, Lusk Blvd. II- R&D 57,000 26 December 1988
San Diego, Lusk Blvd. II- Office 83,000 82 December 1988
San Diego, Lusk Blvd. III 18,000 45 July 1989
Oakland, San Ramon Norris Cyn - R&D 24,000 17 May 1989
Oakland, San Ramon Norris Cyn - Office 28,000 39 May 1989
VIRGINIA
Fairfax County, Shirley Hwy- R&D 60,000 14 August 1989
Fairfax County, Shirley Hwy- Office 53,000 36 August 1989
Fairfax, Alban Road - R&D 59,000 17 October 1990
Fairfax, Alban Road - Office 89,000 47 October 1990
</TABLE>
As of the date of this proxy statement, each of the PSI Exchange Properties
is generating sufficient revenues to cover its operating expenses. None of the
PSI Exchange Properties is subject to any material mortgage, lien, or any
encumbrance other than liens for taxes and assessments not due or payable,
utility easements or other immaterial liens or encumbrances. Each of the PSI
Exchange Properties will continue to be used for its current purpose. PSI has
advised PSP11 that each of the PSI Exchange Properties is adequately covered by
insurance. No single PSI Exchange Property will have a book value of more than
10% of PSP11's book value after the merger or will account for more than 10% of
its aggregate gross revenues after the merger or will be materially important to
AOPP.
Competition exists in all of the market areas in which the PSI Exchange
Properties are located, and the barriers to entry are relatively low for
competitors with the necessary capital. However, AOPP believes that the current
overall demand for commercial space is strong, and as reflected in the table
below the overall performance of the PSI Exchange Properties has generally
improved. The PSI Exchange Properties are concentrated in the Southern
California and Northern Virginia markets. The economy of both of those markets
has been strengthening.
Set forth below is a table showing the overall occupancy rate and realized
rent for the PSI Exchange Properties for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
Years ended December 31, September 30,
-------------------------------- -------------------
1994 1995 1996 1996 1997
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level 94% 95% 96% 96% 97%
Realized monthly rent per occupied
square foot (1) $ .84 $ .87 $ .89 $ .89 $ .94
</TABLE>
(1) Realized monthly rent per occupied square foot represents the actual
revenue earned per occupied square foot.
85
<PAGE>
AOPP'S RECENT AND PROPOSED ACQUISITIONS
The following table contains information as of September 30, 1997 and about
properties acquired and proposed to be acquired by AOPP since September 30,
1997. After the merger, these properties would be owned by PSP11.
<TABLE>
<CAPTION>
Net Rentable Number of Percent
Location Square Feet Spaces Occupied
- ----------------------------------------- ------------ ---------- --------
<S> <C> <C> <C>
CALIFORNIA:
Buena Park (1) 317,300 8 100%
Cerritos, Cerritos Industrial Center (1) 394,600 27 100%
Hayward, Parkway Commerce Center (1) 406,700 29 99%
Laguna Hills, Laguna Hills Commerce 513,100 84 93%
Center (1)
Lake Forest, Canada Business Center (1) 296,600 122 95%
Lake Forest, Lake Forest Commerce 100,800 22 96%
Center (1)
MARYLAND:
Beltsville, Ammendale Business Park (2) 307,800 11 96%
Landover, Centre Pointe Corporate (3) 254,000 16 93%
VIRGINIA:
Sterling, Northpointe E Business Park(2) 51,000 8 99%
Newington, Gunston Industrial Park (3) 246,500 22 94%
Sterling, Shaw Road Business Park (3) 148,500 11 98%
</TABLE>
- ---------------
(1) Acquired from Acquiport.
(2) Acquired from unaffiliated third party.
(3) Proposed to be acquired from unaffiliated third party.
For the year ended December 31, 1996 and the nine months ended
September 30, 1997, each of the above properties generated sufficient revenues
to cover its operating expenses. Only three of the properties are subject to any
material mortgage, lien, or any encumbrance other than liens for taxes and
assessments not due or payable, utility easements or other immaterial liens or
encumbrances. The three properties are encumbered by mortgages in the aggregate
amount of approximately $26,900,000, bearing interest at rates ranging from 7%
to 8% per year and maturing between 2004 and 2006. Each of these properties
will continue to be used for its current purpose and, in AOPP's opinion, will be
adequately covered by insurance. Competition exists in the market areas in which
these properties are located, and the barriers to entry are relatively low for
competitors with the necessary capital. However, AOPP believes that the current
overall demand for commercial space is strong. These properties are located in
the Southern California, Northern California and Washington D.C. metro markets.
The economy of these markets has been strengthening.
None of these properties, other than the Laguna Hills Commerce Center, will
have a book value of more than 10% of PSP11's total assets after the merger or
will account for more than 10% of its aggregate gross revenues after the merger.
Additional information is set forth below with respect to the Laguna Hills
Commerce Center because it represents more than 10% of PSP11's total assets
after the merger or has revenues in excess of 10% of PSP11's aggregate gross
revenues after the merger.
The Laguna Hills Commerce Center is a 24 building business park containing
513,100 rentable square feet located in southern Orange County, California. The
property includes retail office and industrial units.
86
<PAGE>
The southern Orange County manufacturing and warehouse, and research and
development, markets combined contain over 32 million square feet. The southern
Orange County office market contains over 4.2 million square feet. The southern
Orange County retail market contains over 10.4 million square feet. Additional
construction is in process and is expected in the southern Orange County
manufacturing and warehouse, office and retail markets.
Set forth below is a schedule showing the average occupancy rate and
realized rent per square foot for the Laguna Hills Commerce Center for the years
indicated:
<TABLE>
<CAPTION>
Monthly
Average Realized
Occupancy Rent Per
Rate Square Foot
---------- -----------
<S> <C> <C>
1996 94% $1.01
1995 95 1.00
1994 95 .95
1993 86 1.01
1992 83 1.04
</TABLE>
A schedule showing, as of December 31, 1996, the total annual base rent
relating to leases according to their expiration dates is set forth below:
<TABLE>
<CAPTION>
Year of Total Amount
Expiration* Base Rent
- ---------------- ------------
<S> <C>
1997 $ 4,773,000
1998 3,040,000
1999 2,160,000
2000 1,464,000
2001 506,000
Total $11,943,000
===========
- ---------------
</TABLE>
* Assumes that none of the renewal options included in the leases will be
exercised.
87
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PSI'S OWNERSHIP OF PSP11 AND AOPP COMMON STOCK
PSI and Mr. Hughes own in the aggregate 37% of the total outstanding shares
of PSP11 Common Stock and PSP11 Common Stock Series B and C. PSI also owns 43%
of the capital stock of AOPP.
COMMON EXECUTIVE OFFICERS AND DIRECTORS
Certain executive officers and directors of PSI are also executive officers
and directors of PSP11 and AOPP. The following table lists each executive
officer and director of PSI who is also an executive officer and director of
PSP11 and/or AOPP and the executive officers and directors of PSP11 after the
merger:
<TABLE>
<CAPTION>
Executive Position
Current Executive Current Executive with PSP11 after
Name Current Position with PSI Position with PSP11 Position with AOPP the Merger
- ----------------------- ------------------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
B. Wayne Hughes Chairman of the Same None None
Board and Chief
Executive Officer
Harvey Lenkin President and President Director Director
Director
Ronald L. Havner, Jr. None(1) None Chairman, Chief Same as Current
Executive Officer, Position with AOPP
President, Chief
Financial Officer
and Secretary
Obren B. Gerich Senior Vice Vice President and None None(3)
President Secretary
David Goldberg Senior Vice Vice President None None(3)
President
A. Timothy Scott Senior Vice Vice President None None(3)
President
David P. Singelyn Vice President and Vice President and None None(3)
Treasurer Chief Financial
Officer
Mary Jayne Howard(2) None None Executive Vice Same as Current
President Position with AOPP
Vern O. Curtis None Director None Director
Jack D. Steele None Director None Director
James H. Kropp None None None(4) Director
Arthur M. Friedman None None None Director
Alan K. Pribble None None None Director
- ---------------
</TABLE>
(1) Mr. Havner was a senior vice president and chief financial officer of PSI
(and vice president of PSP11) until December 1996 and is currently an
employee of PSI.
(2) Ms. Howard was a senior vice president of PSI until December 1996.
(3) Will be a vice president of PSP11 after the merger.
(4) Mr. Kropp was a director of AOPP from December 1996 until December 1997.
88
<PAGE>
COMPENSATION TO EXECUTIVE OFFICERS AND DIRECTORS
Following the merger, PSP11 will pay annual base compensation of its
executive officers as follows: chief executive officer, president, chief
financial officer and secretary Ronald L. Havner, Jr. ($185,000) and executive
vice president Mary Jayne Howard ($165,000). In addition to these minimum
annual salaries, the executive officers receive discretionary bonuses and
discretionary awards under the Plan. Prior to the merger, these salaries and
bonuses were paid by AOPP.
After the merger, each of PSP11's directors, other than Mr. Havner, will
receive director's fees of $10,000 per year plus $200 for each meeting attended.
In addition, if the PSP11 shareholders approve the Plan, the non-employee
directors would receive automatic grants of options thereunder, and Ronald L.
Havner, Jr. would be eligible to receive discretionary grants of options and/or
restricted stock thereunder. Prior to the merger, each of PSP11's directors,
other than B. Wayne Hughes, received director's fees of $2,000 per year plus
$200 for each meeting attended, and each member of PSP11's audit committee
received $100 for each committee meeting attended.
EMPLOYMENT AGREEMENTS. In December 1997, Ronald L. Havner, Jr. and Mary
Jayne Howard each entered into an employment agreement with AOPP, which
agreements will be assumed by PSP11 in the merger. Mr. Havner's employment
agreement is for a term of two years and provides for an annual base salary of
$185,000 and a discretionary annual bonus. Ms. Howard's employment agreement is
for a term of one year and provides for an annual base salary of $165,000 and a
discretionary annual bonus. The agreements include provisions restricting Mr.
Havner and Ms. Howard from competing with AOPP (PSP11 after the merger) during
employment. In the event of termination of an agreement by AOPP (PSP11 after
the merger) without cause, termination by the employee with cause or a merger or
consolidation in which the employer is not the surviving corporation, or a
transfer of all or substantially all of the assets of the employer (other than
the merger of AOPP into PSP11 or any other merger approved by Mr. Havner in
which the agreement is assumed by the surviving corporation), each agreement
provides for the following payments: (i) the present value of the employee's
annual base salary for the remainder of the term of the agreement (based on a
discount rate of 5%), (ii) a prorated portion of the employee's last annual
bonus, but in no event less than the employee's annual base salary and (iii) the
acceleration of the vesting of the employee's stock options so that all of the
employee's outstanding stock options will be exercisable during a specified
period.
MANAGEMENT AGREEMENTS. PSP11 has management agreements with PSI and AOPP.
Under the management agreements, PSP11 pays PSI a fee of 6% of the gross
revenues of PSP11's mini-warehouses ($327,000 in 1996 and $370,000 in 1997) and
pays AOPP a fee of 5% of the gross revenues of PSP11's commercial properties
($67,000 in 1996 and $71,000 in 1997). PSP11 believes that the terms of the
management agreements are as favorable as would be obtained from unrelated third
parties. After the merger, PSP11's properties will be "self-managed."
After the merger, PSP11 will continue AOPP's management of the commercial
properties owned by PSI and affiliates, which are generally adjacent to mini-
warehouses, for a fee of 5% of the gross revenues of such properties.
89
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PSP11 COMMON STOCK
The PSP11 Common Stock has been listed on the AMEX since March 1991. The
following table sets forth the distributions paid per share on PSP11 Common
Stock with respect to the periods indicated below and the reported high and low
sales prices on the AMEX composite tape for the applicable periods. The merger
will not affect PSP11's AMEX listing.
<TABLE>
<CAPTION>
CALENDAR PERIODS HIGH LOW DISTRIBUTIONS
PAID (1)
1996:
<S> <C> <C> <C>
First quarter $ 18 3/8 $ 16 7/8 $.34
Second quarter 18 7/8 17 5/8 .34
Third quarter 20 1/2 18 1/2 .34
Fourth quarter 20 3/8 19 1/8 .34
1997:
First quarter 20 3/8 19 3/8 .34
Second quarter 20 1/8 19 3/8 .34
Third quarter 21 7/16 19 5/16 .34
Fourth quarter 23 1/2 20 1/2 .34
1998:
First quarter (through January ___, 1998)
</TABLE>
-----------------
(1) Distributions paid per share of PSP11 Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For generally accepted accounting principles purposes, all distributions
were from ordinary income.
As of December 31, 1997, there were approximately 940 record holders of
PSP11's Common Stock. On August 15, 1997, the last full trading day prior to
the first public announcement of the proposed merger, the closing price of PSP11
Common Stock was $20. On _________, 1998, the last full trading day prior to
the date of this proxy statement, the closing price was $_____.
Holders of PSP11 Common Stock are entitled to receive distributions when,
as and if declared by its board of directors out of any funds legally available
for that purpose. PSP11, as a REIT, is required to distribute annually at least
95% of its "REIT taxable income," which, as defined by the relevant tax statutes
and regulations, is generally equivalent to net taxable ordinary income. Under
certain circumstances, PSP11 can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
The AOPP Common Stock is not listed for trading.
90
<PAGE>
SELECTED FINANCIAL INFORMATION
PSP11 HISTORICAL FINANCIAL INFORMATION
The following selected financial historical information relating to each of
the three years in the period ended December 31, 1996 has been derived from
audited financial statements of PSP11. The information for the nine months
ended September 30, 1997 and the same period in 1996 has been derived from
unaudited financial statements of the PSP11. The data below should be read in
conjunction with the Managements Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements included elsewhere in
this proxy statement.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------ ------------------------------
1997 1996 1996 1995 1994
---------- ---------- -------- -------- ---------
(unaudited) (unaudited)
OPERATING DATA: ($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues
Rental revenues $ 5,644 $ 5,401 $ 7,220 $ 6,859 $ 6,651
Interest and other income 55 20 33 19 21
------- ------- ------- ------- -------
5,699 5,421 7,253 6,878 6,672
------- ------- ------- ------- -------
Expenses:
Cost of operations 2,062 2,034 2,728 2,665 2,495
Depreciation 877 848 1,150 1,105 1,046
General and administrative 164 164 217 205 208
Environmental costs - - - 106 -
Interest expense - 3 3 1 -
------- ------- ------- ------- -------
3,103 3,049 4,098 4,082 3,749
------- ------- ------- ------- -------
Net income $ 2,596 $ 2,372 $ 3,155 $ 2,796 $ 2,923
======= ======= ======= ======= =======
BALANCE SHEET DATA(AT END OF PERIOD):
Cash and cash equivalents $ 2,273 $ 1,000 $ 1,290 $ 746 $ 754
Total assets 28,809 27,934 28,129 28,388 28,767
Total debt
Shareholders equity 27,170 26,515 26,617 26,883 27,398
PER SHARE OF COMMON STOCK
Net income(1)(2):
Primary $ 1.32 $ 1.19 $ 1.59 $ 1.37 $ 1.39
Fully-diluted 1.03 .93 1.24 1.09 1.11
Distributions (3):
PSP11 Common Stock 1.02 1.02 1.36 1.36 1.36
PSP11 Common Stock Series B 1.02 1.02 1.36 1.36 1.36
Book value (at end of period)(4) 10.75 10.49 10.53 10.49 10.56
WEIGHTED AVERAGE SHARES OF
COMMON STOCK (IN THOUSANDS)
Primary 1,820 1,834 1,831 1,863 1,926
Fully-diluted 2,527 2,542 2,538 2,571 2,633
OTHER DATA:
Net cash provided by operating
activities $ 3,395 $ 3,318 $ 4,485 $ 3,786 $ 3,899
Net cash used by investing activities 369 311 507 472 216
Net cash used in financing activities 2,043 2,753 3,434 3,322 4,143
Funds from operations (5) 3,473 3,220 4,305 4,007 3,969
Capital expenditures to maintain
facilities 369 311 507 472 216
</TABLE>
91
<PAGE>
AOPP HISTORICAL FINANCIAL INFORMATION
The following selected historical information relating to each of the three
years in the period ended December 31, 1996 has been derived from audited
financial statements of AOPP. The information for the period April 1, 1997
through September 30, 1997, the period from January 1, 1997 through March 31,
1997 and the nine months ended September 30, 1996 has been derived from
unaudited financial statements of the AOPP. As a result of PSI attaining voting
control of AOPP on March 31, 1997, the financial results of 1997 are presented
separately for the period prior to March 31, 1997 (January 1, 1997 through March
31, 1997) and the period subsequent to March 31, 1997 (April 1, 1997 through
September 30, 1997) The data below should be read in conjunction with the
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements included elsewhere in this proxy
statement.
<TABLE>
<CAPTION>
April 1, January 1, Nine Months
1997 through 1997 through Ended
September March September Years Ended December 31,
-----------------------------
30, 1997 31, 1997 30, 1996 1996 1995 1994
------------- -------------- ------------- ------------------------------
(unaudited) (unaudited) (unaudited)
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental revenues $ 15,234 $ 5,805 $ - $ - $ - $ -
Facility management fees 449 247 1,587 2,133 2,044 1,973
Interest and other income 293 29 34 43 37 40
-------- -------- -------- ------- ------ ------
15,976 6,081 1,621 2,176 2,081 2,013
-------- -------- -------- ------- ------ ------
Expenses:
Cost of operations 5,776 2,493
Cost of managing facilitates 97 60 369 514 570 523
Depreciation 2,328 820 - - - -
Amortization (6) 262 - - - - -
General and administrative 554 213 570 1,143 319 245
-------- -------- -------- ------- ------ ------
9,017 3,586 939 1,657 889 768
-------- -------- -------- ------- ------ ------
Income before income taxes and minority
interest 6,959 2,495 682 519 1,192 1,245
Minority interest (7) (4,982) (1,813) - - - -
Income taxes - - (283) (216) (472) (488)
Net income $ 1,977 $ 682 $ 399 $ 303 $ 720 $ 757
======== ======== ======== ====== ====== =======
BALANCE SHEET DATA(AT END OF PERIOD):
Total cash and cash $ 6,455 $ 5,949 $ 290 $ 919 $ 884 $ 18
equivalents
Total assets 202,623 136,922 1,495 1,941 1,110 326
Total debt
Minority interests 125,668 97,180
Shareholders equity 72,511 36,670 1,440 1,734 1,041 343
PER SHARE OF COMMON STOCK(10)
Net income (11) $ .81 $ .37 $ .50 $ .38 $ .94 $ .99
Distributions - - - .51 1.06 .75
Book value (at end of period) $ 20.26 $ 19.69 $ 1.79 $ 2.06 $ 1.30 $ .44
Weighted average shares of
common stock (in thousands)(11) 2,444 1,858 803 803 767 762
OTHER DATA:
Net cash provided by operating
activities $ 10,716 $ 5,840 $ 546 $ 413 $ 950 $ 571
Net cash used by investing
activities (45,099) (582) - - - -
Net cash provided (used) by financing
activities 34,889 (228) (1,140) (378) (84) (563)
Funds from operations (5) 2,713 907 399 303 720 757
</TABLE>
92
<PAGE>
COMPARATIVE PSP11 HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (8)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997 Year Ended December 31, 1996
-------------------------------------------------- ----------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
No Cash Maximum Cash No Cash Maximum Cash
Historical Elections(9) Elections(9) Historical Elections(9) Elections(9)
---------- ------------- ------------ ----------- ------------ -------------
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental revenues $ 5,644 $ 52,311 $ 52,311 $ 7,220 $ 66,039 $ 66,039
Facility management fees 293 293 375 375
Interest and other income 55 377 377 33 76 76
--------- --------- --------- -------- --------- ---------
5,699 52,981 52,981 7,253 66,490 66,490
--------- --------- --------- -------- --------- ---------
Expenses:
Cost of operations 2,062 18,124 18,124 2,728 24,511 24,511
Cost of managing facilitates 66 66 91 91
Depreciation and amortization 877 9,533 9,533 1,150 12,709 12,709
General and administrative 164 1,156 1,156 217 1,660 1,660
Interest expense 1,549 1,824 3 1,949 2,316
--------- --------- --------- -------- --------- ---------
3,103 30,428 30,703 4,098 40,920 41,287
--------- --------- --------- -------- --------- ---------
Income before minority 2,596 22,553 22,278 3,155 25,570 25,203
interest
Minority interest (7,951) (7,987) (9,014) (9,036)
--------- --------- --------- -------- --------- ---------
Net income $ 2,596 $ 14,602 $ 14,291 $ 3,155 $ 16,556 $ 16,167
========= ========= ========= ======== ========= =========
BALANCE SHEET DATA(AT END OF PERIOD):
Cash and cash equivalents $ 2,273 $ 7,303 $ 5,000
Total assets 28,809 451,335 449,032
Total debt 26,900 32,059
Minority interest 133,699 133,699
Shareholders equity 27,170 284,653 277,191
PER SHARE OF COMMON STOCK
Net income:
Primary $1.32 $1.04 $1.04 $ 1.59 $1.18 $1.18
Fully-diluted 1.03 1.24
Book value (at end of period) 10.75 20.21 20.20 10.53
Weighted average shares of
common stock (in thousands)
Primary 1,820 14,088 13,724 1,831 14,088 13,724
Fully-diluted 2,527 2,538
</TABLE>
93
<PAGE>
(1) Primary earnings per share represents the shareholders rights to
distribution out of the respective periods net income, which is calculated
by dividing net income after reduction for any distributions made to the
holders of the PSP11 Common Stock Series B (holders of the PSP11 Common
Stock Series C are not entitled to cash distributions) by the weighted
average number of shares of PSP11 Common Stock. Fully diluted earnings per
share assumes conversion of the PSP11 Common Stock Series B and C into
PSP11 Common Stock.
(2) In connection with the reorganization of the PSP11 Partnership, PSP11
issued PSP11 Common Stock and PSP11 Common Stock Series B and C. The
capital structure of PSP11 was designed to reflect the economic rights of
the limited partners and general partners in the predecessor partnership
and the capital shares were distributed to the limited and general partners
in respect of their interests in the predecessor partnership.
PSP11 Common Stock shares are entitled to 100% of cash distributions from
operations from PSP11 until (a) the sum of (1) all cumulative dividends and
other distributions from all sources to the holders of PSP11 Common Stock
and (2) the cumulative predecessor partnership distributions from all
sources with respect to all units equal (b) the product of $20 multiplied
by the number of the then-outstanding shares of PSP11 Common Stock, at
which time PSP11 Common Stock Series B and C will automatically convert to
PSP11 Common Stock. As of September 30, 1997, conversion will occur with
respect to PSP11 when $5,397,000 in additional distributions are made to
holders of PSP11 Common Stock (assuming no further repurchases of PSP11
Common Stock).
(3) For federal income tax purposes, distributions on the PSP11 Common Stock
were from ordinary income. Distributions for all periods were less than
net income in accordance with GAAP. Distributions for each year included
distributions declared during the fourth quarter and paid in January.
(4) Book value per share computed based on the combined number of shares of
PSP11 Common Stock and PSP11 Common Stock Series B and C outstanding at the
end of the period.
(5) FFO is defined by PSP11 and AOPP as net income (loss), computed in
accordance with generally accepted accounting principles (GAAP), before
depreciation, amortization and extraordinary or non-recurring items. FFO
is presented because PSP11 and AOPP considers FFO to be a useful measure of
the operating performance of a REIT which, together with net income and
cash flows, provides investors with a basis to evaluate the operating and
cash flow performances of a REIT. FFO does not represent net income or
cash flows from operations as defined by GAAP. FFO does not take into
consideration scheduled principal payments on debt and capital
improvements. Accordingly, FFO is not necessarily a substitute for cash
flow or net income as a measure of liquidity or operating performance or
ability to make acquisitions and capital improvements or ability to pay
distributions or debt principal payments. Also, FFO as computed and
disclosed by PSP11 and AOPP may not be comparable to FFO computed and
disclosed by other REITs.
Funds from operations for PSP11 Historical Financial Information is
computed as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------------ ------------------------------
1997 1996 1996 1995 1994
(unaudited) (unaudited)
-------------- ------------- --------- --------- --------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 2,596 $ 2,372 $ 3,155 $ 2,796 $ 2,923
Depreciation 877 848 1,150 1,105 1,046
Environmental costs -- -- -- 106 --
--------- --------- --------- -------- --------
Funds from operations $ 3,473 $ 3,220 $ 4,305 $ 4,007 $ 3,969
========= ========= ========= ======== ========
</TABLE>
94
<PAGE>
Funds from operations for AOPP Historical Financial Information is computed as
follows:
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 Nine Months
through through Ended
September March September Years Ended December 31,
---------------------------
30, 1997 31, 1997 30, 1996 1996 1995 1994
(unaudited) (unaudited) (unaudited)
--------------------------------------------- -------- ------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,977 $ 682 $ 399 $ 303 $ 720 $ 757
Minority interest in income 4,982 1,813 -- -- -- --
Depreciation and amortization 2,590 820 -- -- -- --
--------- --------- --------- -------- ------- -------
Subtotal 9,549 3,315 399 303 720 757
FFO allocated to minority interests (6,836) (2,408) -- -- -- --
--------- --------- --------- -------- ------- -------
Funds from operations allocated to
shareholders $ 2,713 $ 907 $ 399 $ 303 $ 720 $ 757
========= ========= ========= ======= ======= =======
</TABLE>
(6) In March 1997, PSI attained control of AOPP and accordingly, PSIs
purchase price of AOPP was reflected by AOPP in its financial statements
resulting in AOPP establishing $4,395,000 of intangible assets. These
assets are being amortized over seven years.
(7) Minority interest represents the interest in the Operating Partnership
held by PSI and affiliated entities and not by AOPP. As of September 30,
1997, AOPP had a 37% interest in the Operating Partnership.
(8) For the pro forma consolidated financial data, transactions which
occurred during 1996 and 1997 as described in the Notes to Pro Forma
Consolidated Financial Statements are assumed to have occurred at the
beginning of 1996.
(9) Presents consolidated pro forma per share amounts based on the number of
shares of PSP11 Common Stock assumed to be outstanding at September 30,
1997, after giving effect to the issuance of shares of PSP11 Common Stock
in the merger. The per share information assumes the cancellation of
47,824 PSP11 Common Stock Series C shares in accordance with a pre-
existing agreement, the conversion of each remaining share of PSP11
Common Stock Series B and C into 0.8641 share of PSP11 Common and 1.18
shares of PSP11 Common Stock are issued for each share of AOPP Common
Stock in the merger.
(10) Per share amounts for AOPP retroactively reflect the impact of a 10-for-
1 stock split which occurred January 1, 1997 and stock dividend which
occurred December 1997.
(11) Earnings per share of AOPP is computed on the number of shares of common
stock and common stock equivalents outstanding. The preferred stock is
deemed to be a common stock equivalent. The number of shares of common
stock and common stock equivalents has been adjusted to reflect the 10-
for-1 stock split in January 1997 and stock dividend in December 1997.
95
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSP11 HISTORICAL
The following discussion should be read in conjunction with the financial
statements of PSP11 included elsewhere in this proxy statement.
RESULTS OF OPERATIONS
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996. PSP11's net income for the nine months ended September 30,
1997 and 1996 was $2,596,000 ($1.03 per share of fully-diluted PSP11 Common
Stock) and $2,372,000 ($.93 per share of fully-diluted PSP11 Common Stock),
respectively, representing an increase of $224,000 or 9%. This increase is
primarily the result of increases in property net operating income (rental
income less cost of operations, management fees paid to affiliates and
depreciation expense).
Rental income for the nine months ended September 30, 1997 and 1996 was
$5,644,000 and $5,401,000, respectively, representing an increase of $243,000 or
4%. PSP11's mini-warehouse operations contributed $191,000 to the increase in
rental income for the nine-month period ended September 30, 1997 compared to the
same period in 1996. Approximately 76% of the increase in mini-warehouse rental
income for the nine-month period ended September 30, 1997 was generated by
PSP11's two California properties primarily due to an increase in rental rates.
PSP11's commercial operations also contributed to the increase in rental income
for the nine-month period ended September 30, 1997 compared to the same period
in 1996 due to increases in rental rates.
PSP11's mini-warehouse operations had weighted average occupancy levels of
93% and 92% for the nine-month periods ended September 30, 1997 and 1996,
respectively. PSP11's commercial operations had weighted average occupancy
levels of 98% for both of the nine-month periods ended September 30, 1997 and
1996.
Cost of operations (including management fees paid to affiliates and
depreciation expense) for the nine months ended September 30, 1997 and 1996 was
$2,062,000 and $2,034,000, respectively, representing an increase of $28,000 or
1%. This increase is primarily due to an increase in management fees and
property taxes partially offset by a decrease in snow removal costs. Property
taxes increased primarily due to an unfavorable comparison to a one-time tax
refund received in early 1996 from appealing prior years tax assessments at
PSP11's Nesconset, New York property. Snow removal costs were higher in 1996
than amounts typically incurred due to higher than normal snow levels
experienced at PSP11's mini-warehouse facilities located in the eastern states.
In 1995, PSP11 prepaid eight months of 1996 management fees on its mini-
warehouse operations discounted at a 14% effective rate to compensate for early
payment. As a result, management fee expense for the nine months ended
September 30, 1996 was $26,000 lower than it would have been under the
customary, undiscounted fee structure.
During the nine months ended September 30, 1996, PSP11 incurred $3,000 in
interest expense on its line of credit facility. No such expense was incurred
during the same period in 1997 since PSP11 did not have any borrowings against
its credit facility.
Year ended December 31, 1996 compared to year ended December 31, 1995. Net
income in 1996 was $3,155,000 compared to $2,796,000 in 1995, representing an
increase of $359,000 or 13%. Net income per share of fully diluted PSP11 Common
Stock was $1.24 in 1996 compared to $1.09 in 1995, representing an increase of
$.15 or 14% per share. These increases are primarily due to an increase in
property net operating income combined with the favorable impact of comparing to
expenses for 1995 which included a non-recurring charge for environmental
assessments and provision for future remediation costs.
During 1996, property net operating income (rental income less cost of
operations, management fees paid to affiliates and depreciation expense)
increased $253,000 from $3,089,000 in 1995 to $3,342,000 in 1996. This increase
is primarily attributable to an increase in rental income at PSP11's mini-
warehouse and commercial operations.
Rental income for the mini-warehouse operations increased $245,000 or 4%
from $5,631,000 in 1995 to $5,876,000 in 1996. Cost of operations (including
management fees paid to an affiliate of PSP11) increased $63,000 or 3% from
$1,993,000 in 1995 to $2,056,000 in 1996. The results of these changes was a
net increase in property net operating income before depreciation expense of
$181,000 or 5% from $3,639,000 in 1995 to $3,820,000 in 1996. The
96
<PAGE>
increase in rental income is primarily due to an increase in rental rates at a
majority of PSP11s mini-warehouse properties. The increase in cost of operations
is primarily due to increases in payroll, repairs and maintenance and
advertising expense. Repairs and maintenance increased due mainly to an increase
in snow removal and landscaping costs. Snow removal costs increased due to the
higher than normal snow levels experienced at PSP11s mini-warehouse properties
located in the eastern states.
Property net operating income before depreciation expense with respect to
PSP11s commercial operations increased by $117,000 or 21% from $556,000 in 1995
to $673,000 in 1996. This increase is due to an increase in rental income at
PSP11s four commercial facilities as a result of increases in rental rates.
Cost of operations remained stable in 1996 compared to 1995.
Weighted average occupancy levels were 92% for the mini-warehouse
facilities and 97% for the commercial facilities in 1996 compared to 92% for the
mini-warehouse facilities and 95% for the business park facilities in 1995.
In 1995, PSP11 prepaid eight months of 1996 management fees on its mini-
warehouse operations (based on the management fees for the comparable period
during the calendar year immediately preceding the prepayment) discounted at the
rate of 14% per year to compensate for early payment. In 1996, PSP11 expensed
the prepaid management fees. The amount is included in management fees paid to
affiliates in the statements of income. As a result of the prepayment, PSP11
saved approximately $26,000 in management fees, based on the management fees
that would have been payable on rental income generated in 1996 compared to the
amount prepaid.
During 1996, PSP11 incurred $3,000 in interest expense on its line of
credit facility.
Mini-warehouse Operating Trends. The following table illustrates the
operating trends for PSP11s 13 mini-warehouses:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
---------- -------- -------
<S> <C> <C> <C>
Weighted average occupancy level 92% 92% 93%
Realized monthly rent per occupied
square foot (1) $ .72 $ .70 $ .67
Operating margin: (2)
Before reduction for depreciation
expense 65% 65% 65%
After reduction for depreciation
expense 52% 52% 52%
</TABLE>
________________
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions. Includes administrative and late fees.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
LIQUIDITY AND CAPITAL RESOURCES
PSP11 believes that net cash provided by operating activities and FFO are
important measures of its performance. PSP11s financial profile has been
characterized by increasing net cash provided by operating activities and
increasing FFO.
Net cash provided by operating activities reflects the cash generated from
PSP11s business before distributions to shareholders and capital expenditures.
Net cash provided by operating activities has increased over the past years from
$3,899,000 in 1994 to $4,485,000 in 1996. Net cash provided by operating
activities for the nine months ended September 30, 1997 was $3,395,000 compared
to $3,318,000 for the same period in the prior year.
97
<PAGE>
The following table summarizes PSP11s ability to make capital improvements
to maintain its facilities through the use of cash provided by operating
activities. The remaining cash flow is available to PSP11 to pay distributions
to shareholders and repurchase its stock.
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
--------------------------- -----------------------------------------
1997 1996 1996 1995 1994
(unaudited) (unaudited)
------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Net income $ 2,596,000 $ 2,372,000 $ 3,155,000 $ 2,796,000 $ 2,923,000
Depreciation 877,000 848,000 1,150,000 1,105,000 1,046,000
Environmental cost -- -- -- 106,000 --
Change in working capital (78,000) 98,000 180,000 (221,000) (70,000)
------------ ------------- ----------- ------------- -----------
Net cash provided by operating 3,395,000 3,318,000 4,485,000 3,786,000 3,899,000
activities
Capital improvements to maintain
facilities (369,000) (311,000) (507,000) (472,000) (216,000)
------------ ------------- ------------ ------------- ------------
Funds available for distributions to 3,026,000 3,007,000 3,978,000 3,314,000 3,683,000
shareholders and repurchases of stock
Cash distributions to shareholders (2,043,000) (2,068,000) (2,749,000) (2,793,000) (2,889,000)
------------ ------------- ------------ ------------- ------------
Excess funds available for principal
payments, cash distributions to
shareholders and repurchase of stock $ 983,000 $ 939,000 $ 1,229,000 $ 521,000 $ 794,000
============ ============= ============ ============= ============
</TABLE>
Funds from operations (FFO) is defined by PSP11, consistent with the
definition of FFO by the National Association of Real Estate Investment Trusts
(NAREIT) as net income (loss), computed in accordance with generally accepted
accounting principles (GAAP), before depreciation and extraordinary or non-
recurring items. FFO is presented because PSP11 considers FFO to be a useful
measure of the operating performance of a REIT which, together with net income
and cash flows, provides investors with a basis to evaluate the operating and
cash flow performances of a REIT. FFO does not represent net income or cash
flows from operations as defined by GAAP. FFO does not take into consideration
scheduled principal payments on debt and capital improvements. Accordingly, FFO
is not necessarily a substitute for cash flow or net income as a measure of
liquidity or operating performance or ability to make acquisitions and capital
improvements or ability to pay distributions or debt principal payments. Also,
FFO as computed and disclosed by PSP11 may not be comparable to FFO computed and
disclosed by other REITs.
Funds from operation for PSP11 is computed as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------- ----------------------------------------
1997 1996 1996 1995 1994
(unaudited) (unaudited)
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income $2,596,000 $2,372,000 $3,155,000 $2,796,000 $2,923,000
Depreciation 877,000 848,000 1,150,000 1,105,000 1,046,000
Environmental costs -- -- -- 106,000 --
---------- ---------- ---------- ---------- ----------
Funds from operations $3,473,000 $3,220,000 $4,305,000 $4,007,000 $3,969,000
========== ========== ========== ========== ==========
</TABLE>
PSP11 believes that its rental revenues and interest and other income will
be sufficient in the future to meet PSP11s operating expenses, capital
improvements and distributions to shareholders. During 1995, PSP11s property
operator commenced a program to enhance the visual appearance of the mini-
warehouse facilities operated by it. Such enhancements include new signs,
exterior color schemes, and improvements to the rental offices. The vast
majority of the costs associated with these enhancements were incurred in 1995
and 1996.
PSP11 believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
PSP11 has an unsecured revolving credit facility with a bank for borrowings
up to $3,000,000 for working capital purposes and to repurchase PSP11s stock.
Outstanding borrowings on the credit facility, at PSP11s option, bear interest
at either the banks prime rate plus .25% or the LIBOR rate plus 2.25%. Interest
is payable monthly. On
98
<PAGE>
December 31, 1999, all unpaid principal and accrued interest is due and payable.
At September 30, 1997 and for the nine months then ended, there was no
outstanding balance on the credit facility.
PSP11 has established a conservative distribution policy. Dividends
declared per share of PSP11 Common Stock and PSP11 Common Stock Series B were
$1.36 in 1996 and $1.02 for the nine months ended September 30, 1997.
The PSP11 Common Stock Series B and C shares will convert automatically
into PSP11 Common Stock shares on a share-for-share basis in accordance with a
predetermined formula.
REIT Distribution Requirement. PSP11 has elected and intends to continue
to qualify as REIT for federal income tax purposes. As a REIT, PSP11 must meet,
among other tests, sources of income, share ownership, and certain asset tests.
As a REIT, PSP11 is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that at least 95% of its taxable income
is so distributed to its shareholders prior to filing PSP11's tax return. Under
certain circumstances, PSP11 can rectify a failure to meet the 95% distribution
test by making distributions after the close of a particular taxable year and
attributing those distributions to the prior year's taxable income. PSP11 has
satisfied the REIT distribution requirement for 1996 by attributing
distributions in 1997 to the prior year's taxable income. The extent to which
PSP11 will be required to attribute distributions to a prior year will depend on
PSP11's operating results (taxable income) and the level of distributions as
determined by the Board of Directors. The primary difference between book
income and taxable income is depreciation expense. In 1996, PSP11's federal tax
depreciation was $1,229,000.
AOPP HISTORICAL
The following discussion should be read in conjunction with the
Consolidated Financial Statements of AOPP and notes thereto included elsewhere
in this proxy statement.
DESCRIPTION OF BUSINESS
The financial statements of AOPP include the accounts of AOPP and its
Operating Partnership which was formed in 1997. AOPP is the general partner of
the Operating Partnership.
AOPP, formerly known as Public Storage Commercial Properties Group, Inc.,
was previously a wholly-owned subsidiary of Public Storage Management, Inc.
("PSMI"). On November 16, 1995, PSI acquired PSMI in a transaction accounted
for as a purchase. Concurrent with the November 1995 merger, PSI exchanged its
common stock for non-voting participating preferred stock which represents a 95%
economic interest in AOPP. Concurrently, Mr. Hughes and his family purchased
all the voting common stock of AOPP which represented a 5% economic interest.
In December 1996, Ronald L. Havner, Jr. purchased the common stock of AOPP
owned by the Hughes family and became AOPP's Chairman and Chief Executive
Officer. As of January 1997, AOPP was reorganized so as to qualify for taxation
as a REIT. During March 1997, PSI converted its interest represented by
participating preferred stock into AOPP Common Stock.
The Operating Partnership manages, pursuant to property management
agreements, commercial properties. The property management agreements generally
provide for compensation equal to 5% of the gross revenues of the facilities
managed. For the property management fees, under the supervision of the
property owners, the Operating Partnership coordinates rental policies, rent
collections, marketing activities, the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of vendors, suppliers and
independent contractors. The Operating Partnership assists and advises property
owners in establishing policies for the hire, discharge and supervision of
employees for the operation of their facilities, including property managers,
leasing and maintenance personnel.
During 1997, AOPP acquired 39 facilities from PSI and eight affiliated
partnerships. Prior to their acquisition, the Operating Partnership managed
these facilities. These facilities were acquired as follows: 35 on January 2,
1997 from PSI and eight affiliated partnerships and four in April 1997 from PSI.
All of these properties have been transferred by AOPP to the Operating
Partnership. Property operations for these facilities are included in the
consolidated operating results for 1997 for the period owned by AOPP and the
Operating Partnership. Historical operating results for these properties are
set forth elsewhere in this proxy statement.
99
<PAGE>
In July 1997, AOPP acquired two commercial office buildings for an
aggregate purchase price of $33,750,000. One building located in Baltimore,
Maryland, contains 216,000 square feet of office space and 25,000 square feet of
storage space. The property is 92% occupied. The second building in Herndon,
Virginia which is proximate to Washington, D.C., contains approximately 194,000
square feet of office space and is 100% occupied. To fund these transactions,
AOPP issued 1,690,000 shares of common stock to PSI for $33,800,000.
In September 1997, the Operating Partnership purchased one commercial
facility for a purchase price for $10,500,000 in cash and the issuance of 12,000
limited partnership units of the Operating Partnership.
At September 30, 1997, the Operating Partnership owned 40 properties and
AOPP owned two properties. These 42 properties are located in 10 states,
consisting of approximately 3,911,700 square feet of rentable space. The
Operating Partnership also manages 49 commercial properties (approximately
1,881,700 square feet of rentable space) in which it has no ownership interest.
Eleven of these 49 properties (approximately 729,000 square feet of rentable
space) are owned by PSI and are to be transferred to PSP11 in connection with
the merger. Two of these 49 properties (approximately 103,000 square feet of
rentable space) are owned by PSP11. The majority of the remaining 36 properties
(approximately 1,050,000 square feet of rentable space) are adjacent to, and
part of the same legal parcel as, mini-warehouses operated by PSI. AOPP's
interest in the Operating Partnership as of September 30, 1997 was 23% (35% at
December 31, 1997). After the merger, PSP11's interest in the Operating
Partnership, assuming completion of all proposed transactions, will be
approximately 65%.
RESULTS OF OPERATIONS
Nine months ended September 30, 1997 compared to the nine months ended
----------------------------------------------------------------------
September 30, 1996: On March 31, 1997, PSI exchanged its non-voting preferred
- -------------------
stock for voting common stock of AOPP in a transaction accounted for as a
purchase of AOPP by PSI. As a result of PSI's attaining a 95% ownership
interest in AOPP voting common stock, the financial results for 1997 are
presented separately for the period prior to the exchange transaction for the
period January 1, 1997 to March 31, 1997 and subsequent to the exchange
transaction for the period April 1, 1997 to September 30, 1997. To properly
compare the operating results for the nine months ended September 30, 1997 to
the same period in the prior year, the amounts for 1997 have been combined as
follows:
<TABLE>
<CAPTION>
January 1, 1997 - April 1, 1997 - Nine months ended
March 31, 1997 September 30, 1997 September 30, 1997
----------------- ------------------ ------------------
Revenues:
<S> <C> <C> <C>
Rental income $ 5,805,000 $ 15,234,000 $ 21,039,000
Facility management fees 247,000 449,000 696,000
Interest and other income 29,000 293,000 322,000
----------- ------------ ------------
6,081,000 15,976,000 22,057,000
----------- ------------ ------------
Expenses:
Cost of operations 2,493,000 5,776,000 8,269,000
Cost of facility management 60,000 97,000 157,000
Depreciation 820,000 2,328,000 3,148,000
Amortization - 262,000 262,000
General and administrative 213,000 554,000 767,000
----------- ------------ ------------
3,586,000 9,017,000 12,603,000
----------- ------------ ------------
Net income before minority
interest 2,495,000 6,959,000 9,454,000
Minority interest (1,813,000) (4,982,000) (6,795,000)
----------- ------------ ------------
Net income $ 682,000 $ 1,977,000 $ 2,659,000
=========== ============ ============
</TABLE>
100
<PAGE>
Net income for the nine months ended September 30, 1997 was $2,659,000
compared to $399,000 for the nine months ended September 30, 1996. This
significant increase in net income reflects the impact of converting AOPP to a
real estate investment trust and of the acquisition of 42 commercial facilities
in 1997. For the nine months ended September 30, 1997, net operating income
(rental income less cost of operations and depreciation expense) of $9,622,000
was recognized related to the 42 facilities acquired during the period. During
the nine months ended September 30, 1997, $539,000 in net operating income was
recognized from facility management operations compared to $1,218,000 during the
same period in 1996. This decrease of $679,000 is due to the fact that AOPP now
owns 39 of the 88 properties it managed in 1996. The impact to net operating
income from facility management operations in 1997 related to these 39
facilities acquired in 1997 but managed in 1996 is $815,000. During the nine
months ended September 30, 1997, general and administrative expenses were
$767,000 compared to $570,000 for the same period in 1996, a $197,000 increase.
The increase in general and administrative expenses is due to an increase in
salaries related to the January 1997 reorganization. Depreciation and
amortization expense was $3,148,000 and $262,000, respectively for the nine
months ended September 30, 1997. No amounts for depreciation and amortization
expense were reported for the same period in 1996. Of the $9,454,000 earned by
AOPP and its Operating Partnership for the nine months ended September 30, 1997,
$6,795,000 was allocated to the limited partners of the Operating Partnership
and $2,659,000 was allocated to AOPP.
Year ended December 31, 1996 compared to the year ended December 31, 1995.
Net income for the year ended December 31, 1996 was $303,000 compared to net
income for the year ended December 31, 1995 of $720,000. The primary reason for
this decline in net income was an $824,000 increase in general and
administrative expense. Net operating income related to facility management
operations for the year ended December 31, 1996 was $1,619,000, a $145,000 or
9.8% increase from $1,474,000 reported for the year ended December 31, 1995.
The increase is due to a 4.4% increase in facility management fees earned
combined with a 9.0% decrease in cost of managing the facilities. The increase
in facility management fees is due to higher revenues at the facilities managed.
During 1996, revenues of the properties managed were $42.6 million compared to
$40.7 million for 1995 due to a 0.9% increase in occupancy levels (from 94.7% in
1995 to 95.6% in 1996) and a 3.5% increase in realized annual rental rates (from
$8.37 in 1995 to $8.66 in 1996). The reduction in cost of managing the
facilities is due to a $47,000 decrease in salaries related to field management
personnel.
General and administrative expense for 1996 was $1,143,000 compared to
$319,000 in 1995. This increase of $824,000 includes legal expense of $456,000.
This includes approximately $407,000 of non-recurring legal expense related to
corporate planning issues. In addition, general and administrative expense for
1996 includes $533,000 in salaries related to direct and allocated costs from
PSI for management and support functions, including but not limited to
accounting, data processing and legal. In 1995, many of these support functions
were being provided by AOPP's parent. Included in general and administrative
expenses for Post-PSMI Merger 1995 are $120,000 of discretionary bonuses paid to
AOPP personnel.
Year ended December 31, 1995 compared to the year ended December 31, 1994.
Net income for the year ended December 31, 1995 was $720,000 compared to net
income for the year ended December 31, 1994 of $757,000. The decrease is due to
an increase in general and administrative expense. During 1995, net operating
income from facility management operations was $1,474,000 compared to $1,450,000
in 1994. This increase of $24,000 results from a $71,000 increase in facility
management fees offset by a $47,000 increase in cost of managing facilities.
General and administrative expense for 1995 was $319,000 compared to $245,000 in
1994, a $74,000 increase. This increase is due to $90,000 being incurred in
1995 related to severance cost paid during the year.
LIQUIDITY AND CAPITAL RESOURCES
AOPP is characterized by no leverage and an increasing level of funds
available for distributions and investments. Net cash provided by operating
activities for the years ended December 31, 1996, 1995 and 1994 for the period
from April 1, 1997 through September 30, 1997, for the period from January 1,
1997 through March 31, 1997 and for the nine months ended September 30, 1996
were $413,000, $950,000, $571,000, $10,716,000, $5,840,000 and $546,000,
respectively. Management expects cash flows from operations will be sufficient
to fund capital expenditures and distributions in the future.
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<PAGE>
The following table summarizes AOPP's ability to make capital improvements
to maintain its facilities through the use of cash provided by operating
activities. The remaining cash flow is available to AOPP to pay distributions
to shareholders and acquire property interests.
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 Nine months
through through ended Years ended December 31,
September March September -----------------------------
30, 1997 31, 1997 30, 1996 1996 1995 1994
(unaudited) (unaudited) (unaudited)
------------- ---------------- -------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,977,000 $ 682,000 $ 399,000 $ 303,000 $ 720,000 $ 757,000
Depreciation and amortization 2,590,000 820,000 - - - -
Change in working capital 1,167,000 2,525,000 147,000 110,000 230,000 (186,000)
Minority interest in income 4,982,000 1,813,000 - - - -
----------- ----------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 10,716,000 5,840,000 546,000 413,000 950,000 571,000
Capital improvements to maintain
facilities (1,739,000) (582,000) - - - -
----------- ----------- --------- --------- --------- ---------
Funds available for distributions to
shareholders and repurchases of stock 8,977,000 5,258,000 546,000 413,000 950,000 571,000
Cash distributions to shareholders - - - (400,000) (815,000) (563,000)
----------- ----------- --------- --------- --------- ---------
Excess funds available for principal
payments, cash distributions to
shareholders and repurchase of stock $ 8,977,000 $ 5,258,000 $ 546,000 $ 13,000 $ 135,000 $ 8,000
=========== =========== ========= ========= ========= =========
</TABLE>
Funds from operations (FFO) is defined by AOPP as net income (loss),
computed in accordance with generally accepted accounting principles (GAAP),
before depreciation, amortization and extraordinary or non-recurring items. FFO
is presented because AOPP considers FFO to be a useful measure of the operating
performance of a REIT which, together with net income and cash flows, provides
investors with a basis to evaluate the operating and cash flow performances of a
REIT. FFO does not represent net income or cash flows from operations as
defined by GAAP. FFO does not take into consideration scheduled principal
payments on debt and capital improvements. Accordingly, FFO is not necessarily
a substitute for cash flow or net income as a measure of liquidity or operating
performance or ability to make acquisitions and capital improvements or ability
to pay distributions or debt principal payments. Also, FFO as computed and
disclosed by AOPP may not be comparable to FFO computed and disclosed by other
REITs.
Funds from operations for AOPP is computed as follows:
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 Nine Months Ended Years Ended December 31,
through through September --------------------------------
September March 30, 1996 1996 1995 1994
(unaudited) (unaudited) (unaudited)
-------------- ----------------- ------------------ --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
($ in thousands)
Net income $ 1,977 $ 682 $ 399 $ 303 $ 720 $ 757
Minority interest in income 4,982 1,813 -- -- -- --
Depreciation and amortization 2,590 820 -- -- -- --
-------- -------- ------ ----- ----- -----
Subtotal 9,549 3,315 399 303 720 757
FFO allocated to minority
interests (6,836) (2,408) -- -- -- --
-------- -------- ------ ----- ----- -----
Funds from operations
allocated to shareholders $ 2,713 $ 907 $ 399 $ 303 $ 720 $ 757
======== ======= ====== ===== ===== =====
</TABLE>
Distributions. AOPP will elect and intends to qualify as a REIT for
federal income tax purposes for its short taxable year ending at the time of the
merger. As a REIT, AOPP must meet, among other tests, sources of income, share
ownership and certain asset tests. In addition, AOPP is not taxed on that
portion of its taxable income which is distributed to its shareholders provided
that at least 95% of its taxable income is so distributed to its shareholders
prior to filing of its tax return. AOPP intends to meet its distribution
requirement by distributing the minimum amount required under the distribution
test. This amount is impacted by the level of tax depreciation allocated from
the Operating Partnership to AOPP. Although no distributions have been paid for
1997, AOPP will make all such required distributions prior to the filing of its
102
<PAGE>
tax return for its short taxable year ending at the time of the merger. PSP11
(after the merger) will adopt the distribution policy of AOPP.
SUBSEQUENT EVENTS
Acquisition of properties. In December 1997, AOPP issued 4,482,852 shares
of AOPP common stock ($118,655,000) to a subsidiary of a state pension plan, and
the subsidiary of the state pension plan through merger and contribution,
transferred to AOPP six commercial facilities located in California and
$1,000,000 in cash. AOPP incurred approximately $3,300,000 in transaction
costs.
Also in December 1997, AOPP purchased a property from a third party for a
purchase price of $3,875,000, consisting of $3,575,000 in cash and 11,111 units
in the Operating Partnership having a value of $300,000.
In January 1998, AOPP purchased a property from a third party for a
purchase price of $22,643,000 consisting of $22,450,000 in cash and 7,143 units
in the Operating Partnership having a value of $193,000.
Proposed stock issuances to institutional investors. AOPP has entered into
an agreement with a group of institutional investors under which AOPP would
issue up to 5,740,741 shares of AOPP common stock at $27 per share in cash (an
aggregate of up to $155,000,000). There can be no assurance that the
transaction between AOPP and the institutional investors will be completed.
Proposed acquisition of properties. AOPP has entered into contracts to
acquire three commercial facilities from third parties for aggregate
consideration of $54,338,000 consisting of the assumption of mortgage debt with
an approximate outstanding balance of $26,900,000, cash of approximately
$19,900,000 and approximately 279,200 units in the Operating Partnership.
Line of credit with PSI. AOPP has entered into a line of credit agreement
with Public Storage, Inc. for $50,000,000 with an interest rate of the London
Interbank Offered Rate ("LIBOR") plus 1.25%. Under the terms of the agreement,
the note must be repaid with proceeds from any equity offerings or debt
financings. If amounts borrowed are not repaid by January 1998, AOPP must
establish a separate line of credit to repay the amounts borrowed.
Revolving line of credit. AOPP has received a commitment from a commercial
bank whereby the commercial bank has agreed to provide AOPP with a $70 million
unsecured revolving credit facility. The credit facility is expected to be
available in January 1998. Under the facility, at the option of AOPP, the rate
of interest charged is equal to (i) the prime rate or (ii) a rate ranging from
LIBOR plus 0.80% to LIBOR plus 1.30% depending on AOPP's credit rating. In
addition, AOPP pays an annual fee of 0.125% to 0.25% of its average unused
balance of its credit facility; such fee is dependent upon the amount of credit
facility unused.
Under covenants of the credit facility, AOPP is required to (i) maintain a
balance sheet leverage ratio of less than 0.50 to 1.00, (ii) maintain a ratio of
secured debt to gross asset value of less than 0.30 to 1.00, (iii) maintain an
interest coverage ratio of not less than 2.25 times and (iv) maintain a minimum
shareholders' value (as defined). In addition, AOPP will be restricted in the
level of distributions it may pay, the type of investments it may make and is
limited in its ability to incur additional borrowings. (AOPP is required to
maintain unencumbered assets with an aggregate value (as defined) equal to or
greater than two times its unsecured recourse debt.)
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax considerations
of the merger and the cash elections that are reasonably expected to be material
to the PSP11 and AOPP shareholders who are U.S. persons for federal income tax
purposes. The following description is for general information only, is not
exhaustive of all possible tax considerations, and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not give
a detailed discussion of any state, local or foreign tax considerations. In
addition, the discussion is intended to address only those federal income tax
considerations that are generally applicable for all U.S. shareholders of PSP11
or AOPP (as applicable). It does not discuss all aspects of federal income
taxation that might be relevant to a specific shareholder in light of its
particular investment or tax circumstances. The description does not purport to
deal with aspects of taxation that may be relevant to shareholders subject to
special treatment under the federal income tax laws, including, without
limitation, insurance companies, financial institutions, non-U.S. shareholders,
broker-dealers or tax-exempt organizations.
This discussion is based on certain factual assumptions related to the
ownership and operation of AOPP and PSP11 and certain representations made by
AOPP and PSP11 and certain shareholders of AOPP, as well as on the Code,
current, temporary and proposed Treasury Regulations, the legislative history of
the Code, current administrative interpretations and practices of the Internal
Revenue Service ("IRS") (including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS except with respect to
a taxpayer that receives such a ruling), and court decisions, all as of the date
of this proxy statement. No assurance can be given that the factual assumptions
underlying this discussion will be accurate, or that there will not be a change
in the future in the circumstances of AOPP or PSP11 that would affect this
discussion, or that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change the current
law or adversely affect existing interpretations of current law. Changes in the
law or its interpretation could apply retroactively. AOPP and PSP11 have not
requested, and do not plan to request, any rulings from the IRS concerning the
tax treatment of the merger, the exchange or the cash elections. Thus, no
assurance can be provided that the statements in this proxy statement (which do
not bind the IRS or the courts) will not be challenged by the IRS or will be
sustained by a court 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 PSP11 OR AOPP
SHAREHOLDERS, PSP11 AND AOPP SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL, AND FOREIGN TAX LAWS.
THE MERGER
The merger of AOPP with and into PSP11 is intended to be a "reorganization"
for federal income tax purposes, and accordingly (i) no gain or loss will be
recognized by AOPP or PSP11 in connection with the merger, (ii) no gain or loss
will be recognized by PSP11 shareholders who retain their PSP11 Common Stock in
the merger and do not receive any cash and (iii) no gain or loss will be
recognized by AOPP shareholders who receive solely PSP11 Common Stock in
exchange for AOPP Common Stock in connection with the merger (but all AOPP
shareholders will recognize ordinary income in the amount of any distributions
made to them to satisfy AOPP's REIT qualification distribution requirements,
see, "-Reorganization Consequences to AOPP shareholders - REIT Distribution
Requirements"). Hogan & Hartson L.L.P., counsel to PSP11, has rendered an
opinion to the effect that the merger of AOPP with and into PSP11 will
constitute a reorganization under Section 368(a) of the Code, based on certain
factual assumptions and representations made by AOPP and PSP11 and certain AOPP
shareholders. Of particular importance are certain assumptions and
representations relating to the "continuity of interest" requirement discussed
below.
Continuity of Interest Assumption. To qualify as a reorganization, among
other requirements, the merger must satisfy a "continuity of interest" test,
under which the historic AOPP shareholders must continue to retain a meaningful
ownership interest in PSP11 after the merger. Generally, this test will be
considered satisfied if historic AOPP shareholders exchange at least 50% of the
AOPP Common Stock for PSP11 Common Stock in the merger, and the AOPP
shareholders do not at the time of the merger plan to dispose of that PSP11
Common Stock. Management of AOPP and PSP11 have represented that they are not
aware of any plan on the part of AOPP shareholders that would cause this test
not to be satisfied. Based upon this representation and similar representations
from certain shareholders of AOPP, Hogan & Hartson L.L.P. has assumed, for
purposes of its opinion, that the continuity of interest test will be satisfied.
104
<PAGE>
Reorganization Consequences to AOPP and PSP11. As a result of
reorganization treatment, AOPP and PSP11 will not recognize gain or loss in the
merger. PSP11 also will succeed to the assets, liabilities, and tax attributes
(including unsatisfied tax liabilities, if any) of AOPP. Accordingly, following
the merger, PSP11 will hold the properties of AOPP (principally, AOPP's interest
in the Operating Partnership) with a carryover tax basis, determined by
reference to the historic basis of the transferred assets in the hands of AOPP.
The tax basis will not be increased by any cash expended pursuant to cash
elections or to satisfy dissenters' rights, or by the amount of any gain
reportable by those PSP11 or AOPP shareholders who may be taxable as a result of
the merger or cash elections.
Reorganization Consequences to PSP11 Shareholders.
PSP11 Shareholders Who Do Not Receive Cash. No gain or loss will be
-------------------------------------------
recognized by PSP11 shareholders who simply retain their PSP11 Common Stock and
do not receive any cash as a result of the merger or as a result of a cash
election. Such a PSP11 shareholder's tax basis and holding period for the
retained PSP11 Common Stock will not change.
PSP11 Shareholders Receiving Cash Pursuant to the Exercise of Dissenters'
-------------------------------------------------------------------------
Rights. A PSP11 shareholder who exchanges PSP11 Common Stock for cash pursuant
- -------
to the exercise of dissenters' rights generally will recognize capital gain or
loss for federal income tax purposes measured by the difference between the
PSP11 shareholder's adjusted basis in the surrendered PSP11 Common Stock and the
amount of cash received. Although it is unlikely in the context of the merger,
a PSP11 shareholder may be subject to dividend treatment if the payment is
either "essentially equivalent to a dividend" within the meaning of Section 302
of the Code or has the effect of a distribution of a dividend within the meaning
of Section 356(a)(2) of the Code. The receipt of cash pursuant to the exercise
of dissenters' rights generally will not be treated as a dividend if, following
the merger, the shareholder no longer owns any shares of PSP11 (actually or
constructively within the meaning of Section 318 of the Code).
Reorganization Consequences to AOPP Shareholders.
AOPP Shareholders Exchanging AOPP Common Stock Solely for PSP11 Common
----------------------------------------------------------------------
Stock. As a result of reorganization treatment, (i) no gain or loss will be
- ------
recognized by AOPP shareholders who exchange their AOPP Common Stock solely for
PSP11 Common Stock pursuant to the merger by reason of that exchange (but see
"Required REIT Distributions" below), (ii) such an AOPP shareholder's aggregate
tax basis the PSP11 Common Stock received will be the same as the aggregate tax
basis of the shares of AOPP Common Stock surrendered and (iii) provided such
AOPP Common Stock is held as a capital asset at the effective time of the
merger, the holding period of the PSP11 Common Stock will include the holding
period of the surrendered AOPP Common Stock. This discussion does not address
the impact, if any, that the merger might have on the tax treatment of prior
transactions undertaken by AOPP or the AOPP shareholders, including, but not
limited to, the transaction pursuant to which an AOPP shareholder received his
or her AOPP Common Stock.
AOPP Shareholders Receiving Only Cash. An AOPP shareholder who exchanges
--------------------------------------
AOPP Common Stock only for cash (whether pursuant to and subject to the
conditions of the cash election, or as the result of the exercise of applicable
dissenter's rights (if any)) will be taxed on the difference between such AOPP
shareholder's adjusted basis in his or her AOPP Common Stock and the amount of
the cash received.
AOPP Shareholders Receiving Cash and PSP11 Common Stock. AOPP shareholders
--------------------------------------------------------
are not expected to make a cash election. As a result of reorganization
treatment, however, if a cash election were made (i) an AOPP shareholder who,
pursuant to the merger and subject to the conditions of the cash election,
exchanges AOPP Common Stock for a combination of PSP11 Common Stock and cash
will not recognize any loss realized on such exchange and (ii) such AOPP
shareholder will recognize gain by reason of that exchange only to the extent of
the lesser of the amount of cash received or the excess of the fair market value
of the PSP11 Common Stock and the cash received over such AOPP shareholder's tax
basis in the AOPP Common Stock surrendered.
Required REIT Distributions. AOPP must distribute to its shareholders,
----------------------------
prior to the effective time of the merger, an amount of cash necessary for AOPP
to satisfy the REIT distribution requirements under Section 857(a)(1) of the
Code for AOPP's short taxable year ending at the effective time of the merger.
Any such distributions by AOPP are referred to herein as "Pre-Merger
Distributions." Except as provided below with respect to any Pre-Merger
Distributions that may be designated as capital gain dividends, any Pre-Merger
Distributions paid to AOPP's taxable U.S. shareholders out of AOPP's current or
accumulated earnings and profits would be taken into account by such U.S.
shareholders as ordinary income and
105
<PAGE>
would not be eligible for the dividends received deduction generally available
for corporations. Any Pre-Merger Distributions in excess of current and
accumulated earnings and profits of AOPP would not be taxable to the shareholder
to the extent that such distribution does not exceed the adjusted basis of the
shareholder's shares with respect to which the distribution is made, but rather
would reduce the adjusted basis of such shares. To the extent that any Pre-
Merger Distribution in excess of earnings and profits exceeds the adjusted basis
of the shareholder's shares, such distribution would be included in the
shareholder's income as capital gain (for noncorporate shareholders, such
capital gain will be long-term capital gain if the shares have been held for
more than 18 months, mid-term capital gain if the shares have been held for more
than one year, but not more than 18 months, or short-term capital gain if the
shares have been held for one year or less; for corporate shareholders, such
capital gain will be long-term capital gain if the shares have been held for
more than one year or short-term capital gain if the shares have been held for
one year or less) assuming the shareholder holds the shares as a capital asset
at the time of the merger. Any Pre-Merger Distributions designated as capital
gain dividends will be taxed as capital gain (to the extent they do not exceed
the payor's actual net capital gain for the taxable year), as described in
greater detail below, provided that that corporate shareholders may be required
to treat up to 20% of certain capital gain distributions as ordinary income. For
an explanation of the treatment of capital gains distributions generally, see "
- -Taxation of U.S. shareholders Holding PSP11 Common Stock - Distributions by
PSP11."
Failure to Qualify for Reorganization Treatment. In the event that the
merger did not qualify as a reorganization, the merger likely would be treated
as a taxable sale of AOPP's assets to PSP11 for PSP11 Common Stock, with AOPP
then treated as distributing that stock to its shareholders in a contemporaneous
liquidation. PSP11 would not directly recognize gain or loss as result of the
failure of the merger to qualify as a reorganization. PSP11, as the successor to
AOPP, however, would be liable for all taxes imposed on AOPP as a result of the
merger being a taxable transaction. PSP11 also would receive a basis in the
properties acquired from AOPP equal to the fair market value of the stock paid
for the properties. The AOPP shareholders would recognize income or loss equal
to the difference between the tax basis of their AOPP Common Stock and the sum
of the fair market value of the PSP11 Common Stock and the cash received in
exchange for their AOPP Common Stock. The AOPP shareholders would have a tax
basis in their PSP11 Common Stock equal to the fair market value of the shares
at the time of the merger, and their holding period for their PSP11 Common Stock
would not include the period during which their shares of AOPP Common Stock were
held.
PSP11 CASH ELECTION
If a PSP11 shareholder makes a cash election, the receipt of cash in
exchange for all or part of that shareholder's PSP11 Common Stock generally will
be treated as a redemption for federal income tax purposes. The treatment
accorded to any redemption by PSP11 (as distinguished from a sale, exchange or
other disposition by the PSP11 shareholder) of PSP11 Common Stock can only be
determined on the basis of particular facts as to each shareholder of PSP11
Common Stock at the time of the redemption. In general, a shareholder will
recognize capital gain or loss measured by the difference between the amount
received by the shareholder upon the redemption and such shareholder's adjusted
basis in the PSP11 Common Stock redeemed (provided that the PSP11 Common Stock
is held as a capital asset by such shareholder) if such redemption (i) results
in a "complete termination" of the shareholder's interest in all classes of
stock of PSP11 under Section 302(b)(3) of the Code, (ii) is "substantially
disproportionate" with respect to the shareholder's interest in the Company
under Section 302(b)(2) of the Code, or (iii) is "not essentially equivalent to
a dividend" with respect to the shareholder under Section 302(b)(1) of the Code.
In applying these tests, there must be taken into account any ownership of PSP11
Common Stock (including stock purchase rights and options to acquire PSP11
Common Stock), such shareholder's ownership of any other class or series of
PSP11 stock and any ownership of PSP11 stock that is attributed to such
shareholder by reason of the constructive ownership rules set forth in Sections
318 and 302(c) of the Code.
A "substantially disproportionate" reduction in the interest of a
shareholder of PSP11 Common Stock will have occurred if, as a result of the
redemption, (1) the shareholder's ownership of all the outstanding voting stock
of PSP11 is reduced immediately after the redemption to less than 80% of the
shareholder's percentage interest in such stock immediately before the
redemption; (2) the shareholder's percentage ownership of the PSP11 Common Stock
after and before the redemption meets the same 80% requirement; and (3) the
shareholder owns, immediately after the redemption, less than 50% of the total
combined voting power of all classes of stock entitled to vote. Based upon
current law, it is likely that a redemption of PSP11 Common Stock will be
considered "not essentially equivalent to a dividend" as to a particular
shareholder if such shareholder does not own any other stock of PSP11 (either
actually or constructively) and the redemption causes a significant reduction in
such shareholder's interest in PSP11. However, whether a cash election is "not
essentially equivalent to a dividend" depends upon all of the facts and
circumstances applicable to the PSP11 Common Stock shareholder at the time a
cash election is made.
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<PAGE>
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from a cash election will be treated
as a distribution with respect to the PSP11 Common Stock which may be taxable as
a dividend. If the redemption is taxed as a dividend, the PSP11 shareholder's
adjusted basis in the PSP11 Common Stock surrendered in a cash election will be
transferred to any other stock of such shareholder in PSP11. If the shareholder
owns no other stock in PSP11, under certain circumstances, such basis may be
transferred to a related party, or it may be lost.
THE EXCHANGE
The exchange of properties between PSP11 and PSI has been structured in a
manner that is intended by the parties to qualify as a tax-deferred like-kind
exchange for federal income tax purposes. In this regard, each party to the
exchange has agreed not to dispose of the acquired properties for at least two
years. Any sale of an exchanged property during such two-year period would be
treated as a taxable sale of such property. In the exchange, the gain that
otherwise would be reported upon the sale of those properties will be deferred,
and the relatively low tax basis of PSP11 in the properties it relinquishes will
be carried over into the properties it acquires: the PSI Exchange Properties.
In addition, the PSI Exchange Properties will be held directly by PSP11 rather
than the Operating Partnership. If the PSI Exchange Properties were transferred
to the Operating Partnership, the IRS's apparent view (based on published
administrative rulings) would be that gain would be recognized, although the one
court that has considered this issue reached a contrary result. If the exchange
failed to qualify as a tax-deferred like-kind exchange, the exchange would be
treated as a taxable sale of the properties by PSP11.
EFFECT OF THE MERGER ON THE FEDERAL INCOME TAX
TREATMENT OF PSP11 AS A REIT
The following discussion summarizes the impact of the merger and the
acquisition of the assets of AOPP, including AOPP's interest in the Operating
Partnership, on PSP11's qualification as a REIT. PSP11 elected to be taxed as a
REIT beginning with its initial fiscal year ending December 31, 1990. That
election will continue in effect until it is revoked or terminated. The most
important consequence to PSP11 of being treated as a REIT for federal income tax
purposes is that this enables PSP11 to deduct dividend distributions to its
shareholders, thus effectively eliminating the "double taxation" (at the
corporate and shareholder levels) that typically results when a regular
corporation earns income and distributes that income to shareholders in the form
of dividends.
PSP11 believes that it has qualified during each of its past fiscal years,
and currently qualifies, as a REIT, and PSP11 expects that following the merger
it will continue to be taxed as a REIT for federal income tax purposes. While
PSP11 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 PSP11, no assurance can be given that PSP11 will so qualify for
any particular year.
Hogan & Hartson L.L.P., counsel to PSP11, has rendered an opinion to PSP11
to the effect that PSP11 is organized in conformity with the requirements for
qualification as a REIT and its proposed method of operation following the
merger will enable PSP11 to continue to meet the requirements for qualification
as a REIT. Hogan & Hartson L.L.P.'s opinion is based on certain extensive and
detailed representations as to factual and legal matters made by AOPP and PSP11
that relate to the qualification of both PSP11 and AOPP as REITs, including
specific representations regarding satisfaction of the stock ownership and gross
income requirements applicable to REITs.
Adverse Consequences If AOPP Fails to Qualify as a REIT. AOPP has
represented that it intends to make an election to qualify for taxation as a
REIT effective for 1997. PSP11 and AOPP believe that AOPP's election to qualify
for taxation as a REIT will be valid and that AOPP is organized and will have
operated in 1997 and until the time of the merger in conformity with the
requirements for taxation as a REIT. If, for any reason, the IRS were
subsequently to determine that AOPP failed to meet the requirements for REIT
status, AOPP could lose its REIT qualification, causing PSP11 to lose its REIT
qualification for the year of the merger and for subsequent years. Among other
requirements, a REIT is not permitted to have at the end of any taxable year any
undistributed earnings and profits that are attributable to a "C corporation"
taxable year. AOPP was taxable as a "C corporation" prior to 1997, and believes
that at the end of 1996 it did not have any undistributed "C corporation
earnings and profits." However, neither AOPP nor PSP11 has sought an opinion of
counsel or outside accountants to the effect that there are no "C corporation
earnings and profits" at that time or as a result of the merger.
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Amendments to Articles of Incorporation. Following the initial taxable
year of a REIT, its capital stock must be held by 100 or more owners. After the
merger, the stock of PSP11 will continue to be widely-held, satisfying this
requirement. In addition, not more than 50% of the value of the capital stock
of a REIT generally may be held by five or fewer "individuals" (determined after
giving effect to various ownership attribution rules). Prior to the transaction
with the subsidiary of a state pension fund and the merger, approximately 98% of
the value of the outstanding capital stock of AOPP was held by PSI. In turn,
approximately 30% of the value of the outstanding capital stock of PSI is held
by Mr. Hughes and his family (who accordingly held an approximately 30% indirect
interest in the outstanding capital stock of AOPP, and are treated as a single
individual owner for these purposes). Following the transaction with the
subsidiary of a state pension fund and the merger, the direct and indirect
interest in PSP11 held by the Hughes family is expected to decrease to
approximately 11% (8% upon the full issuance of shares to institutional
investors in pending transactions). The direct and indirect interest of the
Hughes family may increase if partnership interests owned by PSI and its
affiliates are exchanged for PSP11 shares.
In order to assist PSP11 in meeting the REIT ownership restrictions, in
light of the Hughes family's indirect ownership interest, the PSP11 articles of
incorporation and bylaws are being amended to prohibit the actual or
constructive ownership by holders other than the Hughes family of more than 2%
of the outstanding shares of all common stock of PSP11 or more than 9.9% of the
outstanding shares of each class or series of shares of preferred stock of
PSP11. The restrictions provide that if, at any time, for any reason, those
ownership limitations are violated or more than 50% in value of PSP11'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 "Proposal Four -
Amendments to PSP11's Articles of Incorporation and Bylaws - Ownership
Limitation."
The REIT protective provisions are modeled after certain arrangements that
the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as 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 PSP11 (a private letter ruling is
legally binding only with respect to the taxpayer to whom it was issued and
PSP11 will not seek a private ruling on this or any other issue) or contend that
PSP11 failed to enforce these various arrangements. Moreover, the PSP11
limitations will not apply to the ownership of shares at the time of the merger,
or to shares of stock of PSP11 deemed to be owned by a person as a result of
such person's ownership of shares of PSI (however, such deemed ownership will be
taken into account in determining whether a subsequent acquisition or transfer
of shares of PSP11 (but not PSI) violates the limitations), exceptions not
contained in the private letter rulings previously issued by the IRS.
Accordingly, there can be no assurance that these arrangements necessarily will
preserve PSP11's REIT status. PSP11 believes, however, that following the
merger it will have issued and outstanding sufficient shares with sufficient
diversity of ownership to allow it to satisfy the REIT ownership requirements.
In addition, provisions in the Taxpayer Relief Act of 1997 provide that with
respect to PSP11 in 1998 and subsequent years, provided that PSP11 complies with
certain reporting requirements and does not know (or exercising reasonable due
diligence, would not have known) of any violation of the requirement that no
five or fewer individuals may own more than 50% in value of the stock, PSP11
will be treated as having satisfied that requirement.
Tax on Disposition of C Corporation Assets. Prior to 1997, AOPP was
taxable as a regular C corporation. In making its election to be taxed as a
REIT for 1997, AOPP has represented that it will elect to be subject to the
"built-in gain" rules of IRS Notice 88-19. Accordingly, PSP11 as the successor
to AOPP may be subject to taxation at the highest regular corporate rate
pursuant to IRS regulations that have not yet been promulgated if PSP11 were to
dispose of certain assets held by AOPP at the beginning of the Recognition
Period. The tax would apply to any built-in gain on those assets (i.e., the
excess of (a) the fair market value of such asset over (b) AOPP's adjusted basis
in such asset, both determined as of the beginning of the Recognition Period)
that PSP11 recognizes during the Recognition Period. For these purposes, the
"Recognition Period" shall mean the ten-year period beginning on the effective
date of AOPP's REIT election. PSP11 currently does not intend to dispose of any
of assets potentially subject to that tax during that period, but there can be
no assurance that one or more such dispositions will not occur.
GENERAL TAX TREATMENT OF PSP11 AS A REIT
The following is a very brief overview of certain of the technical
requirements that PSP11 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 thereof.
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The capital stock must be widely-held and not more than 50% of the value of
the capital stock may be held by five or fewer individuals ("5/50 Test")
(determined after giving effect to various ownership attribution rules).
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), for PSP11's
taxable years commencing on or after January 1, 1998, if PSP11 complies with
regulatory rules pursuant to which it is required to send annual letters to
holders of PSP11 Common Stock requesting information regarding the actual
ownership of the PSP11 Common Stock (see " - Taxation of U.S. Shareholders
Holding PSP11 Common Stock - Ownership Records"), and PSP11 does not know, or
exercising reasonable diligence would not have known, whether it failed to meet
the 5/50 Test, PSP11 will be treated as having met the 5/50 Test.
PSP11's gross income must meet two income tests: (a) at least 75% of the
gross income must be derived from specified real estate sources; and (b) at
least 95% of the gross income must be from the real estate sources includable in
the 75% income test, and/or from dividends, interest, or gains from the sale or
disposition of stock or securities not held for sale in the ordinary course of
business.
Rents received by PSP11 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
or sales. PSP11 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 PSP11, or an
owner of 10% or more of PSP11, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). PSP11 does not anticipate that it will
receive income from Related Party Tenants. Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." PSP11 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,"
PSP11 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 PSP11 derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by PSP11 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 PSP11
believes may not be provided by PSP11 directly without jeopardizing the
qualification of rent as "rents from real property" will be performed by
"independent contractors."
Pursuant to the 1997 Act, for PSP11's taxable years commencing on or after
January 1, 1998, rents received generally will qualify as rents from real
property even if PSP11 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 (or, if services are available only to certain tenants, possibly with
respect to such tenants) cannot exceed one percent of all amounts received,
directly or indirectly, by PSP11 with respect to such property (or, if services
are available only to certain tenants, possibly with respect to such tenants).
In computing any such amounts, the amount that PSP11 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 PSP11 of providing those
services.
Generally, 75% by value of PSP11's investments must be in real estate,
mortgages secured by real estate, cash, or government securities (including its
allocable share of real estate assets held by any partnerships in which PSP11
owns an interest). Not more than 25% of PSP11'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 PSP11 may not exceed 5% of the value of PSP11's total assets, and PSP11 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 PSP11 acquires securities of
an issuer. PSP11 believes that it satisfies these tests.
PSP11 must distribute to its shareholders in each taxable year an amount at
least equal to 95% of PSP11's "REIT Taxable Income" (which is generally
equivalent to net taxable ordinary income). Under certain circumstances, PSP11
can rectify a failure to meet the 95% distribution test by paying dividends
after the close of a particular taxable year.
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets of any partnership in
which it holds a partnership interest, such as the Operating Partnership.
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Federal Income Taxes Payable by REITs. If PSP11 qualifies for taxation as
a REIT, it generally will not be subject to federal corporate income taxes on
net income that it distributes currently to shareholders. However, PSP11 will
be subject to federal income tax in the following circumstances. First, PSP11
will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, PSP11 may be subject to the "alternative minimum tax" on its
items of tax preference. Third, if PSP11 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) which is held primarily for sale to customers in the ordinary
course of business or (ii) other nonqualifying income from foreclosure property,
it will be subject to tax at the highest corporate rate on such income. Fourth,
if PSP11 has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property (other than foreclosure
property) held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if PSP11 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 PSP11
fails the 75% or 95% gross income test.
Failure of PSP11 to Qualify as a REIT. For any taxable year that PSP11
fails to qualify as a REIT, PSP11 would be taxed at the usual corporate rates on
all of its taxable income, whether or not it makes any distributions to its
shareholders. Those taxes would reduce the amount of cash available to PSP11
for distribution to its shareholders. As a result, failure of PSP11 to qualify
during any taxable year as a REIT could have a material adverse effect upon
PSP11 and its shareholders, unless certain relief provisions are available.
Unless certain relief provisions apply, PSP11's election to be treated as a
REIT will terminate automatically if PSP11 fails to meet the qualification
requirements described above and PSP11 will not be eligible to elect REIT status
again until the fifth taxable year that begins after the first year for which
PSP11's election was terminated (or revoked). If PSP11 loses its REIT status,
but later qualifies and elects to be taxed as a REIT again, PSP11 may face
significant adverse tax consequences.
TAXATION OF U.S. SHAREHOLDERS HOLDING PSP11 COMMON STOCK
Distributions by PSP11. As used herein, the term "U.S. shareholder" means
a holder of shares of PSP11 Common Stock who (for United States federal income
tax purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) is an
estate the income of which is subject to United States federal income taxation
regardless of its source or (iv) is a trust the administration of which is
subject to the primary supervision of a United States court and which has one or
more Untied States persons who have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to be
treated as United States persons, shall also be considered U.S. shareholders.
As long as PSP11 qualifies as a REIT, distributions made to PSP11'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 PSP11's
earnings and profits. Such distributions will not be eligible for the dividends
received deductions in the case of shareholders that are corporations.
Dividends declared during the last quarter of a calendar year and actually paid
during January of the immediately following calendar year generally are treated
as if received by the shareholders on December 31 of the calendar year during
which they were declared.
Distributions designated by PSP11 as capital gain dividends generally will
be taxed as long-term capital gain to shareholders (to the extent that the
distributions do not exceed PSP11's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held its stock.
Corporate shareholders however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income. As described below in "- Recent
Legislation," the 1997 Act changed significantly the taxation of capital gains
by taxpayers who are individuals, estates, or trusts. On November 10, 1997, the
IRS issued IRS Notice 97-64, which provides generally that PSP11 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
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marginal tax rate of at least 28%. The Notice further provides that designations
made by the REIT will only be effective to the extent that they comply with
Revenue Ruling 89-81, which requires that distributions made to different
classes of shares be composed proportionately of dividends of a particular type.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of PSP11. Instead, such losses would be
carried over by PSP11 for potential offset against future income (subject to
certain limitations). Distributions made by PSP11 and gain arising from the
sale or exchange by a shareholder of PSP11 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 PSP11.
PSP11 may distribute cash in excess of its net taxable income. Upon
distribution of such cash by PSP11 to shareholders (other than as a capital gain
dividend), if all of PSP11's current and accumulated earnings and profits have
been distributed, the excess cash will be deemed to be a non-taxable return of
capital to each shareholder to the extent of the adjusted tax basis of the
shareholder's capital stock. Distributions in excess of the adjusted tax basis
will be treated as gain from the sale or exchange of the capital stock. A
shareholder who has received a distribution in excess of current and accumulated
earnings and profits of PSP11 may, upon the sale of the capital stock, realize a
higher taxable gain or a smaller loss because the basis of PSP11 Common Stock as
reduced will be used for purposes of computing the amount of the gain or loss.
In any year in which PSP11 does not qualify as a REIT, distributions by
PSP11 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 PSP11's tax preference items.
Sales of Common Stock. In general, a shareholder will realize gain or loss
on the disposition of shares of PSP11 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 PSP11 Common Stock. With respect to dispositions occurring after July
28, 1997, in the case of a shareholder who is an individual or an estate or
trust, such gain or loss will be mid-term capital gain or loss if such shares
have been held for more than one year but not more than 18 months and long-term
capital gain or loss if such shares have been held for more than 18 months. In
the case of a shareholder that is a corporation, such gain or loss will be long-
term capital gain or loss if such shares have been held for more than one year.
Loss upon a sale or exchange of shares of PSP11 Common Stock by a shareholder
who has held such shares of PSP11 Common Stock for six months or less (after
applying certain holding period rules) will be treated as either a long-term or
mid-term capital loss to the extent of distributions from PSP11 required to be
treated by such shareholder as long-term or mid-term capital gain.
Ownership Records. To monitor PSP11's compliance with the REIT share
ownership requirements, PSP11 is required to demand annual written statements
from the record holders of designated percentages of its capital stock
disclosing the actual owners of the capital stock and to maintain permanent
records showing the information it has received as to the actual ownership of
such capital stock and a list of those persons failing or refusing to comply
with such demand.
BACKUP WITHHOLDING
If a shareholder is subject to "backup withholding," PSP11 will be required
to deduct and withhold from any dividends payable to the shareholder a tax of
31%. These rules may apply when a shareholder fails to supply a correct
taxpayer identification number, or when the IRS notifies PSP11 that the
shareholder is subject to the rules or has furnished an incorrect taxpayer
identification number.
TAXATION OF TAX EXEMPT INVESTORS
In general, a tax exempt entity that is a shareholder is not subject to tax
on distributions from PSP11 or gain realized on the sale of capital stock,
provided that the tax exempt entity has not financed the acquisition of its
capital stock with "acquisition indebtedness" within the meaning of the Code.
Special rules apply to organizations exempt under Code Sections 501(c)(7),
(c)(9), (c)(17) and (c)(20), and such prospective investors are urged to consult
their own tax advisors concerning the applicable "set aside" and reserve
requirements. In addition, certain distributions by a REIT to a tax-exempt
employee's
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pension trust that owns more than 10% of the REIT will, in certain
circumstances, be treated as "unrelated business taxable income."
TAXATION OF NON-U.S. SHAREHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of PSP11 Common Stock
by persons that are not U.S. shareholders ("Non-U.S. shareholders"). In
general, Non-U.S. shareholders may be subject to special tax withholding
requirements on distributions from PSP11 and with respect to their sale or other
disposition of PSP11 Common Stock, except to the extent reduced or eliminated by
an income tax treaty between the United States and the Non-U.S. shareholder's
country. A Non-U.S. shareholder who is a shareholder of record and is eligible
for reduction or elimination of withholding must file an appropriate form with
PSP11 in order to claim such treatment. Non-U.S. shareholders should consult
their own tax advisors concerning the federal income tax consequences to them of
an acquisition of shares of PSP11 Common Stock, including the federal income tax
treatment of dispositions of interests in, and the receipt of distributions
from, PSP11.
RECENT LEGISLATION
As described above, the 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals, trusts
and estates.
Capital Gain Rates. Under the 1997 Act, individuals, trusts and estates
that hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than one year
but not more than 18 months may be taxed at a maximum mid-term capital gain rate
of 28% on the sale or exchange of those investments. The 1997 Act also provides
a maximum rate of 25% for "unrecaptured section 1250 gain" for individuals,
trusts and estates, special rules for "qualified 5-year gain," and other changes
to prior law. The 1997 Act allows the IRS to prescribe regulations on how the
1997 Act's new capital gain rates will apply to sales of capital assets by
"pass-through entities," including REITs and to sales of interests in "pass-
through entities." For a discussion of new rules under the 1997 Act that apply
to the taxation of distributions by PSP11 to its shareholders that are
designated by PSP11 as "capital gain dividends," see "Taxation of Holders of
PSP11 Common Stock - Distributions by PSP11" above. Shareholders are urged to
consult with their tax advisors with respect to the new rules contained in the
1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that PSP11 will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which PSP11 can meet the REIT qualification
requirements. These provisions are effective for PSP11's taxable years
commencing on or after January 1, 1998.
TAX ASPECTS OF PSP11'S OWNERSHIP OF INTERESTS IN THE OPERATING PARTNERSHIP
General. Substantially all of PSP11's investments (other than the PSI
Exchange Properties acquired) will be held indirectly through the Operating
Partnership. In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax on those items, without regard
to whether the partners receive a distribution from the partnership. In the
case of a REIT which is a partner in a partnership, Treasury Regulations provide
that for purposes of applying the REIT gross income and gross asset tests, the
REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to that share, based on its "capital interest" in the partnership.
In addition, the character of the gross income and assets of the partnership
shall retain the same character in the hands of the REIT for purposes of Section
856 of the Code which includes the gross income and asset tests described below.
PSP11 will have direct control of the Operating Partnership and intends to
operate it consistent with the requirements for qualification as a REIT. PSP11
will include in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and will take into account
its distributive share of partnership items in the computation of its REIT
taxable income. Moreover, for purposes of the REIT asset tests, PSP11 will
include its proportionate share of assets held through the Operating
Partnership.
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Entity Classification. If the Operating Partnership were treated as an
association, the entity would be taxable as a corporation and therefore would be
subject to an entity level tax on its income. In such a situation, the
character of PSP11's assets and items of gross income would change and would
preclude PSP11 from qualifying as a REIT. The same result could occur if any
subsidiary partnership failed to qualify for treatment as a partnership.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax purposes.
These four characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of interests.
Under final Treasury Regulations that became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability company will be taxed as a partnership for federal income
tax purposes unless it specifically elects otherwise. The Treasury Regulations
provide that the IRS will not challenge the classification of an existing
partnership or limited liability company for tax periods prior to January 1,
1997 so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the federal income
tax consequences of any changes in the entity's classification within the 60
months prior to January 1, 1997, and (3) neither the entity nor any member of
the entity had been notified in writing on or before May 8, 1996, that the
classification of the entity was under examination by the IRS.
Hogan & Hartson L.L.P. is of the opinion, based upon certain factual
assumptions and representations described in the opinion, that the Operating
Partnership will be treated as a partnership for federal income tax purposes
(and not as an association taxable as a corporation).
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, those allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the related Treasury Regulations. Generally,
those provisions require that partnership allocations reflect the economic
arrangement of the partners. The allocations of taxable income and loss
provided for in the Operating Partnership Agreement are intended to comply with
the requirements of Section 704(b) of the Code and the related Treasury
Regulations. If an allocation is not recognized for federal income tax
purposes, the item subject to the allocation will be reallocated in accordance
with the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to that item.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner so that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of the unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of the property at that time (a "Book-Tax Difference"). These allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated and
depreciated properties. Consequently, the Operating Partnership Agreement
requires that those allocations be made in a manner consistent with Section
704(c) of the Code.
In general, the partners of the Operating Partnership who contributed
appreciated assets will be allocated larger depreciation deductions than if they
had retained the contributed property, while those who contributed depreciated
assets will be allocated smaller depreciation deductions than if they had
retained the contributed property. In addition, on the disposition of any
contributed asset that has a Book-Tax Difference, the income or loss
attributable to the Book-Tax Difference generally will be allocated to the
contributing partner. These allocations will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the
hands of the Operating Partnership may cause PSP11 to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of the contributed assets in excess of the economic or book
income allocated to it as a result of that sale. Such an allocation might cause
PSP11 to recognize taxable income in excess of cash proceeds, which might
adversely affect PSP11's ability to comply with the
113
<PAGE>
REIT distribution requirements. See "- Effect of the Merger and Cash Elections
on the Federal Income Tax Treatment of PSP11 as a REIT."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including the "traditional method" or the election of certain methods that would
permit any distortions caused by a Book-Tax Difference to be entirely rectified
on an annual basis or with respect to a specific taxable transaction such as a
sale. The Operating Partnership and PSP11 will determine with respect to each
contribution to the Operating Partnership which method to use.
FEDERAL TAX LAW CHANGES
The anticipated income tax treatment described in this proxy statement may
be changed, perhaps retroactively, by legislative, administrative, or judicial
action at any time. Congress frequently considers changes to the tax laws, and
any such legislation may affect the treatment of real estate investments in
general, or REITs in particular.
STATE AND LOCAL TAXES
The tax treatment of AOPP, PSP11, and the PSP11 shareholders, in states
having taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of AOPP, PSP11, or the
PSP11 shareholders, is provided nor is any representation made as to the tax
status of AOPP or PSP11 in those states. All shareholders should consult their
own tax advisors as to the treatment of AOPP and PSP11 under the respective
state tax laws applicable to them.
LEGAL OPINIONS
David Goldberg, senior vice president and general counsel of PSI, will
deliver an opinion to the effect that the shares of PSP11 Common Stock to be
issued in the merger will be validly issued, fully paid and nonassessable. Mr.
Goldberg owns 81,299 shares of PSI Common Stock, 1,000 shares of PSI convertible
preferred stock and 600 shares of PSI Senior Preferred Stock and has options to
acquire an additional 157,500 shares of PSI Common Stock. Mr. Goldberg also
owns 200 shares of PSP11 Common Stock and 50.8 shares of AOPP common stock and
has options to acquire an additional 10,158.3 shares of AOPP common stock.
Hogan & Hartson L.L.P., Washington, D.C., has rendered an opinion to the effect
that the merger will constitute a reorganization under Section 368(a) of the
Code (based on certain factual assumptions and representations made by PSP11 and
AOPP, and certain shareholders of PSP11). Hogan & Hartson L.L.P. has performed
certain legal services on behalf of AOPP and PSI.
EXPERTS
The financial statements of PSP11 as of December 31, 1996 and 1995 and for
the three years in the period ended December 31, 1996 appearing herein and in
PSP11's Annual Report on Form 10-K have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report contained herein. The
consolidated financial statements of AOPP as of December 31, 1996 and 1995 and
for the three years in the period ended December 31, 1996 have been audited by
Ernst & Young LLP as set forth in their report contained herein. The combined
statements of revenues and certain operating expenses of the Acquired Properties
and of the PSI Exchange Properties for each of the three years in the period
ended December 31, 1996 and the combined statement of revenue and certain
operating expenses of the Largo Property, Gunston Property, Proposed Acquisition
Properties, Northpointe Property and Ammendale Property for the year ended
December 31, 1996 have also been audited by Ernst & Young LLP as set forth in
their reports contained herein. The combined statement of revenue and certain
operating expenses of the Baldon Properties for the year ended December 31, 1996
have been audited by Coopers & Lybrand L.L.P. as set forth in their report
contained herein. The combined statement of revenue and certain operating
expenses of the Acquiport Properties for the year ended December 31, 1996 have
been audited by KPMG Peat Marwick LLP as set forth in their report contained
herein. Such financial statements are included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
INDEPENDENT AUDITORS
PSP11's Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the accounts of PSP11 for the fiscal year ending December 31,
1997.
114
<PAGE>
It is anticipated that representatives of Ernst & Young LLP, which has
acted as the independent auditors of PSP11 and AOPP since their respective
organization, will be in attendance at the annual meeting with the opportunity
to make a statement if they desire to do so and to respond to any appropriate
inquiries of such shareholders or their representatives.
SHAREHOLDER PROPOSALS
Any proposal that a PSP11 shareholder wishes to submit for consideration
for inclusion in the proxy statement for the next annual meeting of shareholders
must be received by PSP11 no later than October 1, 1998.
115
<PAGE>
GLOSSARY
The following are definitions of certain terms used in this proxy
statement:
"AOPP." American Office Park Properties, Inc., a REIT organized as a
California corporation.
"Code." Internal Revenue Code of 1986, as amended.
"Commission." Securities and Exchange Commission.
"Exchange Act." Securities Exchange Act of 1934, as amended.
"FFO." Funds from operations.
"IRS." Internal Revenue Service.
"Jefferies." Jefferies & Company, Inc.
"Merged REITs." Public Storage Properties XVI, Inc., Public Storage
Properties XVII, Inc., Public Storage Properties XVIII, Inc. and Public Storage
Properties XIX, Inc., affiliated REITs that merged into PSI.
"Operating Partnership." American Office Park Properties, L.P., a
California limited partnership. AOPP is the general partner of the Operating
Partnership.
"Operating Partnership Agreement." The Partnership Agreement of the
Operating Partnership among AOPP, as general partner, and the limited partners
of the Operating Partnership.
"PSI." Public Storage, Inc., a REIT organized as a California corporation.
"PSI Exchange Properties." The 11 commercial properties being acquired by
PSP11 from PSI in exchange for 13 predominantly mini-warehouse properties.
"PSP11." Public Storage Properties XI, Inc., a REIT organized as a
California corporation.
"PSP11 Common Stock." Shares of Common Stock Series A, par value $.01 per
share, of PSP11.
"PSP11 Common Stock Series B and C." Shares of Common Stock Series B and
C, par value $.01 per share, of PSP11.
"PSP11 Partnership." Public Storage Properties XI, Ltd., a California
limited partnership, the predecessor to PSP11.
"Registration Statement." PSP11's registration statement on Form S-4
(together with all amendments and exhibits) filed with the Commission under the
Securities Act, of which this proxy statement and prospectus is a part.
"Securities Act." Securities Act of 1933, as amended.
"REIT." A real estate investment trust.
"TNG." The Nicholson Group, Ltd.
"Wilson." Charles R. Wilson & Associates, Inc.
116
<PAGE>
HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
References
----------
<S> <C>
PUBLIC STORAGE PROPERTIES XI, INC. - HISTORICAL:
Report of Independent Auditors F-1
Balance Sheets at December 31, 1996 and 1995 F-2
For the years ended December 31, 1996, 1995 and 1994:
Statements of Income F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-10
Condensed Balance Sheets at September 30, 1997 and December 31, 1996 F-11
Condensed Statements of Income for the nine months
ended September 30, 1997 and 1996 F-12
Condensed Statement of Shareholders' Equity for the
nine months ended September 30, 1997 F-13
Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 F-14
Notes to Condensed Financial Statements F-15
AMERICAN OFFICE PARK PROPERTIES, INC. - HISTORICAL:
Report of Independent Auditors F-16
Balance Sheets at December 31, 1996 and 1995 F-17
For each of the three years in the period ended December 31, 1996:
Statements of Income F-18
Statements of Shareholders' Equity F-19
Statements of Cash Flows F-20
Notes to Financial Statements F-21 - F-25
Condensed Balance Sheets at September 30, 1997 and December 31, 1996 F-26
Condensed Statements of Income for the period from
April 1, 1997 through September 30, 1997, the period
January 1, 1997 through March 31, 1997 and the nine
months ended September 30, 1996 F-27
Condensed Statement of Shareholders' Equity for the
nine months ended September 30, 1997 F-28
Condensed Statements of Cash Flows for the period from
April 1, 1997 through September 30, 1997, the period
January 1, 1997 through March 31, 1997 and the nine
months ended September 30, 1996 F-29
Notes to Condensed Financial Statements F-30 - F-36
</TABLE>
F(1)
<PAGE>
<TABLE>
<S> <C>
ACQUIRED PROPERTIES:
Report of Independent Auditors F-37
Combined Statements of Revenues and Certain Operating Expenses for
the years ended December 31, 1996, 1995 and 1994
and the nine months ended September 30, 1997 and 1996 F-38
Notes to Combined Statements of Revenues and Certain Operating Expenses F-39 - F-40
PSI EXCHANGE PROPERTIES:
Report of Independent Auditors F-41
Combined Statements of Revenues and Certain Operating Expenses for
the years ended December 31, 1996, 1995 and 1994
and the nine months ended September 30, 1997 and 1996 F-42
Notes to Combined Statements of Revenues and Certain Operating Expenses F-43 - F-44
BALDON PROPERTIES:
Report of Independent Accountants F-45
Combined Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996
and nine months ended September 30, 1997 F-46
Notes to Combined Statement of Revenues and
Certain Operating Expenses F-47 - F-48
LARGO PROPERTY:
Report of Independent Auditors F-49
Statements of Revenues and Certain Operating Expenses for
the year ended December 31, 1996 and nine months
ended September 30, 1997 F-50
Notes to Statements of Revenues and
Certain Operating Expenses F-51 - F-52
ACQUIPORT PROPERTIES:
Report of Independent Auditors F-53
Combined Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996 and
nine months ended September 30, 1997 F-54
Notes to Combined Statements of Revenues and
Certain Operating Expenses F-55 - F-56
GUNSTON PROPERTY:
Report of Independent Auditors F-57
Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996
and nine months ended September 30, 1997 F-58
Notes to Statements of Revenues and Certain
Operating Expenses F-59 - F-60
</TABLE>
F(2)
<PAGE>
<TABLE>
<S> <C>
PROPOSED ACQUISITION PROPERTIES:
Report of Independent Auditors F-61
Combined Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996
and nine months ended September 30, 1997 F-62
Notes to Combined Statements of Revenues and
Certain Operating Expenses F-63 - F-64
NORTHPOINTE PROPERTY:
Report of Independent Auditors F-65
Combined Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996
and nine months ended September 30, 1997 F-66
Notes to Combined Statements of Revenues and
Certain Operating Expenses F-67 - F-68
AMMENDALE PROPERTY:
Report of Independent Auditors F-69
Combined Statements of Revenues and Certain Operating
Expenses for the year ended December 31, 1996
and nine months ended September 30, 1997 F-70
Notes to Combined Statements of Revenues and
Certain Operating Expenses F-71 - F-72
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, ASSUMING MAXIMUM CASH ELECTIONS:
Pro Forma Consolidated Balance Sheet at September 30, 1997 PF-4
Notes to Pro Forma Consolidated Balance Sheet PF-5 - PF-10
Pro Forma Consolidated Statements of Income:
For the nine months ended September 30, 1997 PF-11
For the year ended December 31, 1996 PF-12
Notes to Pro Forma Consolidated Statements of Income PF-13 - PF-22
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, ASSUMING NO CASH ELECTIONS:
Pro Forma Consolidated Balance Sheet at September 30, 1997 PF-23
Notes to Pro Forma Consolidated Balance Sheet PF-24 - PF-27
Pro Forma Consolidated Statements of Income:
For the nine months ended September 30, 1997 PF-28
For the year ended December 31, 1996 PF-29
Notes to Pro Forma Consolidated Statements of Income PF-30 - PF-33
</TABLE>
F(3)
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
Public Storage Properties XI, Inc.
We have audited the accompanying balance sheets of Public Storage Properties XI,
Inc. as of December 31, 1996 and 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Storage Properties XI,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 18, 1997
Los Angeles, California
F-1
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,290,000 $ 746,000
Rent and other receivables 53,000 87,000
Prepaid expenses 142,000 268,000
Real estate facilities at cost:
Building, land improvements and
equipment 26,526,000 26,031,000
Land 12,118,000 12,118,000
------------ ------------
38,644,000 38,149,000
Less accumulated depreciation (12,000,000) (10,862,000)
------------ ------------
26,644,000 27,287,000
------------ ------------
Total assets $ 28,129,000 $ 28,388,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 633,000 $ 609,000
Dividends payable 681,000 694,000
Advance payments from renters 198,000 202,000
Shareholders' equity:
Series A common, $.01 par value,
2,828,929 shares authorized,
1,819,937 shares issued and
outstanding (1,856,337 shares
issued and outstanding in 1995) 18,000 19,000
Convertible Series B common, $.01 par
value, 184,453 shares authorized,
issued and outstanding 2,000 2,000
Convertible Series C common, $.01 par
value, 522,618 shares authorized,
issued and outstanding 5,000 5,000
Paid-in-capital 32,421,000 33,105,000
Cumulative net income 25,971,000 22,816,000
Cumulative distributions (31,800,000) (29,064,000)
------------ ------------
Total shareholders' equity 26,617,000 26,883,000
------------ ------------
Total liabilities and shareholders'
equity $ 28,129,000 $ 28,388,000
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income $7,220,000 $6,859,000 $6,651,000
Interest income 33,000 19,000 21,000
---------- ---------- ----------
7,253,000 6,878,000 6,672,000
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of operations 2,334,000 2,265,000 2,107,000
Management fees paid to affiliates 394,000 400,000 388,000
Depreciation 1,150,000 1,105,000 1,046,000
Administrative 217,000 205,000 208,000
Environmental cost - 106,000 -
Interest expense 3,000 1,000 -
---------- ---------- ----------
4,098,000 4,082,000 3,749,000
---------- ---------- ----------
NET INCOME $3,155,000 $2,796,000 $2,923,000
========== ========== ==========
Primary earnings per share-Series A $ 1.59 $ 1.37 $ 1.39
========== ========== ==========
Fully diluted earnings per share-Series A $ 1.24 $ 1.09 $ 1.11
========== ========== ==========
Dividends declared per share:
Series A $ 1.36 $ 1.36 $ 1.36
========== ========== ==========
Series B $ 1.36 $ 1.36 $ 1.36
========== ========== ==========
Weighted average Common shares
outstanding:
Primary- Series A 1,830,845 1,863,470 1,925,554
========== ========== ==========
Fully diluted- Series A 2,537,916 2,570,541 2,632,625
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Convertible Convertible
Series A Series B Series C Paid-in
Shares Amount Shares Amount Shares Amount capital
---------- -------- --------- ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 1,963,062 $20,000 184,453 $2,000 522,618 $5,000 $34,887,000
Net income - - - - - - -
Repurchase of shares (74,525) (1,000) - - - - (1,253,000)
Cash distributions declared:
$1.36 per share - Series A - - - - - - -
$1.36 per share - Series B - - - - - - -
-----------------------------------------------------------------------------------------
Balances at December 31, 1994 1,888,537 19,000 184,453 2,000 522,618 5,000 33,634,000
Net income - - - - - - -
Repurchase of shares (32,200) - - - - - (529,000)
Cash distributions declared:
$1.36 per share - Series A - - - - - - -
$1.36 per share - Series B - - - - - - -
-----------------------------------------------------------------------------------------
Balances at December 31, 1995 1,856,337 19,000 184,453 2,000 522,618 5,000 33,105,000
Net income - - - - - - -
Repurchase of shares (36,400) (1,000) - - - - (684,000)
Cash distributions declared:
$1.36 per share - Series A - - - - - - -
$1.36 per share - Series B - - - - - - -
-----------------------------------------------------------------------------------------
Balances at December 31, 1996 1,819,937 $18,000 184,453 $2,000 522,618 $5,000 $32,421,000
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
net Cumulative shareholder's
income distributions equity
----------- ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1993 $17,097,000 ($23,419,000) $28,592,000
Net income 2,923,000 - 2,923,000
Repurchase of shares - - (1,254,000)
Cash distributions declared:
$1.36 per share - Series A - (2,612,000) (2,612,000)
$1.36 per share - Series B - (251,000) (251,000)
------------------------------------------
Balances at December 31, 1994 20,020,000 (26,282,000) 27,398,000
Net income 2,796,000 - 2,796,000
Repurchase of shares - - (529,000)
Cash distributions declared:
$1.36 per share - Series A - (2,530,000) (2,530,000)
$1.36 per share - Series B - (252,000) (252,000)
------------------------------------------
Balances at December 31, 1995 22,816,000 (29,064,000) 26,883,000
Net income 3,155,000 - 3,155,000
Repurchase of shares - - (685,000)
Cash distributions declared:
$1.36 per share - Series A - (2,484,000) (2,484,000)
$1.36 per share - Series B - (252,000) (252,000)
------------------------------------------
Balances at December 31, 1996 $25,971,000 ($31,800,000) $26,617,000
==========================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,155,000 $ 2,796,000 $ 2,923,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,150,000 1,105,000 1,046,000
Decrease (increase) in rent and
other receivables 34,000 (53,000) (1,000)
Increase in prepaid expenses (79,000) (4,000) (1,000)
Amortization (payment) of prepaid
management fees 205,000 (205,000) -
Increase (decrease) in accounts payable 24,000 151,000 (29,000)
Decrease in advance payments from
renters (4,000) (4,000) (39,000)
----------- ----------- -----------
Total adjustments 1,330,000 990,000 976,000
----------- ----------- -----------
Net cash provided by operating
activities 4,485,000 3,786,000 3,899,000
----------- ----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (507,000) (472,000) (216,000)
----------- ----------- -----------
Net cash used in investing activities (507,000) (472,000) (216,000)
----------- ----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (2,749,000) (2,793,000) (2,889,000)
Advances from affiliate - 145,000 -
Repayment of advances from affiliate - (145,000) -
Borrowing on credit facility 250,000 - -
Repayment of borrowing on credit
facility (250,000) - -
Purchase of Company Series A common
stock (685,000) (529,000) (1,254,000)
----------- ----------- -----------
Net cash used in financing activities (3,434,000) (3,322,000) (4,143,000)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 544,000 (8,000) (460,000)
Cash and cash equivalents at the
beginning of the year 746,000 754,000 1,214,000
----------- ----------- -----------
Cash and cash equivalents at the end of
the year $ 1,290,000 $ 746,000 $ 754,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Public Storage Properties XI, Inc. (the "Company") is a California
corporation which has elected to qualify as a real estate investment trust
("REIT") for Federal income tax purposes. The Company succeeded to the
business of Public Storage Properties XI, Ltd. (the "Partnership") in a
reorganization transaction which was effective December 31, 1990 (the
"Reorganization").
The Company owns and operates primarily self-storage facilities and,
to a lesser extent, business park facilities containing commercial or
industrial spaces.
The term of the Company is until all properties have been sold and, in
any event, not later than December 31, 2038. The bylaws of the Company
provide that, during 1997, unless shareholders have previously approved
such a proposal, the shareholders will be presented with a proposal to
approve or disapprove (a) the sale or financing of all or substantially all
of the properties and (b) the distribution of the proceeds from such
transaction and, in the case of a sale, the liquidation of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
Certain prior year amounts have been reclassified in order to conform
with the 1996 presentation.
Income Taxes:
The Company has and intends to continue to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code (the Code). As a REIT,
the Company is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that the Company meets the
requirements of the Code. The Company believes it is in compliance with
these requirements and, accordingly, no provision for income taxes has been
made.
Statements of Cash Flows:
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Real Estate Facilities:
Cost of land includes appraisal and legal fees related to acquisition
and closing costs. Buildings, land improvements and equipment reflect costs
incurred through December 31, 1996 and 1995 to develop primarily mini-
warehouse facilities and to a lesser extent, business park facilities. The
mini-warehouse facilities provide self-service storage spaces for lease,
usually on a month-to-month basis, to the general public. The buildings
and equipment are depreciated on the straight-line basis over estimated
useful lives of 25 and 5 years, respectively. Included in depreciation is
depreciation of tenant improvements on the Company's business park
facilities of $47,000, $50,000 and $19,000 in 1996, 1995 and 1994,
respectively.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Facilities (continued):
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement 121 in 1996 and based on
current circumstances, such adoption did not have any effect on the
financial statements.
At December 31, 1996, the basis of real estate facilities (excluding
land) for Federal income tax purposes (after adjustment for accumulated
depreciation of $15,586,000) is $9,794,000.
Revenue Recognition:
Property rents are recognized as earned.
Net Income Per Share:
Net income per share is based on net income attributable to each
series of common shares and the weighted average number of such shares
outstanding during the periods presented.
Net income per share is presented on a primary and fully diluted
basis. Primary earnings per share represents the Series A shareholders'
rights to distributions out of the respective period's net income, which is
calculated by dividing net income after reduction for distributions to the
Convertible Series B shareholders (Series C shareholders are not entitled
to cash distributions) by the weighted average number of outstanding Series
A shares (Note 4). Fully diluted earnings per share assumes conversion of
the Convertible Series B and Series C shares into Series A shares.
Use of Estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Environmental Cost:
Substantially all of the Company's facilities were acquired prior to
the time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995,
the Company completed environmental assessments of its properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. These assessments were performed by an
independent environmental consulting firm. Based on the assessments, the
Company expensed $106,000 in 1995 for known environmental remediation
requirements. Although there can be no assurance, the Company is not aware
of any environmental contamination of any of its property sites which
individually or in the aggregate would be material to the Company's overall
business, financial condition, or results of operations.
F-7
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Company has a Management Agreement with Public Storage, Inc.
("PSI") pursuant to which PSI operates the Company's mini-warehouse
facilities for a fee equal to 6% of the facilities' monthly gross revenue
(as defined). Through 1996, the Company's commercial properties were
operated by Public Storage Commercial Properties Group, Inc. ("PSCPG")
pursuant to a Management Agreement which provides for a fee equal to 5% of
the facilities' monthly gross revenue (as defined).
PSI has a 95% economic interest in PSCPG (represented by nonvoting
preferred stock) and B. Wayne Hughes, the Company's Chief Executive
Officer, and members of his family (the "Hughes Family") had a 5% economic
interest in PSCPG (represented by voting common stock) until December 1996
when the Hughes Family sold its interest to Ronald L. Havner, Jr., formerly
Senior Vice President and Chief Financial Officer of PSI, who became the
Chief Executive Officer of PSCPG. PSCPG issued additional voting common
stock to two other unaffiliated investors.
In January 1997, American Office Park Properties, LP ("AOPPLP") became
the operator of the Company's commercial properties pursuant to the
Management Agreement. AOPPLP is an operating partnership formed to own and
operate business parks in which PSI has an approximate 85% economic
interest. The general partner of AOPPLP is PSCPG, now known as American
Office Park Properties, Inc.
Each Management Agreement, as amended in February 1995, provides that
the agreement will expire in February 2002 provided that in February of
each year it shall be automatically extended for one year (thereby
maintaining a seven-year term) unless either party notifies the other that
the Management Agreement is not being extended, in which case it expires,
on the first anniversary of its then scheduled expiration date. Each
Management Agreement may also be terminated by either party for cause, but
if terminated for cause by the Company, the Company retains the rights to
use the service marks and related designs until the then scheduled
expiration date, if applicable, or otherwise a date seven years after such
termination.
In August 1995, the Management Agreement for the mini-warehouse
facilities was amended to provide that upon demand from PSI made prior to
December 15, 1995, the Company agreed to prepay (within 15 days after such
demand) up to 12 months of management fees (based on the management fees
for the comparable period during the calendar year immediately preceding
such prepayment) discounted at the rate of 14% per year to compensate for
early payment. In November 1995, the Company prepaid, to PSI, 8 months of
1996 management fees at a cost of $205,000. The amount has been expensed as
management fees paid to affiliate during 1996.
During the second quarter of 1995, the Company borrowed $145,000 from
an affiliate for working capital purposes. The advance, which was repaid
in May 1995, bore interest at the prime rate plus .25%. Interest expense
of $1,000 was charged to income in 1995 with respect to this advance.
4. SHAREHOLDERS' EQUITY
Series A shares are entitled to all distributions of cash from sale or
refinancing and participate ratably with the Convertible Series B shares in
distributions of cash flow from operations. The Convertible Series C
shares (prior to conversion into Series A shares) will not participate in
any distributions.
The Convertible Series B shares and Convertible Series C shares will
convert automatically into Series A shares on a share-for-share basis (the
"Conversion") when (A) the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the Series A shares
(including liquidating distributions, but not including payments made to
redeem such stock other than in liquidation) and (2) the cumulative
Partnership distributions from all sources with respect to all units equals
(B) the product of $20 multiplied by the number of the then outstanding
"Original Series A shares". The term "Original Series A shares" means the
Series A shares issued in
F-8
<PAGE>
4. SHAREHOLDERS' EQUITY (CONTINUED)
the Reorganization. Through December 31, 1996, the Company has made and
declared cumulative cash distributions of approximately $29,141,000 with
respect to the Series A shares. Accordingly, assuming no repurchases or
redemptions of Series A shares after December 31, 1996, Conversion will
occur when $7,258,000 in additional distributions with respect to the
Series A shares have been made.
Assuming liquidation of the Company at its net book value at December
31, 1996 and 1995, each Series of common shares would receive the following
as a liquidating distribution:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Series A $21,449,000 $22,567,000
Convertible Series B 1,348,000 1,126,000
Convertible Series C 3,820,000 3,190,000
----------- -----------
Total $26,617,000 $26,883,000
=========== ===========
</TABLE>
The Series B and Series C shareholders have agreed that 47,824 of the
Series A shares received upon conversion of the Convertible Series B and
Convertible Series C shares will not be entitled to distributions
attributable to sale or financing proceeds. This agreement, which is
binding on transferees of such Series A shares, is reflected in the
liquidation values applicable to the Series A and Convertible Series B and
C shares.
The Series A shares, Convertible Series B shares and Convertible
Series C shares have equal voting rights. The holders of the Convertible
Series B and Convertible Series C shares have agreed to vote along with the
majority of the unaffiliated Series A shareholders on matters other than
control of the Company and its business.
The Company's Board of Directors has authorized the Company to
purchase up to 400,000 shares of the Company's Series A common stock. As
of December 31, 1996, the Company had purchased and retired 301,275 shares
of Series A common stock, of which 36,400 and 32,200 were purchased and
retired in 1996 and 1995, respectively.
For Federal income tax purposes, all distributions declared by the
Board of Directors in 1996, 1995 and 1994 were ordinary income.
5. NOTE PAYABLE TO BANK
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $3,000,000 for working capital purposes and to repurchase
the Company's stock. Outstanding borrowings on the credit facility, at the
Company's option, bear interest at either the bank's prime rate plus .25%
or the LIBOR rate plus 2.25%. Interest is payable monthly. On December
31, 1999, all unpaid principal and accrued interest is due and payable.
During the first quarter of 1996, the Company borrowed and repaid
$250,000 on its line of credit facility. At December 31, 1996, there was
no outstanding balance on the credit facility.
Under covenants of the credit facility, the Company is (1) required to
maintain a ratio of liabilities to assets (as defined) for each fiscal
quarter of not more than .3 to 1.0, (2) required to maintain a debt
coverage ratio (as defined) for each fiscal quarter of not less than 8
times the debt service, (3) required to maintain a fixed charge coverage
ratio (as defined) for each fiscal quarter of not less than 1.0 to 1.0 and
(4) required to maintain a minimum shareholder's equity (as defined) for
each fiscal quarter of $20 million.
F-9
<PAGE>
6. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------
March 1996 June 1996 Sept. 1996 Dec. 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,741,000 $1,822,000 $1,858,000 $1,832,000
---------- ---------- ---------- ----------
Expenses 1,004,000 1,017,000 1,028,000 1,049,000
---------- ---------- ---------- ----------
Net income $ 737,000 $ 805,000 $ 830,000 $ 783,000
========== ========== ========== ==========
Primary earnings per share- Series A $ 0.37 $ 0.40 $ 0.42 $ 0.40
========== ========== ========== ==========
Fully diluted earnings per share-
Series A $ 0.29 $ 0.32 $ 0.32 $ 0.31
========== ========== ========== ==========
<CAPTION>
Three months ended
-------------------------------------------------
March 1995 June 1995 Sept. 1995 Dec. 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,652,000 $1,718,000 $1,787,000 $1,721,000
---------- ---------- ---------- ----------
Expenses 945,000 1,005,000 995,000 1,137,000
---------- ---------- ---------- ----------
Net income $ 707,000 $ 713,000 $ 792,000 $ 584,000
========== ========== ========== ==========
Primary earnings per share- Series A $ 0.34 $ 0.35 $ 0.39 $ 0.29
========== ========== ========== ==========
Fully diluted earnings per share-
Series A $ 0.27 $ 0.28 $ 0.31 $ 0.23
========== ========== ========== ==========
</TABLE>
F-10
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 2,273,000 $ 1,290,000
Rent and other receivables 41,000 53,000
Prepaid expenses 359,000 142,000
Real estate facilities at cost:
Building, land improvements and
equipment 26,895,000 26,526,000
Land 12,118,000 12,118,000
------------ ------------
39,013,000 38,644,000
Less accumulated depreciation (12,877,000) (12,000,000)
------------ ------------
26,136,000 26,644,000
------------ ------------
Total assets $ 28,809,000 $ 28,129,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 771,000 $ 633,000
Dividends payable 681,000 681,000
Advance payments from renters 187,000 198,000
Shareholders' equity:
Series A common, $.01 par value,
2,828,929 shares authorized,
1,819,937 shares issued and
outstanding in 1997 and 1996 18,000 18,000
Convertible Series B common, $.01 par
value, 184,453 shares authorized,
issued and outstanding 2,000 2,000
Convertible Series C common, $.01 par
value, 522,618 shares authorized,
issued and outstanding 5,000 5,000
Paid-in-capital 32,421,000 32,421,000
Cumulative net income 28,567,000 25,971,000
Cumulative distributions (33,843,000) (31,800,000)
------------ ------------
Total shareholders' equity 27,170,000 26,617,000
------------ ------------
Total liabilities and shareholders'
equity $ 28,809,000 $ 28,129,000
============ ============
</TABLE>
See accompanying notes.
F-11
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
---------- ----------
REVENUES:
<S> <C> <C>
Rental income $5,644,000 $5,401,000
Interest income 55,000 20,000
---------- ----------
5,699,000 5,421,000
---------- ----------
COSTS AND EXPENSES:
Cost of operations 1,733,000 1,746,000
Management fees paid to affiliates 329,000 288,000
Depreciation 877,000 848,000
Administrative 164,000 164,000
Interest expense - 3,000
---------- ----------
3,103,000 3,049,000
---------- ----------
NET INCOME $2,596,000 $2,372,000
========== ==========
Earnings per share:
Primary - Series A $ 1.32 $ 1.19
========== ==========
Fully diluted - Series A $ 1.03 $ 0.93
========== ==========
Dividends declared per share:
Series A $ 1.02 $ 1.02
========== ==========
Series B $ 1.02 $ 1.02
========== ==========
Weighted average Common
shares outstanding:
Primary - Series A 1,819,937 1,834,481
========== ==========
Fully diluted - Series A 2,527,008 2,541,552
========== ==========
</TABLE>
See accompanying notes.
F-12
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Convertible Convertible
Series A Series B Series C Paid-in
Shares Amount Shares Amount Shares Amount capital
--------- --------- --------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 1,819,937 $18,000 184,453 $2,000 522,618 $5,000 $32,421,000
Net income - - - - - - -
Cash distributions declared:
$1.02 per share - Series A - - - - - - -
$1.02 per share - Series B - - - - - - -
--------- --------- --------- -------- -------- -------- -----------
Balances at September 30, 1997 1,819,937 $18,000 184,453 $2,000 522,618 $5,000 $32,421,000
========= ========= ========= ======== ======== ======== ===========
<CAPTION>
Cumulative Total
net Cumulative shareholders'
income distributions equity
----------- ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1996 $25,971,000 ($31,800,000) $26,617,000
Net income 2,596,000 - 2,596,000
Cash distributions declared:
$1.02 per share - Series A - (1,854,000) (1,854,000)
$1.02 per share - Series B - (189,000) (189,000)
----------- ----------- -----------
Balances at September 30, 1997 $28,567,000 ($33,843,000) $27,170,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,596,000 $ 2,372,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 877,000 848,000
Decrease (increase) in rent and other 12,000 (16,000)
receivables
Increase in prepaid expenses (217,000) (18,000)
Amortization of prepaid management fees - 205,000
Increase (decrease) in accounts payable 138,000 (45,000)
Decrease in advance payments from
renters (11,000) (28,000)
----------- -----------
Total adjustments 799,000 946,000
----------- -----------
Net cash provided by operating
activities 3,395,000 3,318,000
----------- -----------
Cash flows from investing activities:
Additions to real estate facilities (369,000) (311,000)
----------- -----------
Net cash used in investing activities (369,000) (311,000)
----------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (2,043,000) (2,068,000)
Borrowing on credit facility - 250,000
Repayment of borrowing on credit
facility - (250,000)
Purchase of Company Series A common
stock - (685,000)
----------- -----------
Net cash used in financing activities (2,043,000) (2,753,000)
----------- -----------
Net increase in cash and cash
equivalents 983,000 254,000
Cash and cash equivalents at the
beginning of the period................. 1,290,000 746,000
----------- -----------
Cash and cash equivalents at the end of
the period.............................. $ 2,273,000 $ 1,000,000
=========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes for the
year ended December 31, 1996.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Company's financial position at
September 30, 1997 and December 31, 1996, the results of its operations for
the nine months ended September 30, 1997 and 1996 and its cash flows for
the nine months then ended.
3. The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results expected for the full year.
4. Certain prior year amounts have been reclassified in order to conform with
current year presentation.
5. The Company has an unsecured revolving credit facility with a bank for
borrowings up to $3,000,000 for working capital purposes and to repurchase
the Company's stock. Outstanding borrowings on the credit facility, at the
Company's option, bear interest at either the bank's prime rate plus .25%
or the bank's LIBOR rate plus 2.25%. Interest is payable monthly. On
December 31, 1999, all unpaid principal and accrued interest is due and
payable. At September 30, 1997 and for the nine months then ended, there
was no outstanding balance on the credit facility.
6. On August 2, 1997, the Company agreed to merge with American Office Park
Properties, Inc. ("AOPP"). Upon the merger of AOPP into the Company, each
of the 1,819,937 outstanding shares of the Company's common stock Series A
(other than shares held by holders of the Company's common stock series A
("Series A Shareholders") who have properly exercised dissenters' rights
under California law) would continue to be owned by the Series A
Shareholders or converted into the right to receive cash as follows: (i)
with respect to up to 20% of the outstanding common stock series A of the
Company, $20.50 in cash and (ii) the balance of the outstanding common
stock Series A of the Company would continue to be owned by the Series A
Shareholders. In the merger, (i) each share of the Company's common stock
series B and each share of the Company's common stock series C would be
converted into .8641 shares of the Company's common stock series A (or up
to 20% in cash) and (ii) each share of AOPP's capital stock would be
converted into 1.18 shares of the Company's common stock series A (or up to
20% in cash). See "Proposal One - The Merger" elsewhere in this Proxy
Statement and Prospectus. Concurrently with the merger, the Company will
exchange 13 mini warehouses for 11 commercial properties owned by Public
Storage, Inc. The merger is conditioned on, among other requirements, the
Company's receipt of a fairness opinion from a financial advisor and
approval by the Company's shareholders. Until the merger is completed, the
Company has agreed that it will not declare or pay distributions on its
capital stock or make any other distribution of assets to its shareholders
other than regular dividends at a quarterly rate not in excess of $.34 per
share.
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
American Office Park Properties, Inc.
We have audited the accompanying balance sheets of American Office Park
Properties, Inc. as of December 31, 1996 and 1995, and the related statements of
income, shareholders' equity, and cash flows for the years ended December 31,
1996, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Office Park
Properties, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
December 19, 1997
F-16
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1996 1995
------ -------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 919,000 $ 884,000
Receivable from PSI 827,000 59,000
Other assets 195,000 167,000
-------------- ------------
Total assets $ 1,941,000 $ 1,110,000
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accrued and other liabilities $ 207,000 $ 69,000
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.10 par value,
$15,010,000 aggregate liquidation
preference, 100,000,000 shares
authorized, 762,380 shares issued and
outstanding at December 31, 1996
and 1995 76,000 75,000
Common stock, $0.10 par value,
100,000,000 shares authorized, 80,251
shares issued and outstanding at
December 31, 1996 (40,125 shares
issued and outstanding
at December 31, 1995) 8,000 4,000
Paid-in capital 1,499,000 714,000
Retained earnings 151,000 248,000
-------------- ------------
Total shareholders' equity 1,734,000 1,041,000
-------------- ------------
Total liabilities and shareholders'
equity $ 1,941,000 $ 1,110,000
============== ============
</TABLE>
See accompanying notes.
F-17
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
STATEMENTS OF INCOME
For each of the three years in the
period ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Facility management fees
primarily from affiliates $ 2,133,000 $ 2,044,000 $ 1,973,000
Interest and other income 43,000 37,000 40,000
-------------- -------------- --------------
2,176,000 2,081,000 2,013,000
-------------- -------------- --------------
EXPENSES:
Cost of facility management 514,000 570,000 523,000
General and administrative 1,143,000 319,000 245,000
-------------- -------------- --------------
1,657,000 889,000 768,000
-------------- -------------- --------------
Net income before income taxes 519,000 1,192,000 1,245,000
Income tax expense (216,000) (472,000) (488,000)
-------------- -------------- --------------
Net income $ 303,000 $ 720,000 $ 757,000
============== ============== ==============
Net income per common share
(See notes) $.38 $.94 $.99
============== ============== ==============
Weighted average shares
outstanding 802,505 767,349 762,380
============== ============== ==============
</TABLE>
See accompanying notes.
F-18
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Total
---------------------- ------------------ Retained Shareholders'
Shares Amount Shares Amount Paid-in Capital Earnings Equity
----------- --------- -------- --------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 - $ - 2,500 $ 3,000 $ - $ 149,000 $ 152,000
Net income - - - - - 757,000 757,000
Distributions - - - - - (563,000) (563,000)
----------- --------- -------- --------- --------------- --------- ----------
BALANCES AT DECEMBER 31, 1994 - - 2,500 3,000 - 343,000 346,000
Issuance of common stock for cash - - 40,125 4,000 786,000 - 790,000
Exchange of common stock for preferred
stock 762,380 76,000 (2,500) (3,000) (73,000) - -
Net Income - - - - - 720,000 720,000
Distributions - - - - - (815,000) (815,000)
----------- --------- -------- --------- --------------- --------- ----------
BALANCES AT DECEMBER 31, 1995 762,380 76,000 40,125 4,000 713,000 248,000 1,041,000
Issuance of common stock for cash - - 40,126 4,000 786,000 - 790,000
Distributions - - - - - (400,000) (400,000)
Net income - - - - - 303,000 303,000
----------- --------- -------- --------- --------------- --------- ----------
BALANCES AT DECEMBER 31, 1996 762,380 $76,000 80,251 $ 8,000 $ 1,499,000 $ 151,000 $1,734,000
=========== ========= ======== ========= =============== ========= ==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
For each of the three years in the
period ended December 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 303,000 $ 720,000 $ 757,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
(Increase) decrease in other assets (28,000) 157,000 (185,000)
Increase (decrease) in accrued and
other liabilities 138,000 73,000 (1,000)
----------- ------------ ----------
Net cash provided by operating
activities 413,000 950,000 571,000
----------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuances of
common stock 790,000 790,000 -
Distributions paid to shareholders (400,000) (815,000) (563,000)
Increase in receivable from PSI (768,000) (59,000) -
----------- ------------ ----------
Net cash used in financing activities (378,000) (84,000) (563,000)
----------- ------------ ----------
Net increase in cash and cash
equivalents 35,000 866,000 8,000
Cash and cash equivalents at the
beginning of the period 884,000 18,000 10,000
----------- ------------ ----------
Cash and cash equivalents at the end of
the period $ 919,000 $ 884,000 $ 18,000
=========== ============ ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Office Park Properties, Inc. ("AOPP"), formerly known as
Public Storage Commercial Properties Group, Inc., was organized in
California in 1984 as a wholly-owned subsidiary of Public Storage
Management, Inc. ("PSMI"), a privately owned company of B. Wayne Hughes
and his family (collectively "Hughes").
On November 16, 1995, Public Storage, Inc. ("PSI") acquired PSMI in a
business combination accounted for using the purchase method. In
connection with the transaction, PSI exchanged its common stock for all of
the non-voting participating preferred stock of AOPP representing a 95%
economic interest and Hughes purchased the voting common stock representing
the remaining 5% economic interest in AOPP. Since PSI's investment
consisted of a non-voting interest, PSI's cost basis of its investment has
not been reflected in AOPP's financial statements.
During December 1996, Ronald L. Havner, Jr. (an executive officer of
PSI) acquired all of Hughes' common stock in AOPP.
In December 1996, AOPP issued 3,950 shares (40,126 shares, adjusted
for a January 1997 10 for 1 stock split and December 1997 stock dividend)
of common stock to third parties in exchange for $790,000 cash.
AOPP operates and manages, pursuant to property management agreements,
commercial office buildings and light industrial business parks. The
property management agreements generally provide for compensation equal to
5% of the gross revenues of the facilities managed. For the property
management fees, under the supervision of the property owners, AOPP
coordinates rental policies, rent collections, marketing activities, the
purchase of equipment and supplies, maintenance activity, and the selection
and engagement of vendors, suppliers and independent contractors. AOPP
assists and advises property owners in establishing policies for the hire,
discharge, and supervision of employees for the operation of their
facilities, including property managers, leasing, and maintenance
personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The financial statements include only the accounts of AOPP.
Cash and cash equivalents:
AOPP considers all highly liquid investments with an original maturity
of three months or less at the date of purchase to be cash equivalents.
Revenue and expense recognition:
Property management fees are recognized in the period earned.
Net income per common share:
Net income per common share is computed using the weighted average
common and common equivalent shares outstanding. AOPP's preferred stock
has been determined to be a common stock equivalent and has been included
in the computation of earnings per share.
Weighted average shares and equivalent shares outstanding have been
adjusted to reflect the exchange of common stock for preferred stock, to
reflect the effect of a 10 for 1 stock split that occurred in January 1997
and the stock dividend that occurred in December 1997.
F-21
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
Income Taxes:
Prior to November 16, 1995, AOPP's earnings were included in the
consolidated federal and combined state income tax returns of PSMI. Under
the terms of a tax sharing agreement, taxes were allocated to AOPP as
though it filed separate federal and state tax returns. For periods
subsequent to November 16, 1995, separate federal and state income tax
returns were filed for AOPP.
Income taxes are accounted for under SFAS 109, "Accounting for Income
Taxes", which requires income taxes to be recorded using the liability
method. Under the liability method, deferred taxes are provided for
temporary differences between the financial reporting and income tax bases
of assets and liabilities, applying presently enacted tax rates and laws.
Taxes have been paid by PSI and PSMI on behalf of AOPP, and are included in
due from affiliate.
<TABLE>
<CAPTION>
The income tax provision is as follows:
<S> <C>
1996:
----
Federal $166,000
State 50,000
---------
$216,000
=========
1995:
----
Federal $372,000
State 100,000
---------
$472,000
=========
1994:
----
Federal $387,000
State 101,000
---------
$488,000
=========
</TABLE>
The income tax provision (benefit) is different from that which would
be computed by applying the Federal income tax rate to income before taxes
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate $177,000 $405,000 $423,000
State income taxes net of Federal
tax benefit 33,000 66,000 66,000
Other 6,000 1,000 (1,000)
--------- --------- ---------
$216,000 $472,000 $488,000
========= ========= =========
</TABLE>
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
General and administrative expense:
General and administrative expense includes legal expense, office
expense, executive salaries, and other such administrative items. Such
amounts include amounts incurred by PSI on behalf of AOPP, which were
subsequently recharged to AOPP.
F-22
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
3. SHAREHOLDERS' EQUITY
AOPP was initially capitalized with 2,500 shares of capital stock.
In connection with the November 16, 1995 merger between PSMI and PSI,
AOPP's Articles of Incorporation were amended authorizing AOPP to issue
only two classes of shares (i) 100,000 shares of $0.10 par value Non-Voting
Preferred Stock and (ii) 100,000 shares of $0.10 par value Common Stock.
AOPP's existing 2,500 shares of capital stock were, concurrent with the
amendment, exchanged for 75,050 shares (762,380 shares adjusted for the
10 for 1 stock split in January 1997 and stock dividend in December 1997)
of Preferred Stock.
The Preferred Stock participates fully on a share for share basis in
any dividends which the Board of Directors of AOPP declares with respect to
the Common Shares. Except under certain conditions, the Preferred Stock
has no voting rights on any matter requiring a vote of shareholders. In
the event of any liquidation, dissolution or winding up of AOPP, the
Preferred Stock shall be entitled to receive, in preference to any payment
on the Common Shares, an amount equal to $200 per share. After this the
Common Shares receive $200 per share. Subsequent to the Common Shares
receiving $200 per share, the remainder is distributed ratably among the
Preferred and Common Shareholders (the liquidation preference after
adjusting for the 10 for 1 stock split in January 1997 and stock dividend
in December 1997 is $19.69).
In connection with the November 16, 1995 merger, Hughes purchased
3,950 shares (40,125 shares, adjusted for the 10 for 1 stock split in
January 1997 and stock dividend in December 1997) of Common Stock for cash
totaling $790,000.
In December 1996, AOPP issued 3,950 shares (40,126 shares, adjusted
for the 10 for 1 stock split in January 1997 and stock dividend in December
1997) of Common Stock to third parties for cash totaling $790,000.
On January 1, 1997, the number of outstanding shares of Preferred
Stock and Common Stock increased to 750,500 shares and 79,000 shares,
respectively, as a result of a 10 for 1 stock split. In March 1997, the
Preferred Stock of AOPP was converted into Common Stock on a share for
share basis. In December 1997, AOPP declared a common stock dividend at a
rate of approximately .016 shares for each common share outstanding. The
balance sheets at December 31, 1996 and 1995 have been retroactively
adjusted to reflect these transactions.
4. PROPERTY MANAGEMENT CONTRACTS
AOPP manages industrial, office and retail facilities for PSI and
entities affiliated with PSI, and third party owners. These facilities,
all located in the United States, operate under the "Public Storage" or "PS
Business Parks" name.
The property management contracts provide for compensation of five
percent of the gross revenue of the facilities managed. Under the
supervision of the property owners, the Company coordinates rental
policies, rent collections, marketing activities, the purchase of equipment
and supplies, maintenance activities, and the selection and engagement of
vendors, suppliers and independent contractors. In addition, the Company
assists and advises the property owners in establishing policies for the
hire, discharge and supervision of employees for the operation of these
facilities, including property managers, leasing, billing and maintenance
personnel.
The property management contract with PSI is for seven year terms with
the term being extended one year each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.
F-23
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
5. SUBSEQUENT EVENTS (UNAUDITED)
AOPP elected to qualify as a real estate investment trust ("REIT") for
Federal income tax purposes pursuant to Section 856 (c) (1) of the Internal
Revenue Code. As a REIT, AOPP is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that AOPP meets
certain tests.
On January 2, 1997, in connection with the reorganization of the
commercial property operations of PSI and affiliated entities, AOPP formed
a partnership (the "Operating Partnership"). Subject to certain
limitations described below, each limited partner other than AOPP has the
right to require the redemption of such limited partner's partnership
interests at any time or from time to time beginning on the date that is
one year after the date on which such limited partner is admitted to the
Operating Partnership.
Unless AOPP, as general partner, elects to assume and perform the
Operating Partnership's obligation with respect to a redemption right, as
described below, a limited partner that exercises its redemption right will
receive cash from the Operating Partnership in an amount equal to the
market value (as defined in the Operating Partnership Agreement) of the
partnership interests redeemed. In lieu of the Operating Partnership
redeeming the partner for cash, AOPP, as the general partner, has the right
to elect to acquire the partnership interest directly from a limited
partner exercising its redemption right, in exchange for cash in the amount
specified above or by issuance of one share of AOPP common stock for each
unit of limited partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of AOPP common stock would be prohibited under the applicable
articles of incorporation or if the general partner believes that there is
a risk that delivery of shares of common stock would cause the general
partner to no longer qualify as a REIT, would cause a violation of the
applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
Concurrent with the formation of the Operating Partnership, (i) PSI
and affiliated entities contributed 26 commercial properties to the
Operating Partnership in exchange for 4,859,000 limited partnership units
("OP Units"), (ii) PSI contributed 9 commercial properties to AOPP in
exchange for 1,000,000 (1,015,380 shares adjusted for the December 1997
stock dividend) shares of Preferred Stock. Immediately thereafter, AOPP
contributed the 9 commercial properties referred to in (ii) above along
with its commercial property management operations and $790,000 in cash to
the Operating Partnership for 1,829,500 OP Units. These transactions were
accounted for as purchases of properties.
In April 1997, the Operating Partnership acquired 4 additional
commercial properties from PSI in exchange for 1,235,500 OP Units in a
transaction accounted for as a purchase.
In July 1997, AOPP purchased two commercial office buildings from
third parties for an aggregate purchase price of $33,750,000. To fund this
transaction, AOPP issued 1,690,000 (1,716,753 shares adjusted for the
December 1997 stock dividend) shares of common stock primarily to PSI for
$33,800,000.
In September 1997, AOPP purchased one commercial facility from a third
party for a purchase price of $10,050,000 in cash and the issuance of
12,000 limited partnership units of the Operating Partnership having a
value of $324,000.
In December 1997, AOPP issued 4,482,852 shares of AOPP common stock to
a subsidiary of a state pension plan, and the subsidiary of the state
pension plan through a merger and contribution, transferred to the Company
six commercial facilities located in California ($118,655,000) and
$1,000,000 in cash. AOPP incurred approximately $3,300,000 in transaction
costs.
Also in December 1997, the Company purchased a property from a third
party for an aggregate purchase price of $3,875,000 consisting of
$3,575,000 in cash and 11,111 OP units having a value of $300,000.
F-24
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
Stock issuances to institutional investors
AOPP has entered into an agreement with a group of institutional
investors under which AOPP will issue up to 5,740,741 shares of AOPP common
stock at $27 per share in cash (an aggregate of up to $155,000,000).
Proposed acquisition of property
AOPP has entered into contracts to acquire four commercial facilities
from third parties for aggregate consideration of $76,981,000 consisting of
the assumption of mortgage debt with an approximate outstanding balance of
$49,350,000, cash of approximately $19,900,000 and approximately 286,300
units in the operating partnership.
Line of credit with PSI
AOPP has entered into a line of credit agreement with Public Storage,
Inc. for $50,000,000 with an interest rate of the London Interbank Offered
Rated ("LIBOR") plus 1.25%. Under the terms of the agreement, the note
must be repaid with proceeds from any equity offerings or debt financings.
If amounts borrowed are not repaid by January 15, 1998 then AOPP must
establish a separate line of credit to repay the amounts borrowed.
Proposed revolving line of credit
AOPP has received a commitment from a commercial bank whereby the
commercial bank has agreed to provide AOPP with a $70 million unsecured
revolving credit facility. The credit facility is expected to be available
in January 1998. Under the facility, at the option of AOPP, the rate of
interest charged is equal to (i) the prime rate or (ii) a rate ranging from
LIBOR plus 0.80% to LIBOR plus 1.30% depending on AOPP's credit rating. In
addition, AOPP pays an annual fee of 0.125% to 0.25% of its average unused
balance of its credit facility; such fee is dependent upon the amount of
credit facility unused.
Under covenants of the credit facility, AOPP is required to (i)
maintain a balance sheet leverage ratio of less than 0.50 to 1.00, (ii)
maintain a ratio of secured debt to gross asset value of less than 0.30 to
1.00, (iii) maintain an interest coverage ratio of not less than 2.25 times
and (iv) maintain a minimum shareholders' value (as defined). In addition,
AOPP will be restricted in the level of distributions it may pay, type of
investments it may make and is limited in its ability to incur additional
borrowings (AOPP is required to maintain unencumbered assets with an
aggregate value(as defined) equal to or greater than two times its
unsecured recourse debt).
Agreement to merge
In August 1997, AOPP agreed to a merger with Public Storage Properties
XI, Inc. ("PSP11"), a real estate investment trust listed on the American
Stock Exchange. Upon the merger of AOPP into PSP11, each share of AOPP's
common stock will be converted into 1.18 shares of PSP11 common stock
series A. See "Proposal One - The Merger" elsewhere in this Proxy
Statement and Prospectus.
F-25
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------ --------------- --------------
<S> <C> <C>
(Unaudited)
Cash and cash equivalents $ 6,455,000 $ 919,000
Real estate facilities, at cost:
Land 55,452,000 -
Buildings 138,855,000 -
--------------- --------------
194,307,000 -
Accumulated depreciation (2,328,000) -
--------------- --------------
191,979,000 -
Receivable from PSI 46,000 827,000
Intangible assets, net of accumulated 3,403,000 -
amortization
Other assets 740,000 195,000
--------------- --------------
Total assets $202,623,000 $ 1,941,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities $ 4,444,000 $ 207,000
Minority interest 125,668,000 -
Commitments and contingencies - -
Shareholders' equity:
Preferred Stock, $0.10 par value,
100,000,000 shares authorized, no
shares issued and outstanding at
September 30, 1997 (762,380 shares
issued and outstanding at December 31, 1996) - 76,000
Common stock, $0.10 par value,
100,000,000 shares authorized,
3,579,277 shares issued and
outstanding at September 30, 1997
(80,251 shares issued and outstanding
at December 31, 1996) 352,000 8,000
Paid-in capital 70,182,000 1,499,000
Cumulative net income 1,977,000 8,274,000
Cumulative distributions - (8,123,000)
--------------- --------------
Total shareholders' equity 72,511,000 1,734,000
--------------- --------------
Total liabilities and shareholders' equity $202,623,000 $ 1,941,000
=============== ==============
</TABLE>
See accompanying notes.
F-26
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 Nine months
through through ended
September 30, 1997 March 31, 1997 September 30, 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental income $ 15,234,000 $ 5,805,000 $ -
Facility management fees 449,000 247,000 1,587,000
primarily from affiliates
Interest and other income 293,000 29,000 34,000
----------------------------------------------------------------------
15,976,000 6,081,000 1,621,000
----------------------------------------------------------------------
EXPENSES:
Cost of operations 5,776,000 2,493,000 -
Cost of facility management 97,000 60,000 369,000
Depreciation 2,328,000 820,000 -
Amortization 262,000 - -
General and administrative 554,000 213,000 570,000
----------------------------------------------------------------------
9,017,000 3,586,000 939,000
----------------------------------------------------------------------
Net income before minority interest
and income taxes 6,959,000 2,495,000 682,000
Minority interest in income (4,982,000) (1,813,000) -
----------------------------------------------------------------------
Net income before income taxes 1,977,000 682,000 682,000
Income tax expense - - (283,000)
----------------------------------------------------------------------
Net income $ 1,977,000 $ 682,000 $ 399,000
======================================================================
Net income per share: $0.81 $0.37 $0.50
======================================================================
Weighted average common shares
and common shares equivalents
outstanding 2,444,020 1,858,346 802,505
======================================================================
</TABLE>
See accompanying notes.
F-27
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
For the period ending September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Cumulative Total
------------------ ---------------- net Cumulative Shareholders'
Shares Amount Shares Amount Paid-in Capital income distributions Equity
------ ------ ------ ------ --------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 762,380 $75,000 80,251 $ 8,000 $ 1,500,000 $ 8,274,000 $(8,123,000) $ 1,734,000
Issuance of preferred stock
in exchange for real estate
facilities 1,015,830 100,000 - - 19,900,000 - - 20,000,000
Issuance of common stock for
cash - - 4,063 - 80,000 - - 80,000
Adjustment to reflect cost
of PSI's investment in AOPP - - - - 12,361,000 - - 12,361,000
Net income - - - - - 682,000 - 682,000
Exchange of preferred stock
for common stock (1,778,210) (175,000) 1,778,210 175,000 833,000 (8,956,000) 8,123,000 -
Adjustment to reflect
minority interests' to
underlying ownership
interest - - - - 1,813,000 - - 1,813,000
--------- ------- --------- -------- ----------- ----------- ----------- -----------
BALANCES AT MARCH 31, 1997 - - 1,862,524 183,000 36,487,000 - - 36,670,000
Issuance of common stock for
cash - - 1,716,753 169,000 33,631,000 - - 33,800,000
Net income - - - - - 1,977,000 - 1,977,000
Adjustment to reflect
minority interests' to
underlying ownership
interest - - - - 64,000 - - 64,000
--------- ------- --------- -------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1997 - $ - 3,579,277 $352,000 $70,182,000 $ 1,977,000 $ - $72,511,000
========= ======= ========= ======== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 Nine months
through through ended
September 30, 1997 March 31, 1997 September 30, 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 1,977,000 $ 682,000 $ 399,000
Depreciation 2,328,000 820,000 -
Amortization 262,000 - -
Minority interest in income 4,982,000 1,813,000 -
(Increase) decrease in other assets (145,000) (400,000) 160,000
Increase (decrease) in accrued and other liabilities 1,312,000 2,925,000 (13,000)
---------------- --------------- ----------------
Net cash provided by operating activities 10,716,000 5,840,000 546,000
---------------- --------------- ----------------
Cash flows from investing activities:
Acquisition of real estate facilities (43,360,000) - -
Improvements to real estate facilities (1,739,000) (582,000) -
---------------- --------------- ----------------
Net cash used by investing activities (45,099,000) (582,000) -
---------------- --------------- ----------------
Cash flows from financing activities:
Net proceeds from the issuances of common stock 33,800,000 80,000 -
Decrease (increase) in receivable from affiliate 1,089,000 (308,000) (1,140,000)
---------------- --------------- ----------------
Net cash provided by (used) by financing activities 34,889,000 (228,000) (1,140,000)
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 506,000 5,030,000 (594,000)
Cash and cash equivalents at the beginning of the period 5,949,000 919,000 884,000
---------------- --------------- ----------------
Cash and cash equivalents at the end of the period $ 6,455,000 $ 5,949,000 $ 290,000
================ =============== ================
Supplemental schedule of noncash investing and
financing activities:
Issuances of preferred stock in exchange for
real estate facilities:
Real estate facilities $ - $ 20,000,000 $ -
Preferred stock - 100,000 -
Paid in capital - 19,900,000 -
Contribution of real estate facilities to operating partnership:
Real estate facilities 24,300,000 97,180,000 -
Intangible assets (730,000) - -
Minority interest 23,570,000 97,180,000 -
Adjustment to reflect cost allocated to PSI's investment in AOPP:
Real estate facilities - 7,146,000 -
Accumulated depreciation - 820,000 -
Intangible assets - 4,395,000 -
Paid in capital - 12,361,000 -
Exchange of preferred stock for common stock:
Preferred stock - (175,000) -
Common stock - 175,000 -
</TABLE>
See accompanying notes.
F-29
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Office Park Properties, Inc. ("AOPP"), formerly known as
Public Storage Commercial Properties Group, Inc., was organized in California in
1984 as a wholly-owned subsidiary of Public Storage Management, Inc. ("PSMI"), a
privately owned company of B. Wayne Hughes and his family (collectively
"Hughes").
On November 16, 1995, Public Storage, Inc. ("PSI") acquired PSMI in a
transaction accounted for as a purchase. In connection with the transaction, PSI
exchanged its common stock for all of the non-voting participating preferred
stock of AOPP representing a 95% economic interest and Hughes purchased all the
voting common stock representing the remaining 5% economic interest in AOPP.
During December 1996, Ronald L. Havner, Jr. (an executive officer of
PSI) acquired all of Hughes' common stock in AOPP.
In December 1996, AOPP issued 3,950 shares (39,500 shares, adjusted
for a January 1997 10 for 1 stock split and stock dividend in December 1997) of
Common Stock to third parties in exchange for $790,000 cash.
AOPP operates and manages, pursuant to property management agreements,
commercial office building and light industrial business parks. The property
management agreements generally provide for compensation equal to 5% of the
gross revenues of the facilities managed. For the property management fees,
under the supervision of the property owners, AOPP coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of vendors, suppliers and
independent contractors. AOPP assists and advises property owners in
establishing policies for the hire, discharge, and supervision of employees for
the operation of their facilities, including property managers, leasing, and
maintenance personnel.
On January 2, 1997, in connection with the reorganization of the
commercial property operations of PSI and affiliated entities, AOPP formed a
partnership (the "Operating Partnership")(collectively, AOPP and the Operating
Partnership are referred to as the "Company"). Concurrent with the formation of
the Operating Partnership, (i) PSI and affiliated entities contributed 26
commercial properties to the Operating Partnership in exchange for 4,859,000
limited partnership units ("OP Units"), (ii) PSI contributed 9 commercial
properties to AOPP in exchange for 1,000,000 (1,015,830 shares adjusted for
stock dividend in December 1997) shares of Preferred Stock. Immediately
thereafter, AOPP contributed the 9 commercial properties referred to in (ii)
above along with its commercial property management operations and $790,000 in
cash to the Operating Partnership for 1,829,500 OP Units. OP Units held by
limited partners in the Operating Partnership may be exchanged for shares of
common stock of AOPP on a one-for-one basis in certain circumstances. These
transactions were accounted for as a purchase of properties at fair value
($117,180,000).
On March 31, 1997, AOPP and PSI agreed to exchange the non-voting
participating preferred stock held by PSI for 1,750,500 shares of (1,778,210
shares, adjusted for stock dividend in December 1997) voting common stock of
AOPP. After the exchange, PSI owned in excess of 95% of the outstanding voting
common stock of AOPP and AOPP accounted for the transaction as if PSI purchased
AOPP. Accordingly, AOPP reflected PSI's cost of its investment in AOPP in
accordance with Accounting Principles Board Opinion No. 16. As a result of PSI
attaining control of AOPP as a result of its ownership in excess of 95% of
AOPP's outstanding voting common stock, the carrying value of AOPP's assets and
liabilities was adjusted to reflect PSI's acquisition cost of its controlling
interest in AOPP of approximately $35 million. As a result, the carrying value
of real estate facilities was increased approximately $8.0 million, intangible
assets increased approximately $4.4 million and paid in capital increased
approximately $12.4 million.
In April 1997, the Operating Partnership acquired 4 additional
commercial properties from PSI in exchange for 1,235,500 OP Units. This
transaction was accounted for at PSI's carrying value of $23.2 million.
F-30
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In July 1997, AOPP purchased two commercial office buildings for an
aggregate purchase price of $33,750,000. To fund this transaction, AOPP issued
1,690,000 shares (1,716,753 shares, adjusted for the December 1997 stock
dividend) of common stock primarily to PSI for $33,800,000. These properties
were acquired from third parties and were accounted for as a purchase of
properties at fair value.
In September 1997, AOPP purchased one commercial facility for a
purchase price of $10,050,000 in cash and the issuance of 12,000 limited
partnership units of the Operating Partnership for a total purchase price of
$10,374,000. This property was acquired from a third page and was accounted for
as a purchase at fair value.
Basis of Presentation:
As a result of PSI attaining a 95% ownership interest in AOPP voting
common stock on March 31, 1997, the unaudited consolidated financial statements
of 1997 are presented separately for the period prior to March 31, 1997 (January
1, 1997 through March 31, 1997) and the period subsequent to March 31, 1997
(April 1, 1997 through September 30, 1997). The financial statements prior to
January 1, 1997, include only the accounts of AOPP. The financial statements for
1997 include the accounts of AOPP and the Operating Partnership as AOPP, as the
sole general partner of the Operating Partnership, has full, exclusive and
complete responsibility and discretion in managing and controlling the Operating
Partnership. As of September 30, 1997, AOPP owned approximately 23% of the
Operating Partnership with the remaining interest owned by PSI and affiliates of
PSI. PSI owns approximately 98% of the outstanding common stock of AOPP as of
September 30, 1997.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, such financial statements reflect all adjustments considered
necessary for a fair presentation of the results of the respective interim
periods and all such adjustments are of a normal and recurring nature.
Cash and cash equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Real Estate Facilities:
Costs related to the improvements of properties are capitalized.
Expenditures for repair and maintenance are charged to expense when incurred.
After March 31, 1997, acquisition of facilities from PSI and entities controlled
by PSI are recorded at the predecessor's basis until such time that AOPP is not
controlled by PSI. Buildings and equipment are depreciated on the straight line
method over the estimated useful lives, which is generally 25 and 5 years,
respectively.
Intangible Assets:
On March 31, 1997, in connection with the adjustment of AOPP's assets
and liabilities to reflect PSI's acquisition basis in AOPP, AOPP established
$4,395,000 of intangible assets. Intangible assets consist of property
management contracts for properties managed, but not owned, by AOPP. The
intangible assets are being amortized over seven years. As properties managed
are subsequently acquired by AOPP, the unamortized basis of intangible assets
related to such property is included in the cost of acquisition of such
property. During April 1997, AOPP acquired four properties from PSI and included
in the cost of real estate facilities for such properties are $730,000 of cost
previously classified as intangible assets. Intangible assets at September 30,
1997 are net of accumulated amortization of $262,000. Amortization expense for
the period April 1, 1997 to September 30, 1997 is $262,000.
F-31
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Evaluation of asset impairment:
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which
requires impairment losses to be recorded on long-lived assets. The
Company evaluates its assets used in operations, by identifying indicators
of impairment and by comparing the sum of the estimated undiscounted future
cash flows for each asset to the asset's carrying amount. When indicators
of impairment are present and the sum of the undiscounted future cash flows
is less than the carrying value of such asset, an impairment loss is
recorded equal to the difference between the asset's current carrying value
and its value based on discounting its estimated future cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. Such assets are to be reported at the lower of
their carrying amount or fair value, less cost to sell. The Company
adopted Statement 121 in 1996 and the adoption had no effect. The
Company's subsequent evaluations have indicated no impairment in the
carrying amount of its assets.
Revenue and expense recognition:
All leases are classified as operating leases. Rental income is
recognized on a straight-line basis over the terms of the leases.
Reimbursements from tenants for real estate taxes and other recoverable
operating expense are recognized as revenue in the period the applicable
costs are incurred.
Costs incurred in connection with leasing are capitalized and
amortized over the lease period.
Property management fees are recognized in the period earned.
Allowance for possible losses:
The Company periodically evaluates amounts billed to tenants and
accrues recoveries from tenants and adjusts the allowance for doubtful
accounts to reflect the amounts estimated to be uncollectible. Amounts
determined to be uncollectible are included in operating expenses.
Net income per common share:
Net income per common share is computed using the weighted average
common and common equivalent shares outstanding. The Company's preferred
stock has been determined to be a common stock equivalent and has been
included in the computation of earnings per share. The weighted average
common and common equivalent shares have been adjusted to reflect the
effects of the stock dividend in December 1997 - see Note 5 - Shareholders'
Equity.
OP Units held by limited partners in the Operating Partnership may be
exchanged for shares of common stock of the Company on a one-for-one basis
in certain circumstances and have not been included in the weighted average
common shares outstanding.
Income taxes:
Income taxes for 1996 are accounted for under SFAS 109, "Accounting
for Income Taxes", which requires income taxes to be recorded using the
liability method. Under the liability method, deferred taxes are provided
for temporary differences between the financial reporting and income tax
bases of assets and liabilities, applying presently enacted tax rates and
laws.
F-32
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Commencing January 1997, AOPP has elected to be taxed as a REIT
pursuant to Section 856 (c) (1) of the Internal Revenue Code. As a REIT,
AOPP is not taxed on that portion of it taxable income which is distributed
to its shareholders provided that AOPP meets certain tests. AOPP believes
it will meet such tests for 1997 and accordingly, no provision for income
taxes for 1997 has been made in the accompanying consolidated financial
statements.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
General and administrative expense:
General and administrative expense includes legal expense, office
expenses, executive salaries and other such administrative items. Such
amounts include amounts incurred by PSI on behalf of the Company, which
were subsequently recharged to the Company.
2. Real Estate Facilities
Prior to 1997, the Company owned no real estate facilities. On January
2, 1997, the Company acquired 35 real estate facilities (containing 3.0
million square feet) from PSI and affiliated entities. In April 1997, the
Company acquired 4 real estate facilities (containing 0.4 million square
feet) from PSI, of which PSI had acquired on the same date from two
affiliated REITs. In July and September 1997, the Company acquired two
facilities and one facility, respectively, from unaffiliated third parties.
These facilities were recorded at their respective purchase price and
related costs of acquisition.
The activity in real estate facilities in 1997 is as follows:
<TABLE>
<CAPTION>
Accumulated
Land Buildings Depreciation Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $ - $ - $ - $ -
Acquisitions of Buildings and land 35,154,000 82,026,000 - 117,180,000
Capital improvements (Jan - Mar 1997) - 582,000 - 582,000
Depreciation expense (Jan - Mar 1997) - - (820,000) (820,000)
Adjustment to reflect PSI's basis in
cost of PSI's investment in previously
acquired properties - 7,146,000 820,000 7,966,000
----------- ------------ ----------- ------------
Balances at March 31, 1997 35,154,000 89,754,000 - 124,908,000
Acquisitions of buildings and land 20,298,000 47,362,000 - 67,660,000
Capital improvements (Apr - Sep 1997) - 1,739,000 - 1,739,000
Depreciation expense (Apr - Sep 1997) - - (2,328,000) (2,328,000)
----------- ------------ ----------- ------------
Balances at September 30, 1997 $55,452,000 $138,855,000 $(2,328,000) $191,979,000
=========== ============ =========== ============
</TABLE>
F-33
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. LEASING ACTIVITY
Future minimum rental revenues under non-cancelable leases as of
September 30, 1997 with tenants for the above real estate facilities are as
follows:
<TABLE>
<S> <C>
1997 (Remainder) $ 6,935,000
1998 25,414,000
1999 16,470,000
2000 9,910,000
2001 5,708,000
Thereafter 9,376,000
-------------------
$73,813,000
===================
</TABLE>
4. MINORITY INTERESTS
In consolidation, the Company classifies ownership interests in the
Operating Partnership, other than its own, as minority interest on the
consolidated financial statements. Minority interest in income consists of
the minority interests' share (approximately 72% for the nine months ended
September 30, 1997 and 63% at September 30, 1997) of the operating results
of the Company.
Subject to certain limitations described below, each limited partner
other than AOPP has the right to require the redemption of such limited
partner's partnership interests at any time or from time to time beginning
on the date that is one year after the date on which such limited partner
is admitted to the Operating Partnership.
Unless AOPP, as general partner, elects to assume and perform the
Operating Partnership's obligation with respect to a redemption right, as
described below, a limited partner that exercises its redemption right will
receive cash from the Operating Partnership in an amount equal to the
market value (as defined in the Operating Partnership Agreement) of the
partnership interests redeemed. In lieu of the Operating Partnership
redeeming the partner for cash, AOPP, as general partner, has the right to
elect to acquire the partnership interest directly from a limited partner
exercising its redemption right, in exchange for cash in the amount
specified above or by issuance of one share of AOPP common stock for each
unit of limited partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of AOPP common stock would be prohibited under the applicable
articles of incorporation or if the general partner believes that there is
a risk that delivery of shares of common stock would cause the general
partner to no longer qualify as a REIT, would cause a violation of the
applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
5. SHAREHOLDERS' EQUITY
The Preferred Stock participates fully on a share for share basis in
any dividends which the Board of Directors of AOPP declares with respect to
the Common Shares. In the event of any liquidation, dissolution or winding
up of AOPP, the Preferred Stock shall be entitled to receive, in preference
to any payment on the Common Shares, an amount equal to $200 per share.
After this the Common Shares receive $200 per share. Subsequent to the
Common Shares receiving $200 per share, any remainder is distributed
ratably among the Preferred and Common shareholders (the liquidation
preference after adjusting for the 10 for the 1 stock split in January 1997
and December 1997 stock dividend is $19.69).
In December 1996, AOPP issued 3,950 shares (40,126 shares, adjusted
for the 10 for 1 stock split in January 1997 and stock dividend in December
1997) of Common Stock to third parties for cash totaling $790,000.
F-34
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
In January 1997, the number of outstanding shares of Preferred and
Common Stock increased to 750,500 and 79,000 shares, respectively, as a
result of a 10 for 1 stock split. In March 1997, the Preferred Stock was
exchanged for Common Stock of the Company on a share for share basis. In
December 1997, AOPP declared a common stock dividend at a rate of
approximately .016 shares for each common share outstanding. The balance
sheet at December 31, 1996 has been retroactively restated to reflect these
transactions.
6. PROPERTY MANAGEMENT CONTRACTS
The Company manages industrial, office and retail facilities for PSI
and entities affiliated with PSI, and third party owners. These
facilities, all located in the United States, operate under the "Public
Storage" or "PS Business Parks" name.
The property management contracts provide for compensation of five
percent of the gross revenue of the facilities managed. Under the
supervision of the property owners, the Company coordinates rental
policies, rent collections, marketing activities, the purchase of equipment
and supplies, maintenance activities, and the selection and engagement of
vendors, suppliers and independent contractors. In addition, the Company
assists and advises the property owners in establishing policies for the
hire, discharge and supervision of employees for the operation of these
facilities, including property managers, leasing, billing and maintenance
personnel.
The property management contract with PSI is for seven year terms with
the term being extended one year each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.
7. STOCK OPTIONS
The Company has a 1997 Stock Option Plan (the "Plan"). Under the
Plan, the Company has granted non-qualified options to certain directors,
officers and key employees to purchase shares of the Company's common stock
at a price equal to the fair market value of the common stock at the date
of grant. Generally, options under the Plans vest over a three-year period
from the date of grant at the rate of one-third per year and expire ten
years after the date of grant.
At September 30, 1997, there were 1,000,000 options authorized to
grant, of which 250,000 options were granted in 1997 at an exercise price
of $20.
8. SUBSEQUENT EVENTS
Acquisition of properties
In December 1997, AOPP issued 4,482,852 shares of AOPP common stock to
a subsidiary of a state pension plan, and the subsidiary of the state
pension plan through merger and contribution, transferred to the Company
six commercial facilities located in California ($118,655,000) and
$1,000,000 in cash. AOPP incurred approximately $3,300,000 in transaction
costs.
Also in December 1997, the Company purchased a property from a third
party for a purchase price of $3,875,000, consisting of $3,575,000 in cash
and 11,111 OP units have a value of $300,000.
In January 1998, the Company purchased a property form a third party
for a purchase price of $22,643,000 consisting of $22,450,000 and 7,143 OP
units having a value of $193,000.
F-35
<PAGE>
AMERICAN OFFICE PARK PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Stock issuances to institutional investors
AOPP has entered into an agreement with a group of institutional
investors under which AOPP will issue up to 5,740,741 shares of AOPP common
stock at $27 per share in cash (an aggregate of up to $155,000,000).
Proposed acquisition of property
AOPP has entered into contracts to acquire three commercial facilities
from third parties for aggregate consideration of $54,338,000 consisting of
the assumption of mortgage debt with an approximate outstanding balance of
$26,900,000, cash of approximately $19,900,000 and approximately 279,200
units in the operating partnership.
Line of credit with PSI
AOPP has entered into a line of credit agreement with Public Storage,
Inc. for $50,000,000 with an interest rate of the London Interbank Offered
Rate ("LIBOR") plus 1.25%. Under the terms of the agreement, the note must
be repaid with proceeds from any equity offerings or debt financings. If
amounts borrowed are not repaid by January 15, 1998, then AOPP must
establish a separate line of credit to repay the amounts borrowed.
Proposed revolving line of credit
AOPP has received a commitment from a commercial bank whereby the
commercial bank has agreed to provide AOPP with a $70 million unsecured
revolving credit facility. The credit facility is expected to be available
in January 1998. Under the facility, at the option of AOPP, the rate of
interest charged is equal to (i) the prime rate or (ii) a rate ranging from
LIBOR plus 0.80% to LIBOR plus 1.30% depending on AOPP's credit rating. In
addition, AOPP pays an annual fee of 0.125% to 0.25% of its average unused
balance of its credit facility; such fee is dependent upon the amount of
credit facility unused.
Under covenants of the credit facility, AOPP is required to (i)
maintain a balance sheet leverage ratio of less than 0.50 to 1.00, (ii)
maintain a ratio of secured debt to gross asset value of less than 0.30 to
1.00, (iii) maintain an interest coverage ratio of not less than 2.25 times
and (iv) maintain a minimum shareholders' value (as defined). In addition,
AOPP will be restricted in the level of distributions it may pay, type of
investments it may make and is limited in its ability to incur additional
borrowings (AOPP is required to maintain unencumbered assets with an
aggregate value (as defined) equal to or greater than two times its
unsecured recourse debt).
Agreement to merge
In August 1997, AOPP agreed to a merger with Public Storage Properties
XI, Inc. ("PSP11"), a real estate investment trust listed on the American
Stock Exchange. Upon the merger of AOPP into PSP11, each share of AOPP's
common stock will be converted into 1.18 shares of PSP11 common stock
series A. See "Proposal One - The Merger" elsewhere in this Proxy
Statement and Prospectus.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying combined statements of revenues and certain
operating expenses of the Acquired Properties (as defined in Note 1) ("Combined
Summaries") for each of the three years in the period ended December 31, 1996.
The Combined Summaries are the responsibility of management. Our responsibility
is to express an opinion on the above mentioned combined 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 Combined Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Combined Summaries. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Combined Summaries presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying Combined Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Combined Summaries present fairly the combined revenues and
certain operating expenses of the Acquired Properties for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
August 19, 1997
F-37
<PAGE>
THE ACQUIRED PROPERTIES
Statements of Revenues and Certain Operating Expenses
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Rental Revenues $20,974,000 $19,959,000 $26,682,000 $25,703,000 $25,100,000
Certain Operating Expenses 8,123,000 7,976,000 10,738,000 10,737,000 10,607,000
----------- ----------- ----------- ----------- -----------
Excess Rentals over Certain
Operating Expenses $12,851,000 $11,983,000 $15,944,000 $14,966,000 $14,493,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
THE ACQUIRED PROPERTIES
Notes to Combined Statements of Revenues and Certain Operating Expenses
1. BACKGROUND AND BASIS FOR COMBINATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of certain commercial office, industrial and
retail real estate assets ("Acquired Properties") acquired by American
Office Park Properties, Inc. and its operating partnership (collectively,
"AOPP") in January and April 1997. They are prepared in order to comply
with Rule 3.14 of Regulation S-X of the Securities and Exchange Commission,
and are to be filed in connection with the proposed merger of Public
Storage Properties XI, Inc. and AOPP.
All of the Acquired Properties were previously owned by Public Storage
Inc. ("PSI"), which is the principal shareholder of AOPP. AOPP manages the
properties. As property manager, AOPP coordinates rental policies, rent
collections, marketing activities, the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of vendors,
suppliers, and independent contractors. Pursuant to management agreements,
AOPP charges a fee to the property owner for these services in the amount
of 5% of the gross revenues collected.
The Acquired Properties are composed of:
. Thirty-five real estate facilities acquired on January 2, 1997 from
PSI and eight affiliated partnerships. PSI owns approximately a 70%
economic interest in the affiliated partnerships.
. Four real estate facilities acquired in April 1997 from PSI. PSI
acquired three of these four facilities on the same date from two
affiliated REITs.
The combined statements of revenue and certain operating expenses
include only the accounts and activity of the Acquired Properties. Items
which are not comparable to the proposed future operations of the
properties have been excluded. Such items include mortgage interest,
depreciation, amortization, management fees charged by AOPP to its
affiliates, and indirect costs incurred by AOPP in the management of those
properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Acquired Properties' leases are accounted for as operating leases.
Minimum rent revenues are recognized on a straight-line basis over the
respective lease term. Recoveries from tenants, which include an
administrative fee, are recognized as income in the period the applicable
costs are accrued. The difference between the rental income recognized on a
straight-line basis and the amount collected on a cash basis is not
material for any of the periods presented.
Allowance for Uncollectible Accounts
Management periodically evaluates amounts billed to tenants and
accrues recoveries from tenants and adjusts the allowance for doubtful
accounts to reflect the amounts estimated to be uncollectible. Amounts
determined to be uncollectible are included in operating expenses.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and certain operating expenses
during the reporting periods. Actual results could differ from those
estimates.
F-39
<PAGE>
3. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $22,040,000
1998 12,537,000
1999 6,161,000
2000 2,525,000
2001 1,167,000
Thereafter 2,551,000
-----------
$46,981,000
===========
</TABLE>
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
of Public Storage Properties XI, Inc.
We have audited the accompanying combined statements of revenues and certain
operating expenses of the PSI Exchange Properties (as defined in Note 1)
("Combined Summaries") for each of the three years in the period ended December
31, 1996. The Combined Summaries are the responsibility of management. Our
responsibility is to express an opinion on the above mentioned combined
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 Combined Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Combined Summaries. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Combined Summaries presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying Combined Summaries were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Combined Summaries present fairly the combined revenues and
certain operating expenses of the Exchanged Properties for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
August 19, 1997
F-41
<PAGE>
PSI EXCHANGE PROPERTIES
Statements of Revenues and Certain Operating Expenses
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------ ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Rental Revenues $5,958,000 $5,600,000 $7,495,000 $7,212,000 $6,952,000
Certain Operating Expenses 2,472,000 2,486,000 3,274,000 3,222,000 3,156,000
---------- ---------- ---------- ---------- ----------
Excess Rentals over Certain
Operating Expenses $3,486,000 $3,114,000 $4,221,000 $3,990,000 $3,796,000
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-42
<PAGE>
PSI EXCHANGE PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR COMBINATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of the commercial office and industrial real
estate assets ("PSI Exchange Properties") to be acquired from Public
Storage, Inc. ("PSI") in exchange for Public Storage Properties XI, Inc.'s
("PSP11") self-storage real estate assets in connection with a proposed
merger of PSP11 and American Office Park Properties, Inc. ("AOPP"). PSI is
the principal shareholder of AOPP. These combined statements are prepared
in order to comply with Rule 3.14 of Regulation S-X of the Securities and
Exchange Commission, and are to be filed in connection with the proposed
merger.
AOPP currently manages the properties. As property manager, AOPP
coordinates rental policies, rent collections, marketing activities, the
purchase of equipment and supplies, maintenance activity, and the selection
and engagement of vendors, suppliers, and independent contractors.
Pursuant to management agreements, AOPP charges a fee to the property owner
for these services in the amount of 5% of the gross revenues collected.
PSI Exchange Properties are composed of eleven commercial office and
industrial real estate facilities. PSI acquired these facilities in June
1997 from four affiliated REITs.
The combined statements of revenue and certain operating expenses
include only the accounts and activity of the PSI Exchange Properties.
Items which are not comparable to the proposed future operations of the
properties have been excluded. Such items include mortgage interest,
depreciation, amortization, management fees charged by AOPP to its
affiliates, and indirect costs incurred by AOPP in the management of those
properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The PSI Exchange Properties' leases are accounted for as operating
leases. Minimum rent revenues are recognized on a straight-line over the
respective lease term. Recoveries from tenants, which include an
administrative fee, are recognized as income in the period the applicable
costs are accrued. The difference between the rental income recognized on
a straight-line basis and the amount collected on a cash basis is not
material for any of the periods presented.
Allowance for Uncollectible Accounts
Management periodically evaluates amounts billed to tenants and
accrues recoveries from tenants and adjusts the allowance for doubtful
accounts to reflect the amounts estimated to be uncollectible. Amounts
determined to be uncollectible are included in operating expenses.
F-43
<PAGE>
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and certain operating expenses
during the reporting periods. Actual results could differ from those
estimates.
Property Rentals
Future minimum rental revenues under non-cancelable leases as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 6,199,000
1998 3,501,000
1999 1,869,000
2000 730,000
2001 435,000
Thereafter 414,000
-----------
$13,148,000
===========
</TABLE>
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Baldon Properties (as defined in Note 1) ("Combined
Summary") for the year ended December 31, 1996. The Combined Summary is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the Combined Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Combined Summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Combined Summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Combined Summary. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying Combined Summary was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission for
inclusion in the Proxy Statement of Public Storage Properties XI, Inc. as
described in Note 1 and is not intended to be a complete presentation of the
Baldon Properties' revenue and operating expenses.
In our opinion, the Combined Summary referred to above presents fairly, in all
material respects, the combined revenues and certain operating expenses of the
Baldon Properties for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
February 26, 1997,
except for the information presented in
the first paragraph of Note 1
as to which the date is
October 3, 1997
F-45
<PAGE>
THE BALDON PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Rental revenues $4,932,000 $5,641,000
Certain operating expenses 1,542,000 2,234,000
------------------ -----------------
Excess rental revenues over certain operating expenses $3,390,000 $3,407,000
================== =================
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-46
<PAGE>
THE BALDON PROPERTIES
Notes to Combined Statement of Revenues and Certain Operating Expenses
1. Background and Basis for Combination
The accompanying combined statements of revenues and certain operating
expenses include the accounts of the industrial, office and retail real
estate assets ("Baldon Properties") acquired by American Office Park
Properties, Inc. ("AOPP") from Baldon Real Estate, Inc. (A Real Estate
Investment Trust - formerly MMP Real Estate, Inc.) in July 1997. They are
prepared in order to comply with Rule 3.14 of Regulation S-X of the
Securities and Exchange Commission, and are to be filed in connection with
the proposed merger of Public Storage Properties XI, Inc. and AOPP.
The Baldon Properties are composed of an office building located in
Baltimore, Maryland and an office park consisting of two buildings in
Herndon, Virginia.
The combined statements of revenue and certain operating expenses include
only the accounts and activity of the Baldon Properties. Items which are
not comparable to the proposed future operations of the properties have
been excluded. Such items include mortgage interest, depreciation,
management fees and interest income.
2. Summary of Significant Accounting Policies
Revenues Recognition
The Baldon Properties' leases are accounted for as operating leases.
Minimum rent revenues are recognized on a straight-line basis over the
respective lease term. Recoveries from tenants, which include an
administrative fee, are recognized as income in the period the applicable
costs are accrued. The difference between the rental income recognized on a
straight-line basis and the amount collected on a cash basis is not
material for any of the periods presented.
Allowance for Uncollectible Accounts
Management periodically evaluated amounts billed to tenants and accrued
recoveries from tenants and adjusted the allowance for doubtful accounts to
reflect the amounts estimated to be uncollectible. Amounts determined to be
uncollectible are included in operating expenses.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the reported amounts of revenues and certain operating expenses during the
reporting periods. Actual results could differ from those estimates.
3. Property Rentals
Future minimum rental revenues under non-cancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997......... $ 5,714,000
1998......... 5,405,000
1999......... 5,099,000
2000......... 3,522,000
2001......... 1,941,000
------------
$ 21,681,000
============
</TABLE>
F-47
<PAGE>
4. PROPERTY ASSESSMENT (UNAUDITED)
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: The properties were purchased from an unaffiliated party in July
1997. Based on the investigation of the properties by AOPP, the Company is
not aware of any material factors relating to the properties that would
cause this financial information not to be necessarily indicative of future
operating results other than the factors specifically considered by AOPP as
described below.
In the decision to acquire the properties, AOPP considered the competition
from other commercial property owners, the location, the leases, the rental
rates and the occupancy level of the property.
AOPP has reviewed the expenses of the properties, including salaries of on-
site personnel, utilities, property taxes, supplies, insurance and repairs
and maintenance. AOPP expects that certain expenses, including bad debt
expenses of $138,000 reported in 1996, will be lower in the future and that
the operating expenses to be incurred by AOPP will be consistent to those
reported for the nine months ended September 1997. AOPP expects to be able
to pass inflationary operating expense increases in future periods through
to its tenants.
AOPP has insured the properties under a blanket insurance policy at rates
lower than those generally charged to individual owners. AOPP believes that
the insurance coverage provided by the policy will be adequate.
As part of the acquisition process, a physical inspection of the properties
was performed that indicated that approximately $67,000 of repairs and
equipment would be required in the near future and approximately $1,300,000
of repairs and equipment will be required over the next five years.
F-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying statement of revenues and certain operating
expenses of the Largo Property (as defined in Note 1) ("Statement") for the year
ended December 31, 1996. The Statement is the responsibility of the property's
management. Our responsibility is to express an opinion on the above mentioned
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Statement presents fairly the combined revenues and certain
operating expenses of the Largo Property for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
October 9, 1997
F-49
<PAGE>
THE LARGO PROPERTY
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Rental revenues $952,000 $1,290,000
Certain operating expenses 230,000 320,000
-------- ----------
Rental revenues in excess of certain
operating expenses $722,000 $ 970,000
======== ==========
</TABLE>
See accompanying notes.
F-50
<PAGE>
THE LARGO PROPERTY
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR PRESENTATION
The accompanying statements of revenues and certain operating expenses
include the accounts of the Largo Property, located in Maryland and
acquired by American Office Park Properties, Inc. ("AOPP") from an
unaffiliated party in September 1997. The statements are prepared in order
to comply with Rule 3.14 of Regulation S-X of the Securities and Exchange
Commission, and are to be filed in connection with the proposed merger of
Public Storage Properties XI, Inc. and AOPP.
The statements of revenue and certain operating expenses include only the
accounts and activity of the Largo Property. Items which are not comparable
to the proposed future operations of the property have been excluded. Such
items include mortgage interest, depreciation, amortization, management
fees and miscellaneous income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: The property was purchased from an unaffiliated party in September
1997. Based on the investigation of the property by AOPP, the Company is
not aware of any material factors relating to the property that would cause
this financial information not to be necessarily indicative of future
operating results other than the factors specifically considered by AOPP as
described below.
In the decision to acquire the property, AOPP considered the competition
from other commercial property owners, the location, the leases, the rental
rates and the occupancy level of the property.
AOPP has reviewed the expenses of the property, including salaries of on-
site personnel, utilities, property taxes, supplies, insurance and repairs
and maintenance. AOPP expects that operating expenses in the future will be
consistent to those reported for 1996 and the nine months ended September
1997. AOPP expects to be able to pass inflationary operating expense
increases in future periods through to its tenants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Largo Property leases are accounted for as operating leases. Minimum
rent revenues are recognized on a straight-line basis over the respective
lease term. Recoveries from tenants, which include an administrative fee,
are recognized as income in the period the applicable costs are accrued.
The difference between the rental income recognized on a straight-line
basis and the amount collected on a cash basis is not material for any of
the periods presented.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and certain operating expenses
during the reporting periods. Actual results could differ from those
estimates.
F-51
<PAGE>
3. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997...................................... $745,000
1998...................................... 624,000
1999...................................... 297,000
2000...................................... 242,000
2001...................................... 242,000
Thereafter................................ 214,000
----------
$2,364,000
==========
</TABLE>
F-52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholder of
Acquiport Two Corporation and
Acquiport Three Corporation
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Acquiport Properties owned by Acquiport Two
Corporation and Acquiport Three Corporation (as defined in Note 1) for the year
ended December 31, 1996. The Combined Summary is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
combined statement of revenues and certain operating expenses based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined statement of revenues and certain operating
expenses are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
statement of revenues and certain operating expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the combined
statement of revenues and certain operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain operating expenses
was prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Proxy Statement of
Public Storage Properties XI, Inc.
In our opinion, the combined statement of revenues and certain operating
expenses presents fairly the combined revenues and certain operating expenses of
the Acquiport Properties owned by Acquiport Two Corporation and Acquiport Three
Corporation (as defined in Note 1) for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 14, 1997
F-53
<PAGE>
ACQUIPORT PROPERTIES OWNED BY
ACQUIPORT TWO CORPORATION AND
ACQUIPORT THREE CORPORATION
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Rental revenues $11,107,000 $14,579,000
Certain operating expenses 2,263,000 3,350,000
----------- -----------
Excess rental revenues over certain operating expenses $ 8,844,000 $11,229,000
=========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE>
ACQUIPORT PROPERTIES OWNED BY
ACQUIPORT TWO CORPORATION AND
ACQUIPORT THREE CORPORATION
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR COMBINATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of certain of the industrial, office and
retail real estate assets ("Acquiport Properties") acquired by American
Office Park Properties, Inc. and its operating partnership (collectively,
"AOPP") from Acquiport Two Corporation (a wholly-owned subsidiary of a
state pension plan) and Acquiport Three Corporation (a wholly-owned
Subsidiary of a state pension plan) in December 1997. They are prepared in
order to comply with Rule 3.14 of Regulation S-X of the Securities and
Exchange Commission, and are to be filed in connection with the proposed
merger of Public Storage Properties XI, Inc. and AOPP.
The Acquiport Properties are composed of:
Laguna Hills Commerce Center Laguna Hills, CA
Lake Forest Commerce Center Lake Forest, CA
Parkway Commerce Center Hayward, CA
Canada Business Center Lake Forest, CA
Cerritos Industrial Center Cerritos, CA
Buena Park Buena Park, CA
The combined statements of revenues and certain operating expenses include
only the accounts and activity of the Acquiport Properties. Items which are
not comparable to the proposed future operations of the Acquiport
Properties have been excluded. Such items include mortgage interest,
depreciation, management fees and interest income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: The Acquiport Properties were acquired from an unaffiliated party.
Based on the investigation of the Acquiport Properties by AOPP, it is not
aware of any material factors relating to the Acquiport Properties that
would cause this financial information not to be necessarily indicative of
future operating results other than the factors specifically considered by
AOPP as described below.
In the decision to acquire the Acquiport Properties, AOPP considered the
competition from other commercial property owners, the location, the
leases, the rental rates and the occupancy level of the property.
AOPP has reviewed the expenses of the Acquiport Properties, including
salaries of on-site personnel, utilities, property taxes, supplies,
insurance and repairs and maintenance. AOPP expects that property tax
expenses will be approximately $380,000 (unaudited) higher in the future
than amounts included in operating expenses for the year ended December 31,
1996 and approximately $180,000 (unaudited) higher than amounts included in
operating expenses for the nine months ended September 30, 1997. AOPP
expects to be able to pass inflationary operating expense increases in
future periods through to its tenants through expense recoveries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Acquiport Properties' leases are accounted for as operating leases.
Minimum rent revenues are recognized on a method which approximates
straight-line basis over the respective lease term. Recoveries from
tenants, which include an administrative fee, are recognized as income in
the period the applicable costs are accrued.
F-55
<PAGE>
Allowance for Uncollectible Accounts
Management periodically evaluates amounts billed to tenants and accrued
recoveries from tenants and adjusts the allowance for doubtful accounts to
reflect the amounts estimated to be uncollectible. Amounts determined to be
uncollectible are included in operating expenses.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the reported amounts of revenues and certain operating expenses during the
reporting periods. Actual results could differ from those estimates.
3. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................ $12,288,000
1998........................................ 8,213,000
1999........................................ 5,483,000
2000........................................ 3,534,000
2001........................................ 1,541,000
Thereafter.................................. 355,000
-----------
$31,414,000
===========
</TABLE>
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying statement of revenues and certain operating
expenses of the Gunston Property (as defined in Note 1) ("Statement") for the
year ended December 31, 1996. The Statement is the responsibility of the
property's management. Our responsibility is to express an opinion on the above
mentioned statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Statement presents fairly the revenues and certain operating
expenses of the Gunston Property for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
November 10, 1997
F-57
<PAGE>
THE GUNSTON PROPERTY
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Rental revenues $1,698,000 $ 2,071,000
Certain operating expenses (173,000) (325,000)
Interest expense (720,000) (1,009,000)
---------- -----------
Rental revenues in excess of certain operating and
interest expenses $ 805,000 $ 737,000
========== ===========
</TABLE>
See accompanying notes.
F-58
<PAGE>
THE GUNSTON PROPERTY
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR PRESENTATION
The accompanying statements of revenues and certain operating expenses
include the accounts of the Gunston Property, located in Virginia and
proposed to be acquired by American Office Park Properties, Inc. ("AOPP").
The statements are prepared in order to comply with Rule 3.14 of Regulation
S-X of the Securities and Exchange Commission, and are to be filed in
connection with the proposed merger of Public Storage Properties XI, Inc.
and AOPP.
The statements of revenue and certain operating expenses includes only the
accounts and activity of the Gunston Property. Items which are not
comparable to the proposed future operations of the property have been
excluded. Such items include depreciation, amortization, management fees
and miscellaneous income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: The property is a proposed acquisition from an unaffiliated party.
Based on the investigation of the property by AOPP, it is not aware of any
material factors relating to the property that would cause this financial
information not to be necessarily indicative of future operating results
other than the factors specifically considered by AOPP as described below.
In the decision to acquire the property, AOPP considered the competition
from other commercial property owners, the location, the leases, the rental
rates and the occupancy level of the property.
AOPP has reviewed the expenses of the property, including salaries of on-
site personnel, utilities, property taxes, supplies, insurance and repairs
and maintenance. AOPP expects that certain expenses will be approximately
$200,000 (unaudited) per annum higher in the future than amounts incurred
under the 1996 ownership structure of the prior owner ($250,000 (unaudited)
higher than amounts reported for the nine months ended September 30, 1997).
AOPP expects to be able to pass inflationary operating expense increases in
future periods through to its tenants through expense recoveries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Gunston Property leases are accounted for as operating leases. Minimum
rent revenues are recognized on a straight-line basis over the respective
lease term. Recoveries from tenants, which include an administrative fee,
are recognized as income in the period the applicable costs are accrued.
The difference between the rental income recognized on a straight-line
basis and the amount collected on a cash basis is not material for any of
the periods presented.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the reported amounts of revenues and certain operating expenses during the
reporting periods. Actual results could differ from those estimates.
F-59
<PAGE>
3. MORTGAGE DEBT
The property provides collateral for a mortgage note with an approximate
outstanding balance at December 31, 1996 and September 30, 1997 of
$12,752,000 and $12,275,000, respectively. The mortgage note bears interest
at 7.625% and is due May 2004.
4. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997....................................... $1,818,000
1998....................................... 1,827,000
1999....................................... 1,742,000
2000....................................... 1,149,000
2001....................................... 1,110,000
Thereafter................................. 910,000
----------
$8,556,000
==========
</TABLE>
F-60
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Proposed Acquisition Properties (as defined in Note 1)
("Combined Statement") for the year ended December 31, 1996. The Combined
Statement is the responsibility of the property's management. Our
responsibility is to express an opinion on the above mentioned statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Combined Statement is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Combined Statement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall Combined Statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Combined Statement was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Combined Statement presents fairly the combined revenues and
certain operating expenses of the Proposed Acquisition Properties for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
December 19, 1997
F-61
<PAGE>
PROPOSED ACQUISITION PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Rental revenues $2,993,000 $ 3,584,000
Certain operating expenses (821,000) (1,044,000)
Interest expense (829,000) (937,000)
---------- -----------
Rental revenues in excess of certain operating and
interest expenses $1,343,000 $ 1,603,000
========== ===========
</TABLE>
See accompanying notes.
F-62
<PAGE>
PROPOSED ACQUISTION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR PRESENTATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of two properties located in Virginia
(collectively "Proposed Acquisition Properties") and proposed to be
acquired by American Office Park Properties, Inc. ("AOPP"). The properties
are owned by different owners but have a common property manager. The
statements are prepared in order to comply with Rule 3.14 of Regulation S-X
of the Securities and Exchange Commission, and are to be filed in
connection with the proposed merger of Public Storage Properties XI, Inc.
and AOPP.
The combined statements of revenue and certain operating expenses includes
only the accounts and activity of the Proposed Acquisition Properties.
Items which are not comparable to the proposed future operations of the
properties have been excluded. Such items include depreciation,
amortization, management fees and miscellaneous income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: The properties are proposed acquisitions from unaffiliated parties.
Based on the investigation of the properties by AOPP, it is not aware of
any material factors relating to the properties that would cause this
financial information not to be necessarily indicative of future operating
results other than the factors specifically considered by AOPP as described
below.
In the decision to acquire the properties, AOPP considered the competition
from other commercial property owners, the location, the leases, the rental
rates and the occupancy level of the property.
AOPP has reviewed the expenses of the properties, including salaries of on-
site personnel, utilities, property taxes, supplies, insurance and repairs
and maintenance. AOPP expects that certain operating expenses, will be
approximately $190,000 (unaudited) higher in the future than amounts
reported for 1996 and that the operating expenses to be incurred by AOPP
will be approximately $100,000 (unaudited) higher than those reported for
the nine months ended September 1997. AOPP expects to be able to pass
inflationary operating expense increases in future periods through to its
tenants through expense recoveries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Proposed Acquisition Properties leases are accounted for as operating
leases. Minimum rent revenues are recognized on a straight-line basis over
the respective lease term. Recoveries from tenants, which include an
administrative fee, are recognized as income in the period the applicable
costs are accrued. The difference between the rental income recognized on a
straight-line basis and the amount collected on a cash basis is not
material for any of the periods presented.
Use of Estimates
The preparation of the combined statements of revenues and certain
operating expenses in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the reported amounts of revenues and certain operating expenses during the
reporting periods. Actual results could differ from those estimates.
F-63
<PAGE>
3. MORTGAGE DEBT
The two properties provide collateral for mortgage notes. The notes have an
aggregate outstanding balance of approximately $14,814,000 and $14,645,000
at December 31, 1996 and September 30, 1997, respectively. The notes bear
interest at rates ranging from 7.125% to 8.125% (7.50% weighted average
interest rate). The loans mature in July 2005 and May 2006.
4. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997..................................... $ 2,755,000
1998..................................... 2,633,000
1999..................................... 2,201,000
2000..................................... 2,117,000
2001..................................... 1,751,000
Thereafter............................... 2,195,000
-----------
$13,652,000
===========
</TABLE>
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying statement of revenues and certain operating
expenses of the Northpointe Property (as defined in Note 1) ("Statement") for
the year ended December 31, 1996. The Statement is the responsibility of
management. Our responsibility is to express an opinion on the above mentioned
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Statement presents fairly the revenues and certain operating
expenses of the Northpointe Property for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 28, 1998
F-65
<PAGE>
NORTHPOINTE PROPERTY
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Rental revenues $473,000 $585,000
Certain operating expenses 94,000 142,000
-------- --------
Rental revenues in excess of certain
operating expenses $379,000 $443,000
======== ========
</TABLE>
See accompanying notes.
F-66
<PAGE>
NORTHPOINTE PROPERTY
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR PRESENTATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of the Northpointe property located in Virginia
("Northpointe Property") acquired by American Office Park Properties, Inc.
("AOPP") in December 1997. The property was owned by a third party. The
statements are prepared in accordance with Rule 3.14 of Regulation S-X of the
Securities and Exchange Commission and are to be filed in connection with the
proposed merger of Public Storage Properties XI, Inc. and AOPP.
The combined statements of revenue and certain operating expenses include
only the accounts and activity of the Northpointe Property. Items which are
not comparable to the proposed future operations of the property has been
excluded. Such items include depreciation, amortization, management fees and
miscellaneous income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: the property was acquired from an unaffiliated party. Based on the
investigation of the property by AOPP, it is not aware of any material
factors relating to the property that would cause this financial information
not to be necessarily indicative of future operating results other than the
factors specifically considered by AOPP as described below.
In the decision to acquire the property, AOPP considered the competition from
other commercial property owners, the location, the leases, the rental rates
and the occupancy level of the property.
AOPP has reviewed the expenses of the property, including salaries of on-site
personnel, utilities, property taxes, supplies, insurance and repairs and
maintenance. AOPP expects that the operating expenses will be comparable in
the future to amounts reported for 1996 and the nine months ended September
1997. AOPP expects to be able to pass inflationary operating expense
increases in future periods through to its tenants through expense
recoveries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Northpointe Property leases are accounted for as operating leases.
Minimum rent revenues are recognized on a straight-line basis over the
respective lease term. Recoveries from tenants, which include an
administrative fee, are recognized as income in the period the applicable
costs are accrued. The difference between the rental income recognized on a
straight-line basis and the amount collected on a cash basis is not material
for any of the periods presented.
Use of Estimates
The preparation of the combined statements of revenues and certain operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenues and certain operating expenses during the reporting periods.
Actual results could differ from those estimates.
F-67
<PAGE>
3. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997... $ 334,000
1998... 86,000
1999... 75,000
2000... 34,000
----------
$ 529,000
==========
</TABLE>
F-68
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
of American Office Park Properties, Inc.
We have audited the accompanying statement of revenues and certain operating
expenses of the Ammendale Property (as defined in Note 1) ("Statement") for the
year ended December 31, 1996. The Statement is the responsibility of
management. Our responsibility is to express an opinion on the above mentioned
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the Statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Proxy Statement of Public Storage Properties XI, Inc.
In our opinion, the Statement presents fairly the revenues and certain operating
expenses of the Ammendale Property for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 28, 1998
F-69
<PAGE>
AMMENDALE PROPERTY
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Rental revenues $2,162,000 $3,136,000
Certain operating expenses 480,000 714,000
---------- ----------
Rental revenues in excess of certain operating expenses $1,682,000 $2,422,000
========== ==========
</TABLE>
See accompanying notes.
F-70
<PAGE>
AMMENDALE PROPERTY
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
1. BACKGROUND AND BASIS FOR PRESENTATION
The accompanying combined statements of revenues and certain operating
expenses include the accounts of the Ammendale property located in Maryland
("Ammendale Property") acquired by American Office Park Properties, Inc.
("AOPP") in December 1997. The property was owned by a third party. The
statements are prepared in accordance with Rule 3.14 of Regulation S-X of the
Securities and Exchange Commission and are to be filed in connection with the
proposed merger of Public Storage Properties XI, Inc. and AOPP.
The combined statements of revenue and certain operating expenses include
only the accounts and activity of the Ammendale Property. Items which are not
comparable to the proposed future operations of the property have been
excluded. Such items include depreciation, amortization, management fees and
miscellaneous income.
An audited statement is being presented for the most recent fiscal year
available instead of the three most recent years based on the following
factor: the property was acquired from an unaffiliated party. Based on the
investigation of the property by AOPP, it is not aware of any material
factors relating to the property that would cause this financial information
not to be necessarily indicative of future operating results other than the
factors specifically considered by AOPP as described below.
In the decision to acquire the property, AOPP considered the competition from
other commercial property owners, the location, the leases, the rental rates
and the occupancy level of the property.
AOPP has reviewed the revenues and expenses of the property, including
salaries of on-site personnel, utilities, property taxes, supplies, insurance
and repairs and maintenance. Included in rental revenues for the year ended
December 31, 1996 is $110,000 related to a lease termination fee received and
included in operating expenses for the year ended December 31, 1996 is
approximately $75,000 of snow removal cost; such cost for the nine months
ended September 30, 1997 was $12,000. AOPP cannot predict the level of these
items in the future. AOPP expects to be able to pass inflationary operating
expense increases in future periods through to its tenants through expense
recoveries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues Recognition
The Ammendale Property leases are accounted for as operating leases. Minimum
rent revenues are recognized on a straight-line basis over the respective
lease term. Recoveries from tenants, which include an administrative fee, are
recognized as income in the period the applicable costs are accrued. The
difference between the rental income recognized on a straight-line basis and
the amount collected on a cash basis is not material for any of the periods
presented.
Use of Estimates
The preparation of the combined statements of revenues and certain operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenues and certain operating expenses during the reporting periods.
Actual results could differ from those estimates.
F-71
<PAGE>
3. PROPERTY RENTALS
Future minimum rental revenues under non-cancelable leases as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997......... $2,321,000
1998......... 1,737,000
1999......... 978,000
2000......... 630,000
2001......... 412,000
Thereafter... 350,000
----------
$6,428,000
==========
</TABLE>
F-72
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements were
prepared to reflect the proposed merger (the "Merger") of American Office Park
Properties, Inc. ("AOPP") and Public Storage Properties XI, Inc. ("PSP11").
Under the Merger Agreement:
. AOPP will merge into PSP11.
. Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash. The amount of cash elections (the "Cash Elections") will be
limited to 20% of the total outstanding shares of PSP11. If a PSP11
shareholder does not elect cash, he or she will continue to own PSP11
Common Stock.
. Each share of PSP11 Common Stock Series B and each share of PSP11
Common Stock Series C will be converted into either .8641 share of
PSP11 Common Stock or the right to receive $17.71 in cash (up to 20%
of the outstanding Series B and Series C), at the option of the
shareholders. All of the Series B and Series C shareholders have
indicated that they intend to elect PSP11 Common Stock in the Merger.
. Each share of AOPP Common Stock will be converted into either 1.18
shares of PSP11 Common Stock or the right to receive $24.19 in cash
(up to 20% of the outstanding AOPP Common Stock), at the option of an
AOPP shareholder. All of the AOPP shareholders have indicated that
they intend to elect PSP11 Common Stock in the Merger.
. The surviving corporation in the Merger will be renamed "PS Business
Parks, Inc. ("PSBP")."
. Concurrent with the Merger, PSP11 will exchange (the "Exchange") 11
mini-warehouses and two properties that combine mini-warehouse and
commercial space for 11 commercial properties owned by Public Storage,
Inc. ("PSI").
The number of PSP11 Common Shares outstanding upon the consummation of the
Merger will depend in large part on the amount of shares electing cash. Since
the amount is not predictable, two scenarios of pro forma financial information
have been provided: (i) assuming maximum Cash Elections of 20% of PSP11 Common
Stock and (ii) assuming no Cash Elections.
The Merger will be treated as a reverse merger whereby AOPP will be treated as
the accounting acquirer using the purchase method. This has been determined
based upon the following:
. The business focus post Merger will continue to be that of AOPP's
which includes the acquisition, ownership and management of commercial
properties. Prior to the Merger, PSP11's business focus has been
primarily on the ownership and operation of its mini-warehouse
properties which represent approximately 88% of its portfolio.
. Following the Merger, the former shareholders and unitholders of AOPP
will own in excess of 80% of the merged companies.
In addition to adjustments to reflect the proposed Merger, pro forma
adjustments were made to reflect the following transactions:
1. On January 2, 1997, AOPP formed a partnership (the "Operating
Partnership"), concurrent with the formation of the Operating
Partnership (i) the Operating Partnership acquired 26 commercial
properties from PSI and affiliated entities in exchange for 4,859,000
units of limited partnership ("OP Units"), (ii) AOPP acquired nine
commercial properties from PSI in exchange for 1,000,000 shares of
Preferred Stock of AOPP and (iii) AOPP contributed these nine
commercial properties to the Operating Partnership for 1,000,000 OP
Units. In addition, AOPP contributed its property management
operations and other net assets to the Operating Partnership in
exchange for 829,500 OP Units.
PF-1
<PAGE>
2. In April 1997, the Operating Partnership acquired four commercial
properties from PSI in exchange for 1,235,500 OP Units.
3. On July 31, 1997, AOPP acquired two commercial properties from an
unaffiliated third party for cash totaling $33,750,000. AOPP raised
the cash for this acquisition by issuing 1,690,000 shares of AOPP
Common Stock to PSI for cash totaling $33,800,000.
4. On September 24, 1997, the Operating Partnership acquired one
commercial property from an unaffiliated third party for an aggregate
cost of $10,374,000, consisting of cash of $10,050,000 and the
issuance of 12,000 OP Units having a value of $324,000.
5. On December 10, 1997, the Operating Partnership purchased a commercial
property (the "Northpointe Property") for $3,875,000, consisting of
cash of $3,575,000 and the issuance of 11,111 OP units having a value
of $300,000.
6. In December 1997, AOPP reached agreements in principle to acquire
three commercial properties (the "Gunston" and "Proposed
Acquisitions") from unaffiliated third parties for an aggregate cost
of $54,338,000, consisting of cash totaling $19,900,000, the issuance
of 279,200 OP Units having a value of $7,538,000 and the assumption of
$26,900,000 of mortgage debt.
7. On December 24, 1997, AOPP completed a transaction under which AOPP
issued an aggregate of 4,482,852 shares of AOPP common stock and
limited partnership interests convertible into AOPP common stock to a
subsidiary of a state pension fund, and the subsidiary of the state
pension fund, through a merger and contribution, transferred to AOPP
six commercial properties ($118,655,000) and $1,000,000 cash. All of
the limited partnership interests issued in connection with this
transaction have been converted into AOPP common stock. AOPP incurred
approximately $3,300,000 in transaction costs. See "AMERICAN OFFICE
PARK PROPERTIES, INC. - AGREEMENT WITH SUBSIDIARY OF STATE PENSION
FUND."
8. On January 13, 1998, the Operating Partnership purchased a commercial
property (the "Ammendale property") for $22,643,000, consisting of
cash of $22,450,000 and the issuance of 7,143 OP units having a value
of $193,000.
9. On January 23, 1998, AOPP entered into an agreement with a group of
institutional investors under which AOPP would issue up to 5,740,741
shares of AOPP common stock at $27.00 per share in separate tranches.
The first tranche, 1,851,852 shares or $50.0 million, will be issued
in January 1998. The remainder of the shares are to be issued as the
funds are required by AOPP. See "AMERICAN OFFICE PARK PROPERTIES,
INC. - STOCK ISSUANCE TO INSTITUTIONAL INVESTORS" for further
information.
The pro forma consolidated balance sheet at September 30, 1997 has been prepared
to reflect (i) the aforementioned acquisitions and proposed acquisitions of
commercial properties which occurred after September 30, 1997 and the related
issuance of AOPP common stock and OP Units, (ii) the issuance of $50.0 million
of AOPP Common Stock to institutional investors, and (iii) the proposed Merger
transaction between AOPP and PSP11.
Due to uncertainties, no adjustments have been made to the pro forma
consolidated balance sheet at September 30, 1997 with respect to any potential
share issuances to the subsidiary of the state pension plan pursuant to its
rights to acquire additional shares in AOPP.
The pro forma consolidated statements of income for the nine months ended
September 30, 1997 and for the year ended December 31, 1997 have been prepared
assuming (i) the aforementioned acquisitions and proposed acquisitions of
commercial properties (ii) the issuance of $50.0 million of AOPP Common Stock to
institutional investors, and (iii) the proposed Merger between AOPP and PSP11,
as if all such transactions were completed at the beginning of fiscal 1996.
PF-2
<PAGE>
The pro forma adjustments are based upon available information and upon certain
assumptions as set forth in the notes to the pro forma consolidated financial
statements that PSP11 and AOPP believe are reasonable in the circumstances. The
pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements of PSP11, AOPP, and
certain financial information with respect to properties acquired and proposed
to be acquired pursuant to agreements in principle (See "FINANCIAL STATEMENTS -
ACQUIRED PROPERTIES, - PSI EXCHANGE PROPERTIES, - BALDON PROPERTIES, - LARGO
PROPERTY, - ACQUIPORT PROPERTIES, - GUNSTON PROPERTY, - PROPOSED ACQUISITION
PROPERTIES, - NORTHPOINTE PROPERTY, AND - AMMENDALE PROPERTY.) The following pro
forma consolidated financial statements do not purport to represent what AOPP's
results of operations would actually have been if the transactions in fact had
occurred at the beginning of the respective periods or to project AOPP's results
of operations for any future date or period.
PF-3
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSUMING MAXIMUM CASH ELECTIONS OF 20%
<TABLE>
<CAPTION>
AOPP
-------------------------------------------------------
PRO FORMA ADJUSTMENTS
---------------------------
PROPERTY OTHER AOPP
ASSETS AOPP ACQUISITIONS ADJUSTMENTS PRE-MERGER PSP11
(HISTORICAL) (NOTE 1) (NOTE 2) (PRO FORMA) (HISTORICAL)
---------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 6,455 $(48,225) $47,600 $ 5,830 $ 2,273
Real estate facilities, net of accumulated depreciation 191,979 199,511 - 391,490 26,136
Intangible assets, net of accumulated amortization 3,403 - - 3,403 -
Other assets 786 - - 786 400
Purchase cost - - - - -
-------- -------- ------- -------- --------
Total assets $202,623 $151,286 $47,600 $401,509 $ 28,809
======== ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 4,444 $ - $ - $ 4,444 $ 1,639
Notes payable - 26,900 - 26,900 -
Minority interest 125,668 8,031 - 133,699 -
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized 3,579,277 issued and outstanding
(13,724,103 pro forma shares issued and
outstanding) 358 448 185 991 -
Series A - - - - 18
Series B - - - - 2
Series C - - - - 5
Paid-in capital 70,176 115,907 47,415 233,498 32,421
Cumulative net income 1,977 - - 1,977 28,567
Cumulative distribution paid - - - - (33,843)
-------- -------- ------- -------- --------
Total shareholders' equity 72,511 116,355 47,600 236,466 27,170
-------- -------- ------- -------- --------
Total liabilities and shareholders' equity $202,623 $151,286 $47,600 $401,509 $ 28,809
======== ======== ======= ======== ========
Book Value per share of Common Stock (Note 4) $ 20.26 $ 23.85 $ 10.75
======== ======== ========
<CAPTION>
PRO FORMA MERGER
ADJUSTMENTS
----------------------
PSBP
ASSETS PURCHASE VALUATION POST-MERGER
(NOTE 3) (NOTE 3) (PRO FORMA)
-------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents $(3,103) $ - $ 5,000
Real estate facilities, net of accumulated depreciation - 23,418 441,044
Intangible assets, net of accumulated amortization - (1,601) 1,802
Other assets - - 1,186
Purchase cost 48,987 $ (48,987) -
------- ---------- --------
Total assets $45,884 $ (27,170) $449,032
======= ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ - $ - $ 6,083
Notes payable 5,159 - 32,059
Minority interest - - 133,699
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized 3,579,277 issued and outstanding
(13,724,103 pro forma shares issued and
outstanding) 203 178 1,372
Series A - (18) -
Series B - (2) -
Series C - (5) -
Paid-in capital 40,522 (32,599) 273,842
Cumulative net income - (28,567) 1,977
Cumulative distribution paid - 33,843 -
------- ---------- --------
Total shareholders' equity 40,725 (27,170) 277,191
------- ---------- --------
Total liabilities and shareholders' equity $45,884 $ (27,170) $449,032
======= ========== ========
Book Value per share of Common Stock (Note 4) $ 20.20
========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
PF-4
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
1. ACQUISITION OF REAL ESTATE FACILITIES
-------------------------------------
In December 1997, AOPP reached agreements in principle to acquire three
commercial properties (The "Gunston Property" and "Proposed Acquisitions")
from unaffiliated third parties for an aggregate cost of $54,338,000,
consisting of cash totaling $19,900,000, the issuance of 279,200 OP Units
having a value of $7,538,000, and the assumption of $26,900,000 of mortgage
debt.
On December 10, 1997, AOPP purchased the Northpointe property for an
aggregate cost of $3,875,000 consisting of $3,575,000 cash and the issuance
of 11,111 OP units having a value of $300,000.
On January 13, 1998, AOPP purchased the Ammendale property for an aggregate
cost of $22,643,000 consisting of $22,450,000 cash and the issuance of
7,143 OP units having a value of $193,000.
In addition, on December 24, 1997, AOPP completed a transaction under which
AOPP issued 4,482,852 shares of AOPP common stock to a subsidiary of a
state pension fund, and the subsidiary of the state pension fund, through a
merger and contribution, transferred to AOPP six commercial properties
($118,655,000) and $1,000,000 cash. AOPP incurred transaction costs of
approximately $3,300,000.
The following pro forma adjustments have been made to the pro forma
consolidated balance sheet as of September 30, 1997 to reflect the
acquisition and proposed acquisitions of the above commercial properties
and the related issuance of common stock and OP Units:
<TABLE>
<CAPTION>
(in 000's)
--------------
<S> <C>
. Cash and cash equivalents has been decreased to
reflect the cash portion of the acquisition cost
of the properties purchased, as follows:
The Gunston Property........................ $ (1,700)
Proposed Acquisitions....................... (18,200)
Northpointe Property.............. ......... (3,575)
Ammendale Property.......................... (22,450)
Properties acquired from the subsidiary of
a state pension fund (transaction costs of
approximately $3,300,000, net of $1,000,000
contribution from the subsidiary of a state
pension fund)............................... (2,300)
--------
$(48,225)
========
. Real estate facilities has been adjusted to
reflect the acquisition cost of the facilities
acquired:
The Gunston Property........................ $ 21,187
Proposed Acquisitions....................... 33,151
Northpointe Property........................ 3,875
Ammendale Property.......................... 22,643
Properties acquired from the subsidiary of
a state pension fund........................ 118,655
--------
$199,511
========
. Notes payable has been increased to reflect the
principal balance of related notes expected to
be assumed by AOPP in connection with the Gunston
Property and the Proposed Acquisitions........... $ 26,900
========
</TABLE>
PF-5
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
. Minority interest has been increased to reflect the
issuance of 297,454 OP Units in connection with the
acquisition of the Gunston, Proposed Acquisitions,
Northpointe, and Ammendale commercial properties........ $ 8,031
========
. Common stock has been increased to reflect the
issuance of 4,482,852 shares with a par value of
$0.10 per share......................................... $ 448
========
. Paid-in Capital has been increased to reflect the
issuance of common stock ($119,655,000 less par value
of $448,000) less estimated transaction costs of
$3,300,000.............................................. $115,907
========
</TABLE>
2. OTHER ADJUSTMENTS
In December 1997, AOPP reached an agreement in principle with a group of
institutional investors under which AOPP would issue up to 5,740,740 shares
of AOPP common stock at $27.00 per share in separate tranches. The first
tranche, 1,851,852 shares or $50.0 million, is to be issued in January
1998. The remainder of the shares are to be issued as the funds are
required by AOPP.
The following pro forma adjustments have been made to the September 30,
1997 pro forma balance sheet to reflect the proposed issuance of $50.0
million of AOPP Common Stock to institutional investors:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
. Cash and cash equivalents has been increased to
reflect the net proceeds from the issuance of common
stock to institutional investors (gross proceeds of
$50,000,000 less estimated offering costs of
$2,400,000)............................................. $ 47,600
========
. Common stock has been increased to reflect the
issuance of 1,851,852 shares of common stock to
institutional investors, at par value of $0.10 per
share................................................... $ 185
========
. Paid-in Capital has been increased to reflect the
issuance of 1,851,852 shares of common stock to
institutional investors (Net proceeds of $47,600,000
less par value of $185,000)............................. $ 47,415
========
</TABLE>
PF-6
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
3. MERGER PRO FORMA ADJUSTMENTS
----------------------------
The Merger will be accounted for using the purchase method of accounting
with AOPP being the accounting acquirer. The total purchase cost will be
allocated to the acquired net assets; first to the tangible and
identifiable intangible assets and liabilities acquired based upon their
respective fair values, and the remainder will be allocated to the excess
of purchase cost over fair value of assets acquired, if any. Upon
completion of the Merger, the outstanding shares of AOPP common stock
(historical shares outstanding at September 30, 1997 combined with the
shares issued in December 1997 and January 1998) will be converted into an
aggregate of 11,698,498 shares of PSP11 Common Stock and PSP11 will be
renamed "PS Business Parks, Inc."
In determining the cost of the Merger, AOPP evaluated as a measure of cost
of the Merger (i) the aggregate fair value of PSP11's net assets acquired,
(ii) the fair value of PSP11's Common Stock traded in the market, and (iii)
the cash election price of $20.50 per share of PSP11 Common Stock. AOPP
determined that the use of the cash price of $20.50 was a reliable measure
of the Merger cost; further, that such cash price was materially equivalent
to the Merger cost had either of the other alternatives been chosen, based
upon the following:
. The fair value of the net assets of PSP11 were readily determinable as
of August 15, 1997(date the Merger was announced). Substantially all
of the PSP11 assets were comprised of real estate facilities having
current appraised values as determined by independent appraisers. The
estimated fair value per share of PSP11 Common Stock at August 15,
1997 based upon the fair values of the net assets was approximately
$20.50 per share.
. Since AOPP is the accounting acquirer, AOPP's common stock market
price would have been an indicator of the Merger cost. However, AOPP's
common stock is not publicly traded, accordingly, AOPP evaluated
PSP11's common stock as a determination of AOPP's implied common stock
value. The market price of PSP11's Common Stock from January 1, 1997
through August 15, 1997 ranged from $20-3/8 to $19-3/8. The closing
price of PSP11's Common Stock on August 15, 1997, was $20.00. PSP11's
trading price for the one month period after the announcement of the
proposed Merger traded in the range from $19-15/16 to $20-9/16.
. Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash. The amount of cash elections will be limited to 20% of the total
outstanding shares of PSP11. If a PSP11 shareholder does not elect
cash, he or she will continue to own PSP11 Common Stock. Similarly,
each share of AOPP Common Stock will be converted into either 1.18
shares of PSP11 Common Stock or the right to receive $24.19 in cash
(up to 20% of the outstanding AOPP Common Stock), at the option of an
AOPP shareholder; however, all of the AOPP common shareholders have
indicated that they will not be taking the cash election option.
In determining the fair value of the net assets to be acquired, historical
carrying values as of September 30, 1997 were used with respect to PSP11's
other assets and accrued liabilities since they approximately fair value
and appraised values were used for PSP11's real estate facilities (see
"PROPOSAL ONE - THE MERGER - REAL ESTATE PORTFOLIO APPRAISAL BY TNG"). The
aggregate purchase cost and its preliminary allocation to the historical
assets and liabilities is as follows:
PF-7
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
PURCHASE COST:
- --------------
(in 000's)
----------
<S> <C>
. Issuance of 1,455,950 shares of Common Stock
to PSP11's Series A common shareholders
(1,819,937 shares outstanding less assumed
shares electing cash of 363,987) at $20.50
per share.................................................. $29,847
. Issuance of 569,655 shares of Common Stock
to the holders of PSP11's Common Stock
Series B and Series C (707,071 combined
shares outstanding less cancellation of
47,824 shares of Series C the remaining
of which is multiplied by the conversion
ratio of 0.8641) at $20.50 per share....................... 11,678
. Cash elections (assumes that 20% or 363,987
shares of the Series A Common Stock of PSP11
elect to receive $20.50 per share in cash in
the Merger)................................................ 7,462
-------
Total Purchase Cost $48,987
=======
PRELIMINARY ALLOCATION OF PURCHASE COST:
- ----------------------------------------
Cash....................................................... $ 2,273
Other assets............................................... 400
Accrued and other liabilities.............................. (1,639)
Real estate facilities (fair value of
$48,000,000 less $47,000 of excess
aggregate fair values of net assets
acquired over purchase cost)............................... 47,953
-------
$48,987
=======
</TABLE>
The following pro forma adjustments have been made to reflect the Merger as
of September 30, 1997:
<TABLE>
<CAPTION>
PURCHASE ADJUSTMENTS:
- ---------------------
(in 000's)
----------
<S> <C>
. Cash and cash equivalents have been reduced
to reflect the cash necessary to satisfy
cash elections ($7,462,000) combined with
estimated direct costs and expenses of the
merger of $800,000......................................... $(8,262)
=======
. Unallocated purchase cost has been increased
to reflect the aggregate purchase cost..................... $48,987
=======
. Common stock has been increased to reflect
the issuance of 2,025,605 shares with a par
value of $0.10 per share................................... $ 203
=======
. Paid-in Capital has been decreased to reflect
the issuance of common stock ($41,525,000 less
par value of $203,000 and estimated direct
costs and expenses of the Merger of $800,000).............. $40,522
=======
</TABLE>
PF-8
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
VALUATION ADJUSTMENTS:
- ----------------------
(in 000's)
------------
<S> <C>
. Unallocated purchase cost has been
decreased to reflect the allocation of
the aggregate purchase cost.......................... $(48,987)
============
. Real estate facilities has been
increased to reflect the fair value of
the real estate facilities to be
acquired in the Merger (purchase price
allocation of $47,953,000 plus related
net historical cost of management
contracts on AOPP's books with respect
to such properties ($1,601,000) less
PSP11 historical net book value of
$26,136,000)......................................... $ 23,418
============
. AOPP's intangible assets have been
reduced to reflect the
reclassification to real estate with
respect to the above pro forma
adjustment........................................... $ (1,601)
============
. PSP11's historical equity has been
eliminated as follows:
Series A common stock........................... (18)
Series B common stock........................... (2)
Series C common stock........................... (5)
Paid-in capital................................. (32,421)
Cumulative distributions........................ (28,567)
Cumulative net income........................... 33,843
------------
$(27,170)
============
</TABLE>
ADDITIONAL MERGER RELATED ADJUSTMENTS:
- -------------------------------------
AOPP would not have sufficient cash for operations after satisfying cash
elections and closing costs of the merger, and would borrow from its line of
credit to satisfy working capital requirements. The following pro forma
adjustments have been made to reflect these borrowings, as well as to reflect
the issuance of common stock to AOPP shareholders pursuant to the terms of the
Merger Agreement.
<TABLE>
<CAPTION>
(in 000's)
-----------
<S> <C>
. Cash has been increased to reflect
the borrowings from AOPP's line of
credit............................................... $5,159
==========
. Notes payable has been increased to
reflect the borrowings from AOPP's
line of credit....................................... $5,159
==========
. Common stock has been increased to
reflect the issuance of 1,784,517
shares (par value of $0.10 per share)
to the shareholders of AOPP to adjust
to the terms of the Merger Agreement
(9,913,981 pro forma shares multiplied
by the conversion ratio of 1.18 less
9,913,981 shares).................................... $ 178
==========
. Paid-in capital has been decreased
to reflect the issuance of the above
common stock to AOPP shareholders.................... $ (178)
==========
</TABLE>
PF-9
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
EXCHANGE OF PROPERTIES
----------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI. The fair value of the mini-warehouse
facilities is approximately $42,400,000 compared to the fair value of the
11 commercial properties to be received of $42,900,000. Through the pro
forma adjustments above, the commercial facilities are reflected on the pro
forma consolidated balance sheet at their fair approximate values as a
result of the accounting acquisition of PSP11 by AOPP. No additional
adjustments have been made to reflect the Exchange as the relative
valuations are nearly the same.
4. BOOK VALUE PER SHARE OF COMMON STOCK
------------------------------------
Book value per share has been determined by dividing total shareholders'
equity by the outstanding shares of Common Stock. The following summarizes
the shares outstanding:
<TABLE>
<CAPTION>
Common shares
outstanding
-------------
<S> <C>
. AOPP historical shares outstanding at September 30, 1997........................... 3,579,277
. AOPP shares issued in December 1997 to subsidiary of state pension fund............ 4,482,852
. Pro forma shares issued to institutional investors................................. 1,851,852
----------
Pre-Merger pro forma AOPP shares outstanding 9,913,981
. PSP11's Series A shares (assuming maximum Cash Elections, see
"Purchase cost" above)............................................................. 1,455,950
. PSP11's Series B and C (see "Purchase cost" above)................................. 569,655
. Incremental shares issued to AOPP shareholders based upon the conversion of the
Pre-Merger AOPP shares into PSP11 equivalents (9,913,981 pro forma shares
subtracted from the product of 9,913,981 multiplied by 1.18)....................... 1,784,517
----------
Post-Merger pro forma AOPP shares outstanding................................... 13,724,103
==========
</TABLE>
PF-10
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
AOPP
------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
---------------------------------------------------
ACQUISITION OF ACQUISITION OF
REAL ESTATE REAL ESTATE FROM OTHER AOPP
AOPP FROM AFFILIATES THIRD PARTIES ADJUSTMENTS PRE-MERGER PSP11
(HISTORICAL) (NOTE 1) (NOTE 2) (NOTE 3) (PRO FORMA) (HISTORICAL)
------------ ---------------- --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income:
Commercial properties $ 21,039 $ 1,038 $ 23,214 $ - $ 45,291 $ 1,062
Mini-warehouse properties - - - - - 4,582
Facility management fees 696 (52) - - 644 -
Interest and other income 322 - - - 322 55
------------ ---------------- --------------- ------------ ------------ -------------
22,057 986 23,214 - 46,257 5,699
------------ ---------------- --------------- ------------ ------------ -------------
EXPENSES:
Cost of operations:
Commercial properties 8,269 363 6,477 - 15,109 517
Mini-warehouse properties - - - - - 1,545
Cost of managing facilities 157 (12) - - 145 -
Depreciation and amortization 3,410 92 5,023 - 8,525 877
General and administrative 767 - - 225 992 164
Interest expense - - 1,549 - 1,549 -
------------ ---------------- --------------- ------------ ------------ -------------
12,603 443 13,049 225 26,320 3,103
------------ ---------------- --------------- ------------ ------------ -------------
Income before minority
interest in income 9,454 543 10,165 (225) 19,937 2,596
Minority interest in income (6,795) - - (1,101) (7,896) -
(Note 7)
------------ ---------------- --------------- ------------ ------------ -------------
Net income (loss) 2,659 $ 543 $10,165 $(1,326) $ 12,041 $ 2,596
============ ================ =============== ============ ============ =============
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.19 $ 1.21 $1.03
=========== =========== =============
Weighted average shares
(Note 4 and 6) 2,239 9,914 2,527
=========== =========== =============
<CAPTION>
PRO FORMA
MERGER
ADJUSTMENTS
-----------
EXCHANGE OF
REAL ESTATE PSBP
FACILITIES POST-MERGER
(NOTE 5) (PRO FORMA)
------------ ------------
<S> <C> <C>
REVENUES:
Rental income:
Commercial properties $ 5,958 $52,311
Mini-warehouse properties (4,582) -
Facility management fees (351) 293
Interest and other income - 377
------------ ------------
1,025 52,981
------------ ------------
EXPENSES:
Cost of operations:
Commercial properties 2,498 18,124
Mini-warehouse properties (1,545) -
Cost of managing facilities (79) 66
Depreciation and amortization 131 9,533
General and administrative - 1,156
Interest expense 275 1,824
------------ ------------
1,280 30,703
------------ ------------
Income before minority
interest in income (255) 22,278
Minority interest in income
(Note 7) (91) (7,987)
------------ ------------
Net income (loss) $ (346) $14,291
============ ============
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.04
============
Weighted average shares
(Note 4 and 6) 13,724
============
</TABLE>
See Accompanying Notes to Pro-Forma Consolidated Statements of Income.
PF-11
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
AOPP
-----------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------------
ACQUISITION OF ACQUISITION OF
REAL ESTATE REAL ESTATE OTHER AOPP
AOPP FROM AFFILIATES FROM THIRD PARTIES ADJUSTMENTS PRE-MERGER PSP11
(HISTORICAL) (NOTE 1) (NOTE 2) (NOTE 3) (PRO FORMA) (HISTORICAL)
----------- --------------- ------------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income:
Commercial properties $ - $26,682 $30,886 $ - $57,568 $ 976
Mini-warehouse properties - - - - - 6,244
Facility management fees 2,133 (1,334) - - 799 -
Interest and other income 43 - - - 43 33
------ ------- ------- ------- ------- ------
2,176 25,348 30,886 - 58,410 7,253
------ ------- ------- ------- ------- ------
EXPENSES:
Cost of operations:
Commercial properties - 11,059 9,661 - 20,720 464
Mini-warehouse properties - - - - - 2,264
Cost of managing facilities 514 (321) - - 193 -
Depreciation and amortization - 4,565 6,800 - 11,365 1,150
General and administrative 1,143 - - 300 1,443 217
Interest expense - - 1,946 - 1,946 3
------ ------- ------- ------- ------- ------
1,657 15,303 18,407 300 35,667 4,098
------ ------- ------- ------- ------- ------
Income (loss) before
minority interest in income 519 10,045 12,479 (300) 22,743 3,155
and income taxes
Minority interest in income - - - (9,007) (9,007) -
(Note 7)
Income tax expense (216) - - 216 - -
------ ------- ------- ------- ------- ------
Net income (loss) $ 303 $10,045 $12,479 $(9,091) $13,736 $3,155
====== ======= ======= ======= ======= ======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 0.38 $ 1.39 $ 1.24
====== ======= ======
Weighted average shares
(Notes 4 and 6) 803 9,914 2,538
====== ======= ======
<CAPTION>
PRO FORMA
MERGER ADJUSTMENTS
------------------
EXCHANGE OF REAL PSBP
ESTATE FACILITIES POST-MERGER
(NOTE 5) (PRO FORMA)
------------------ -----------
<S> <C> <C>
REVENUES:
Rental income:
Commercial properties $ 7,495 $66,039
Mini-warehouse properties (6,244) -
Facility management fees (424) 375
Interest and other income - 76
------- -------
827 66,490
------- -------
EXPENSES:
Cost of operations:
Commercial properties 3,327 24,511
Mini-warehouse properties (2,264) -
Cost of managing facilities (102) 91
Depreciation and amortization 194 12,709
General and administrative - 1,660
Interest expense 367 2,316
------- -------
1,522 41,287
------- -------
Income (loss) before
minority interest in income (695) 25,203
and income taxes
Minority interest in income (29) (9,036)
(Note 7)
------- -------
Income tax expense - -
Net income (loss) $ (724) $16,167
======= =======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $1.18
=======
Weighted average shares
(Notes 4 and 6) 13,724
=======
</TABLE>
See Accompanying Notes to Pro-Forma Consolidated Statements of Income.
PF-12
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
1. ACQUISITION OF REAL ESTATE FACILITIES FROM AFFILIATES (THE "ACQUIRED
--------------------------------------------------------------------
PROPERTIES")
------------
During 1997, AOPP acquired the following real estate facilities:
. On January 2, 1997, AOPP acquired nine commercial properties
($20,000,000 aggregate fair value) from PSI in exchange for
1,000,000 shares of Preferred Stock. AOPP contributed these nine
commercial properties to the Operating Partnership for 1,000,000 OP
Units. In addition, the Operating Partnership acquired 26 commercial
properties from PSI and affiliated entities in exchange for
4,859,000 OP Units.
. On April 1, 1997, the Operating Partnership acquired four commercial
properties from PSI in exchange for 1,235,500 OP Units.
The following pro forma adjustments have been made to the pro forma
consolidated statements of income to reflect the above as if the
transactions were completed as of January 1, 1996 (see financial statements
for the Acquired Properties included elsewhere in this Proxy Statement):
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
--------------- ------------
(in 000's)
<S> <C> <C>
. Rental income has been increased to reflect:
. the pro forma rental income as if
the acquired real estate facilities
were owned by AOPP throughout the
entire period...................................... $ 20,974 $26,682
. less the rental income with respect
these properties included in AOPP's
historical amounts................................. (19,936) -
-------- --------
Total incremental rental income.................... $ 1,038 $26,682
======== ========
. Facility management fee income has
been decreased to eliminate AOPP's
historical management fee income (5%
of rental income) with respect to the
commercial properties acquired (a
partial period in the case of the nine
month period as a portion has already
been eliminated in the historical
amounts), as such fee is not
collected on owned facilities....................... $ (52) $(1,334)
======== ========
</TABLE>
PF-13
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
--------------- ------------
<S> <C> <C>
. Cost of operations has been increased as follows:
. To reflect the pro forma cost of operations as if the acquired real
estate facilities were owned by AOPP throughout the entire full
period $ 8,123 $10,738
. The above adjustment excludes facility management fees, accordingly,
a pro forma adjustment has been made to reflect the actual cost of
management 237 321
------- -------
. To eliminate cost of operations included in AOPP's historical amounts (7,997) -
------- -------
Total incremental cost of operations $ 363 $11,059
======= =======
. Cost of managing facilities has been decreased to eliminate the costs
associated with the management fee income with respect to the Acquired
Properties. The reduction in management fee income will result in a
reduction in cost of operations with respect to facility management....... $ (12) $ (321)
======= =======
. Depreciation has been increased to reflect the incremental depreciation
of the commercial properties (a partial period with respect to the nine
month period, representing the difference between the full period pro
forma amounts and the historical amounts)................................. $ 92 $ 4,565
======= =======
</TABLE>
2. ACQUISITION OF REAL ESTATE FACILITIES FROM THIRD PARTIES
--------------------------------------------------------
During 1997, AOPP completed the acquisition of several properties and had
agreements in principle to acquire several additional properties:
. Baldon Properties: In July 1997, AOPP issued 1,690,000 shares of
common stock primarily to PSI for cash totaling $33,800,000. AOPP
used substantially all of the proceeds to acquire two commercial
properties in July 1997 from an unaffiliated third party for
$33,750,000 in cash.
. Largo Property: On September 24, 1997, AOPP acquired one commercial
property for cash totaling $10,050,000 and the issuance of 12,000 OP
Units.
PF-14
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997 and Year Ended December 31, 1996
(Unaudited)
(Assuming Maximum Cash Elections Of 20%)
. Acquiport Properties: On December 24, 1997, AOPP completed a
transaction where AOPP issued 4,482,852 shares of AOPP common stock to
a subsidiary of a state pension fund, and the subsidiary of the state
pension fund, through a merger and contribution, transferred to AOPP
six commercial properties ($118,655,000) and $1,000,000 cash. The
Company will incur $3,300,000 in transaction costs.
. Gunston Property: In December 1997, AOPP reached agreement in
principle to acquire a commercial property from an unaffiliated third
party for an aggregate cost of $21,187,000, consisting of cash
totaling $1,700,000, the issuance of 271,167 OP Units having a value
of $7,322,000 and the assumption of $12,165,000 of mortgage debt.
. Proposed Acquisition Properties: In December 1997, AOPP reached
agreements in principle to acquire two commercial properties from an
unaffiliated third party for an aggregate cost of $33,151,000
consisting of cash totaling $18,200,000, the issuance of 8,033 OP
Units having a value of $216,000 and the assumption of $14,735,000 of
mortgage debt.
. Northpointe and Ammendale Properties: In December 1997 and January
1998, AOPP acquired these properties from unaffiliated third parties,
for an aggregate cost of $26,518,000 consisting of cash of $26,025,000
and the issuance of 18,254 OP units having a value of $493,000.
The following pro forma adjustments have been made to reflect the operations of
these properties as if such properties had been acquired at the beginning of
fiscal 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(in 000's)
<S> <C> <C>
. Rental income has been increased to reflect the pro forma rental
income of the properties, as if these facilities were owned by AOPP
throughout the entire period presented:
. Rental income for the entire period base properties'
historical operations:
Baldon properties ......................................... $ 4,932 $ 5,641
Largo property ............................................ 952 1,290
Acquiport properties ..................................... 11,107 14,579
Gunston property .......................................... 1,698 2,071
Northpointe Property ...................................... 473 585
Ammendale Property ........................................ 2,162 3,136
Proposed Acquisitions ..................................... 2,993 3,584
. Less: the portion of rental income with respect to these
properties which has been included in AOPP's historical
amounts ....................................................... (1,103) -
------------------ --------------------
$ 23,214 $ 30,886
================== ====================
</TABLE>
PF-15
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997 and Year Ended December 31, 1996
(Unaudited)
(Assuming Maximum Cash Elections Of 20%)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------ -----------------
<S> <C> <C>
. Cost of operations has been increased to reflect the pro forma
cost of operations of these properties, as if they were owned
by AOPP throughout the entire period presented:
. Cost of operations for the entire period base properties'
historical operations:
Baldon..................................................... $ 1,542 $ 2,234
Largo...................................................... 230 320
Acquiport Properties....................................... 2,263 3,350
Gunston Property........................................... 173 325
Northpointe Property....................................... 94 142
Ammendale Property......................................... 480 714
Proposed Acquisitions...................................... 821 1,044
. Less: the portion of cost of operations with respect to
these properties which has been included
in AOPP's historical amounts............................... (217) -
. Plus: Pro forma adjustment to reflect additional estimated
personnel cost to manage the facilities and property taxes. 1,091 1,532
-------------- --------------
$ 6,477 $ 9,661
. Depreciation has been increased to reflect depreciation ============== ==============
expense for each of the periods.............................. $ 5,023 $ 6,800
============== ==============
. Interest expense has been increased to reflect the
historical interest expense for each of the periods
presented with respect to the assumption of
mortgage notes payable....................................... $ 1,549 $ 1,946
============== ==============
</TABLE>
PF-16
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997 and Year Ended December 31, 1996
(Unaudited)
(Assuming Maximum Cash Elections Of 20%)
3. OTHER PRO FORMA ADJUSTMENTS
---------------------------
<TABLE>
<CAPTION>
NINE MONTHS Year Ended
ENDED SEPTEMBER December 31,
30, 1997 1996
------------------ ----------------
(in 000's)
<S> <C> <C>
. A pro forma adjustment has been made
to increase general and administrative
expense to reflect additional costs
with respect to payroll as AOPP hires
acquisition and executive personnel.................... $ 225 $ 300
=============== =============
. Many of the properties acquired were
acquired by the consolidated Operating
Partnership in exchange for OP Units
from affiliates of AOPP. Such
affiliates are represented as minority
interest in the consolidated financial
statements. Accordingly, a pro forma
adjustment has been made to increase
"Minority interest in income" to
reflect the incremental income
associated with pro forma adjustments
allocable to the minority interest
(representing the difference between
the pro forma amounts less the
historical amounts included in AOPP's
historical financial statements)....................... $ (1,101) $ (9,007)
=============== =============
. Prior to 1997, AOPP operated as a
taxable "C Corporation" and as a
result incurred tax expense.
Commencing in 1997, AOPP will elect
to qualify as a real estate investment
trust for federal tax purposes. As a
real estate investment trust, and
provided AOPP meets certain
requirements (See "Federal Income Tax
Considerations"), AOPP will no longer
incur tax expense. AOPP expects to
meet such requirements, accordingly,
a pro forma adjustment has been made
to eliminate historical income tax
expense................................................ $ - $ 216
=============== =============
</TABLE>
PF-17
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997 and Year Ended December 31, 1996
(Unaudited)
(Assuming Maximum Cash Elections Of 20%)
4. NET INCOME PER COMMON SHARE (AOPP PRE-MERGER PRO FORMA) HAS BEEN COMPUTED
---------------------------------------------------------------------------
AS FOLLOWS:
-----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Historical net income................................................ $ 2,659,000 $ 303,000
Historical weighted average common shares............................ 2,238,766 802,505
Historical net income per common share............................... $ 1.19 $ 0.38
Pro forma net income................................................. $ 12,041,000 $ 13,736,000
Pro forma weighted average common shares (1)......................... 9,913,981 9,913,981
Pro forma net income per common share................................ $ 1.21 $ 1.39
- --------------------------------------------------------------------------------------------------------------
(1)
Historical weighted average shares (common and equivalents).......... 2,238,766 802,505
Adjusted for:
Issuance of Preferred Stock in January 1997 in connection
with property acquisitions (which on March 31, 1997 was
exchanged for an equivalent number of shares of AOPP
common stock).................................................... - 1,015,830
Other issuances.................................................... - 44,189
Issuance of common shares in July 1997 in connection
with property acquisitions....................................... 1,340,511 1,716,753
Issuance of common stock to subsidiary of a state
pension fund (on December 24, 1997).............................. 4,482,852 4,482,852
Pro forma issuance of common stock to institutional
investors........................................................ 1,851,852 1,851,852
Total Pre-Merger pro forma weighted average shares............. 9,913,981 9,913,981
============= ============
</TABLE>
PF-18
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
5. PRO FORMA MERGER ADJUSTMENTS - EXCHANGE OF PROPERTIES:
------------------------------------------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
(in 000's)
<S> <C> <C>
. Rental income - commercial properties has been increased
to reflect the rental income with respect to the 11
commercial properties received through the Exchange........ $ 5,958 $ 7,495
========= =========
. Rental income - mini-warehouses has been decreased to
eliminate the rental income with respect to the 11
mini-warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through
the Exchange............................................... $ (4,582) $ (6,244)
========= =========
. A pro forma adjustment has made to facility management
fees to:
. eliminate the historical facility management fees
related to 11 commercial properties acquired in
the Exchange as such fee will no longer be charged to
properties as AOPP will own them $ (298) $ (375)
. eliminate the historical facility management fees
related to the two commercial properties of PSP11
acquired in the Merger (53) (49)
--------- ---------
$ (351) $ (424)
========= =========
</TABLE>
PF-19
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
(in 000's)
<S> <C> <C>
. A pro forma adjustment has been made to cost of
operations to:
. eliminate historical management fees paid to AOPP
to manage PSP11's two commercial properties which
are included in historical amounts and as a result of
the Merger will no longer be incurred $ (53) $ (49)
. reflect the cost of operations of the 11 commercial
properties acquired in the Exchange (before cost of
management) 2,472 3,274
. reflect the cost of management for PSP11's two
commercial properties and the 11 commercial
properties acquired in the Exchange 79 102
------- -------
$ 2,498 $ 3,327
======= =======
. Cost of operations - mini-warehouses has been decreased
to eliminate the cost of operations with respect to the 11
mini-warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through
the Exchange.................................................... $(1,545) $(2,264)
======= =======
. Cost of managing facilities has been decreased to
eliminate the historical cost of managing the two PSP11
commercial properties and the 11 commercial properties
acquired in the Exchange, such costs are reclassified to
Cost of operations - commercial properties....................... $ (79) $ (102)
======= =======
. A pro forma adjustment has been made to depreciation
expense to reflect the:
. Eliminate the historical depreciation expense
of PSP11's facilities........................................ $ (877) $(1,150)
. Record depreciation expense based on the acquired
cost of the remaining PSP11 facilities ($47,953,000
cost, 30% allocated to land, the remaining cost
allocated to buildings, depreciated straight-line over
25 years).................................................... 1,008 1,344
------- -------
$ 131 $ 194
======= =======
</TABLE>
PF-20
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
(in 000's)
<S> <C> <C>
. A pro forma adjustment has been made to interest expense to
reflect interest expense related to pro forma borrowings on
AOPP's line of credit (see note 3 - Merger Pro Forma
Adjustments - Additional merger adjustments to the pro
forma balance sheet................................................ $ 275 $ 367
=========== ===========
. A pro forma adjustment has been made to increase the
minority interests' share of income based upon its pro rata
ownership interest in the above pro forma adjustments.............. $ (91) $ (29)
=========== ===========
6. POST-MERGER PRO FORMA NET INCOME PER SHARE OF COMMON STOCK HAS BEEN COMPUTED AS FOLLOWS:
----------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
<S> <C> <C>
Post-Merger pro forma net income...................................... $14,291,000 $16,167,000
Post-Merger pro forma weighted average common shares(1)............... 13,724,103 13,724,103
Pro forma net income per share of Common Stock........................ $ 1.04 $ 1.18
- -----------------------------------------------------------------------------------------------------------------------------------
(1)
Pre-Merger pro forma weighted average shares from Note 4 above........ 9,913,981 9,913,981
PSP11's Series A shares (see Note 4 to the Pro Forma
Consolidated Balance Sheet - Assuming Maximum Cash
Elections of 20%).................................................. 1,455,950 1,455,950
PSP11's Series B and C (see Note 4 to the Pro Forma
Consolidated Balance Sheet - Assuming Maximum Cash
Elections of 20%).................................................. 569,655 569,655
Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11
equivalents (9,913,981 shares subtracted from the product
of 9,913,981 multiplied by 1.18) (see Note 4 to the Pro Forma
Consolidated Balance Sheet - Assuming Maximum Cash
Elections of 20%).................................................. 1,784,517 1,784,517
----------- -----------
Post-Merger pro forma weighted average Common Stock common
shares............................................................. 13,724,103 13,724,103
=========== ===========
</TABLE>
PF-21
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING MAXIMUM CASH ELECTIONS OF 20%)
7. MINORITY INTEREST:
------------------
Minority interest represents ownership interests of OP Units in the
consolidated Operating Partnership which are not owned by AOPP. The OP
Units, subject to certain conditions of the Operating Partnership
Agreement, are convertible into Common Shares of AOPP on a one-for-one
basis. Pro forma weighted average OP Units outstanding during each period
owned by minority interests totaled 7,670,733 (after adjustment for the
conversion factor of 1.18). The following table summarizes the ownership
interests:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
--------------- --------------
(in 000's)
<S> <C> <C>
Pro forma AOPP Common Shares outstanding........................... 13,724,103 13,724,103
Pro forma OP Units owned by minority interests which are
convertible into AOPP Common Shares............................... 7,670,733 7,670,733
---------- ----------
Total AOPP Common Shares outstanding assuming
conversion of OP Units...................................... 21,394,836 21,394,836
========== ==========
Percentage ownership of AOPP Common Shares outstanding............. 64.1% 64.1%
Percentage ownership of minority interests......................... 35.9% 35.9%
---------- ----------
Total ownership interest....................................... 100.0% 100.0%
========== ==========
</TABLE>
PF-22
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSUMING NO CASH ELECTIONS
<TABLE>
<CAPTION>
AOPP
------------------------------------------
PRO FORMA ADJUSTMENTS
PROPERTY OTHER AOPP
AOPP ACQUISITIONS ADJUSTMENTS PRE-MERGER
ASSETS (HISTORICAL) (NOTE 1) (NOTE 2) (PRO FORMA)
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,455 $(48,225) $47,600 $ 5,830
Real estate facilities, net of accumulated depreciation 191,979 199,511 391,490
Intangible assets, net of accumulated amortization 3,403 - 3,403
Other assets 786 - 786
Purchase cost - - -
--------- --------- -------- ---------
Total assets $202,623 $151,286 $47,600 $401,509
========= ========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 4,444 $ - $ - $ 4,444
Notes payable - 26,900 - 26,900
Minority interest 125,668 8,031 - 133,699
Shareholder's equity:
Common stock, $.10 par value, 100,000,000 shares
authorized 3,579,277 issued and outstanding
(14,088,090 pro forma shares issued and
outstanding) 358 448 185 991
Series A - - -
Series B - - -
Series C - - -
Paid-in capital 70,176 115,907 47,415 233,498
Cumulative net income 1,977 - - 1,977
Cumulative distribution paid - - - -
--------- --------- -------- ---------
Total shareholders' equity 72,511 116,355 - 236,466
--------- --------- -------- ---------
Total liabilities and shareholders' equity $202,623 $151,286 $47,600 $401,509
========= ========= ======== =========
Book Value per share of Common Stock (Note 4) $ 20.26 $23.85
========= =========
<CAPTION>
PRO FORMA MERGER
----------------------
ADJUSTMENTS PSBP
---------------------- -----------
PSP11 PURCHASE VALUATION POST-MERGER
(HISTORICAL) (NOTE 3) (NOTE 3) (PRO FORMA)
ASSETS ------------ -------- --------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,273 $ (800) $ - $ 7,303
Real estate facilities, net of accumulated depreciation 26,136 - 23,418 441,044
Intangible assets, net of accumulated amortization
Other assets - - (1,601) 1,802
Purchase cost 400 - - 1,186
- 48,987 (48,987) -
-------- ------- -------- --------
Total assets $ 28,809 $48,187 $(27,170) $451,335
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 1,639 $ - $ - $ 6,083
Notes payable - - - 26,900
Minority interest - - - 133,699
Shareholder's equity:
Common stock, $.10 par value, 100,000,000 shares
authorized 3,579,277 issued and outstanding
(14,088,090 pro forma shares issued and
outstanding) - 239 179 1,409
Series A 18 - (18) -
Series B 2 - (2) -
Series C 5 - (5) -
Paid-in capital 32,421 47,948 (32,600) 281,267
Cumulative net income 28,567 - (28,567) 1,977
Cumulative distribution paid (33,843) - 33,843 -
-------- ------- -------- --------
Total shareholders' equity 27,170 48,187 (27,170) 284,653
-------- ------- -------- --------
Total liabilities and shareholders' equity $ 28,809 $48,187 $(27,170) $451,335
======== ======= ======== ========
Book Value per share of Common Stock (Note 4) $ 10.75 $ 20.21
======== ========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet
PF-23
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
1. ACQUISITION OF REAL ESTATE FACILITIES
-------------------------------------
Same as Note 1 to Pro Forma Consolidated Balance Sheet (Assuming Maximum Cash
Elections of 20%).
2. OTHER ADJUSTMENTS
-----------------
Same as note 2 to Pro Forma Consolidated Balance Sheet (Assuming Maximum Cash
Elections of 20%).
3. MERGER PRO FORMA ADJUSTMENTS
----------------------------
The Merger will be accounted for using the purchase method of accounting with
AOPP being the accounting acquirer. The total purchase cost will be allocated
to the acquired net assets; first to the tangible and identifiable intangible
assets and liabilities acquired based upon their respective fair values, and
the remainder will be allocated to the excess of purchase cost over fair
value of assets acquired, if any. Upon completion of the Merger, the
outstanding shares of AOPP common stock (historical shares outstanding at
September 30, 1997 combined with the shares issued in December 1997 and
January 1998) will be converted into an aggregate of 11,698,498 shares of
PSP11 Common Stock and PSP11 will be renamed "PS Business Parks, Inc."
In determining the cost of the Merger, AOPP evaluated as a measure of cost of
the Merger (i) the aggregate fair value of PSP11's net assets acquired, (ii)
the fair value of PSP11's Common Stock traded in the market, and (iii) the
cash election price of $20.50 per share of PSP11 Common Stock. AOPP
determined that the use of the cash price of $20.50 was a reliable measure of
the Merger cost; further, that such cash price was materially equivalent to
the Merger cost had either of the other alternatives been chosen, based upon
the following:
. The fair value of the net assets of PSP11 were readily determinable
as of August 15 1997(date the Merger was announced). Substantially
all of the PSP11 assets were comprised on real estate facilities
having current appraised values as determined by independent
appraisers. The estimated fair value per share of PSP11 Common Stock
at August 15, 1997 based upon the fair values of the net assets was
approximately $20.50 per share.
. Since AOPP is the accounting acquirer, AOPP's common stock market
price would have been an indicator of the Merger cost. However,
AOPP's common stock is not publicly traded, accordingly, AOPP
evaluated PSP11's common stock as a determination of AOPP's implied
common stock value. The market price of PSP11's Common Stock from
January 1, 1997 through August 15, 1997 ranged from $20-3/8 to $19-
3/8. The closing price of PSP11's Common Stock on August 15, 1997,
was $20.00. PSP11's trading price for the one month period after the
announcement of the proposed Merger traded in the range from $19-
15/16 to $20-9/16.
. Each outstanding share of PSP11 Common Stock will continue to be
owned by current holders or converted into the right to receive
$20.50 in cash. The amount of cash elections will be limited to 20%
of the total outstanding shares of PSP11. If a PSP11 shareholder does
not elect cash, he or she will continue to own PSP11 Common Stock.
Similarly, each share of AOPP Common Stock will be converted into
either 1.18 shares of PSP11 Common Stock or the right to receive
$24.19 in cash (up to 20% of the outstanding AOPP Common Stock), at
the option of an AOPP shareholder.
In determining the fair value of the net assets to be acquired, historical
carrying values as of September 30, 1997 were used with respect to PSP11's
other assets and accrued liabilities since they approximate fair value and
appraised values were used for PSP11's real estate facilities (see "PROPOSAL
ONE - THE MERGER - REAL ESTATE PORTFOLIO APPRAISAL BY TNG"). The aggregate
purchase cost and its preliminary allocation to the historical assets and
liabilities is as follows:
PF-24
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
<CAPTION>
PURCHASE COST:
- --------------
(in 000's)
----------
<S> <C>
. Issuance of 1,819,937 shares of Common Stock to PSP11's Series A
common shareholder at $20.50 per share........................................ $37,309
. Issuance of 569,655 shares of Common Stock to the holders of PSP11's
Common Stock Series B and Series C (707,071 combined shares
outstanding less cancellation of 47,824 shares of Series C the remaining
of which is multiplied by the conversion ratio of 0.8641) at $20.50 per
share......................................................................... 11,678
-------
Total Purchase Cost...................................................... $48,987
=======
PRELIMINARY ALLOCATION OF PURCHASE COST:
- ----------------------------------------
Cash.......................................................................... $ 2,273
Other assets.................................................................. 400
Accrued and other liabilities................................................. (1,639)
Real estate facilities (fair value of $48,000,000 less $47,000 of
excess aggregate fair values of net assets acquired over purchase
cost)......................................................................... 47,953
-------
$48,987
=======
</TABLE>
The following pro forma adjustments have been made to reflect the Merger as
of September 30, 1997:
<TABLE>
<CAPTION>
PURCHASE ADJUSTMENTS:
- ---------------------
(in 000's)
----------
<S> <C>
. Cash and cash equivalents has been reduced to reflect to cash
necessary to fund estimated direct costs and expenses of the
Merger........................................................................ $ (800)
=======
. Unallocated purchase cost has been increased to reflect the
aggregate purchase cost....................................................... $48,987
=======
. Common stock has been increased to reflect the issuance of
2,389,592 shares with a par value of $0.10 per share......................... $ 239
=======
. Paid-in Capital has been increased to reflect the issuance of
common stock ($48,987,000 less par value of $239,000 and
estimated direct costs and expenses of the Merger of $800,000)................ $47,948
=======
</TABLE>
PF-25
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
<CAPTION>
VALUATION ADJUSTMENTS:
- ----------------------
(in 000's)
----------
<S> <C>
. Unallocated purchase cost has been decreased to reflect the allocation
of the aggregate purchase cost................................................ $(48,987)
========
. Real estate facilities has been increased to reflect the fair value of the
real estate facilities to be acquired in the Merger (purchase price
allocation of $47,953,000 plus related net cost of management
contracts with respect to such properties ($1,601,000) less PSP11
historical net book value of $26,136,000)..................................... $ 23,418
========
. AOPP's intangible assets have been reduced to reflect the
reclassification to real estate with respect to the above pro forma
adjustment.................................................................... $ (1,601)
========
. PSP11's historical equity has been eliminated as follows:
Series A common stock...................................................... $ (18)
Series B common stock...................................................... (2)
Series C common stock...................................................... (5)
Paid-in capital............................................................ (32,421)
Cumulative net income...................................................... (28,567)
Cumulative distributions................................................... 33,843
--------
$(27,170)
========
. Additionally, common stock has been increased to reflect the issuance
of 1,784,517 shares with a par value of $0.10 per share to the
shareholders of AOPP to adjust to the terms of the Merger Agreement
(9,913,981 pro forma shares multiplied by the conversion ratio of 1.18
less 9,913,981 shares)........................................................ $ 179
========
. Paid-in capital has been decreased to reflect the issuance of the
above common stock to AOPP shareholders....................................... $ (179)
========
</TABLE>
EXCHANGE OF PROPERTIES
- ----------------------
Same as Note 3 to Pro Forma Consolidated Balance Sheet (Assuming Maximum Cash
Elections of 20%) - "EXCHANGE OF PROPERTIES."
----------------------
PF-26
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
4. BOOK VALUE PER SHARE OF COMMON STOCK
------------------------------------
Book value per share has been determined by dividing total shareholders'
equity by the outstanding shares of Common Stock. The following summarizes
the shares outstanding:
<TABLE>
<CAPTION>
Common shares
outstanding
-------------
<S> <C>
. AOPP historical shares outstanding at September 30, 1997............................. 3,579,277
. AOPP shares issued in December 1997 to subsidiary of a state pension fund............ 4,482,852
. Pro forma shares issued to institutional investor group.............................. 1,851,852
----------
Pre-Merger pro forma AOPP shares outstanding 9,913,981
. PSP11's Series A shares (Assuming no Cash Elections, see "Purchase cost" above)..... 1,819,937
. PSP11's Series B and C (see "Purchase cost" above)................................... 569,655
. Incremental shares issued to AOPP shareholders based upon the conversion of
the Pre-Merger AOPP shares into PSP11 equivalents (9,913,981 pro forma shares
subtracted from the product of 9,913,981 multiplied by 1.18)......................... 1,784,517
----------
Post-Merger AOPP pro forma shares outstanding.......................... 14,088,090
==========
</TABLE>
PF-27
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
<CAPTION>
AOPP
---------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------
ACQUISITION OF ACQUISITION OF
REAL ESTATE REAL ESTATE FROM OTHER AOPP
AOPP FROM AFFILIATES THIRD PARTIES ADJUSTMENTS PRE-MERGER PSP11
(HISTORICAL) (NOTE 1) (NOTE 2) (NOTE 3) (PRO FORMA) (HISTORICAL)
------------- --------------- ---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income:
Commercial properties $21,039 $1,038 $23,214 $ - $45,291 $1,062
Mini-warehouse properties - - - - - 4,582
Facility management fees 696 (52) - - 644 -
Interest and other income 322 - - - 322 55
------- ------ ------- -------- ------- ------
22,057 986 23,214 - 46,257 5,699
------- ------ ------- -------- ------- ------
EXPENSES:
Cost of operations:
Commercial properties 8,269 363 6,477 - 15,109 517
Mini-warehouse properties - - - - - 1,545
Cost of managing facilities 157 (12) - - 145 -
Depreciation and amortization 3,410 92 5,023 - 8,525 877
General and administrative 767 - - 225 992 164
Interest Expense - - 1,549 - 1,549 -
------- ------ ------- -------- ------- ------
12,603 443 13,049 225 26,320 3,103
------- ------ ------- -------- ------- ------
Income before minority
interest in income 9,454 543 10,165 (225) 19,937 2,596
Minority interest in income
(Note 7) (6,795) - - (1,101) (7,896) -
------- ------ ------- -------- ------- ------
Net income (loss) $ 2,659 $ 543 $10,165 $ (1,326) $12,041 $2,596
======= ====== ======= ======== ======= ======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 1.19 $1.21 $1.03
======= ======= ======
Weighted average shares 2,239 9,914 2,527
======= ======= ======
<CAPTION>
PRO FORMA
MERGER
ADJUSTMENTS
-----------
EXCHANGE OF
REAL ESTATE PSBP
FACILITIES POST-MERGER
(NOTE 5) (PRO FORMA)
---------- -----------
<S> <C> <C>
REVENUES:
Rental income:
Commercial properties $ 5,958 $52,311
Mini-warehouse properties (4,582) -
Facility management fees (351) 293
Interest and other income - 377
------- -------
1,025 52,981
------- -------
EXPENSES:
Cost of operations:
Commercial properties 2,498 18,124
Mini-warehouse properties (1,545) -
Cost of managing facilities (79) 66
Depreciation and amortization 131 9,533
General and administrative - 1,156
Interest Expense - 1,549
------- -------
1,005 30,428
------- -------
Income before minority
interest in income 20 22,553
Minority interest in income
(Note 7) (55) (7,951)
------- -------
Net income (loss) $ (35) $14,602
======= =======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 1.04
=======
Weighted average shares 14,088
=======
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
PF-28
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
AOPP
----------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------
ACQUISITION OF
ACQUISITION OF REAL ESTATE
REAL ESTATE FROM THIRD OTHER AOPP
AOPP FROM AFFILIATES PARTIES ADJUSTMENTS PRE-MERGER PSP11
(HISTORICAL) (NOTE 1) (NOTE 2) (NOTE 3) (PRO FORMA) (HISTORICAL)
----------- --------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income:
Commercial properties $ - $26,682 $30,886 $ - $57,568 $ 976
Mini-warehouse properties - - - - - 6,244
Facility management fees 2,133 (1,334) - - 799 -
Interest and other income 43 - - - 43 33
------ ------- ------- ------- ------- ------
2,176 25,348 30,886 - 58,410 7,253
------ ------- ------- ------- ------- ------
EXPENSES:
Cost of operations:
Commercial properties - 11,059 9,661 - 20,720 464
Mini-warehouse properties - - - - - 2,264
Cost of managing facilities 514 (321) - - 193 -
Depreciation and amortization - 4,565 6,800 - 11,365 1,150
General and administrative 1,143 - - 300 1,443 217
Interest expense - - 1,946 - 1,946 3
------ ------- ------- ------- ------- ------
1,657 15,303 18,407 300 35,667 4,098
------ ------- ------- ------- ------- ------
Income (loss) before minority
interest in income and income 519 10,045 12,479 (300) 22,743 3,155
taxes
Minority interest in income (Note 7) - - - (9,007) (9,007) -
Income tax expense (216) - - 216 - -
------ ------- ------- ------- ------- ------
Net income (loss) $ 303 $10,045 $12,479 $(9,091) $13,736 $3,155
====== ======= ======= ======= ======= ======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 0.38 $ 1.39 $ 1.24
====== ======= ======
Weighted average shares 803 9,914 2,538
====== ======= ======
PRO FORMA
MERGER
ADJUSTMENTS
-----------
EXCHANGE OF
REAL ESTATE PSBP
FACILITIES POST-MERGER
(NOTE 5) (PRO FORMA)
----------- -----------
<S> <C> <C>
REVENUES:
Rental income:
Commercial properties $ 7,495 $66,039
Mini-warehouse properties (6,244) -
Facility management fees (424) 375
Interest and other income - 76
------- -------
827 66,490
------- -------
EXPENSES:
Cost of operations:
Commercial properties 3,327 24,511
Mini-warehouse properties (2,264) -
Cost of managing facilities (102) 91
Depreciation and amortization 194 12,709
General and administrative - 1,660
Interest expense - 1,949
------- -------
1,155 40,920
------- -------
Income (loss) before minority
interest in income and income
taxes (328) 25,570
Minority interest in income (Note 7) (7) (9,014)
Income tax expense - -
------- -------
Net income (loss) $ (335) $16,556
======= =======
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 1.18
=======
Weighted average shares 14,088
=======
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
PF-29
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
1. ACQUISITION OF REAL ESTATE FACILITIES FROM AFFILIATES
-----------------------------------------------------
Same as Note 1 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
2. ACQUISITION OF REAL ESTATE FACILITIES FROM THIRD PARTIES
--------------------------------------------------------
Same as Note 2 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
3. OTHER PRO FORMA ADJUSTMENTS
---------------------------
Same as Note 3 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
4. NET INCOME PER COMMON SHARE (AOPP PRE-MERGER PRO FORMA) HAS BEEN COMPUTED AS
----------------------------------------------------------------------------
FOLLOWS:
--------
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
--------------- --------------
(in 000's)
<S> <C> <C>
Historical net income......................................... $ 2,659,000 $ 303,000
Historical weighted average common shares..................... 2,238,766 802,505
Historical net income (loss) per common share................. $1.19 $0.38
Pro forma net income.......................................... $12,041,000 $13,736,000
Pro forma weighted average common shares (1).................. 9,913,981 9,913,981
Pro forma net income per common share......................... $1.21 $1.39
- -------------------------------------------------------------------------------------------------------
(1)
Historical weighted average shares (common and equivalents)... 2,238,766 802,505
Adjusted for:
Issuance of Preferred Stock in January 1997 in connection
with property acquisitions (which on March 31, 1997 was
exchanged for an equivalent number of shares of AOPP
common Stock)............................................. - 1,015,830
Other issuances............................................. - 44,189
Issuance of common shares in July 1997 in connection with
property acquisitions..................................... 1,340,511 1,716,753
Issuance of common stock to a subsidiary of a state pension
fund (on December 24, 1997)............................... 4,482,852 4,482,852
Issuance of common stock to institutional investor group.... 1,851,852 1,851,852
----------- -----------
Total Pre-Merger pro forma weighted average shares.... 9,913,981 9,913,981
=========== ===========
</TABLE>
PF-30
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
5. PRO FORMA MERGER ADJUSTMENTS - EXCHANGE OF PROPERTIES:
------------------------------------------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
(in 000's)
<S> <C> <C>
. Rental income - commercial properties has been increased
to reflect the rental income with respect to the 11
commercial properties received through the Exchange............ $ 5,958 $ 7,495
======= ==========
. Rental income - mini-warehouses has been decreased to
eliminate the rental income with respect to the 11 mini-
warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through
the Exchange................................................... $(4,582) $ (6,244)
======== ==========
. A pro forma adjustment has made to facility management
fees to:
. eliminate the historical facility management fees
related to 11 commercial properties acquired in the
Exchange as such fee will no longer be charged to
these properties as AOPP will own them...................... $ (298) $ (375)
. eliminate the historical facility management fees
related to the two commercial properties of PSP11
acquired in the Merger...................................... (53) (49)
------- ----------
$ (351) $ (424)
======= ==========
. A pro forma adjustment has been made to cost of
operations to:
. eliminate historical management fees paid to AOPP
to manage PSP11's two commercial properties which
are included in historical amounts and as a result of
the Merger will no longer be incurred....................... $ (53) $ (49)
. reflect the cost of operations of the 11 commercial
properties acquired in the Exchange (before cost of
management)................................................. 2,472 3,274
. reflect the cost of management for the PSP11's two
commercial properties and the 11 commercial
properties acquired in the Exchange......................... 79 102
------- ----------
$ 2,498 $ 3,327
======= ==========
</TABLE>
PF-31
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
(in 000's)
<S> <C> <C>
. Cost of operations - mini-warehouses has been decreased
to eliminate the cost of operations with respect to the
11 mini-warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through the
Exchange.......................................................... $ (1,545) $ (2,264)
============== ===============
. Cost of managing facilities has been decreased to
eliminate the historical cost of managing the two PSP11
commercial properties and the 11 commercial properties
acquired in the Exchange, such costs are reclassified to
Cost of operations - commercial properties......................... $ (79) $ (102)
============== ===============
. A pro forma adjustment has been made to:
. Eliminate the historical depreciation expense of
PSP11's facilities............................................. $ (877) $ (1,150)
============== ===============
. Record depreciation expense based on the acquired
cost of the remaining PSP11 facilities ($48,000,000
cost, 30% allocated to land, the remaining cost
allocated to buildings, depreciated straight-line over
25 years)...................................................... 1,008 1,344
-------------- ---------------
$ 131 $ 194
============== ===============
. A pro forma adjustment has been made to increase the
minority interests' share of income based upon its pro
rata ownership interest........................................ $ (55) $ (7)
============== ===============
</TABLE>
6. PRO FORMA NET INCOME PER SHARE OF COMMON STOCK HAS BEEN COMPUTED AS FOLLOWS:
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- ------------------
<S> <C> <C>
Post-Merger pro forma net income................................. $ 14,602,000 $ 16,556,000
Post-Merger pro forma weighted average Common Stock
common shares (1)................................................ 14,088,090 14,088,090
Pro forma net income per share of Common Stock................... $ 1.04 $ 1.18
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PF-32
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(ASSUMING NO CASH ELECTIONS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- --------------------
<S> <C> <C>
(1)
Pre-Merger pro forma weighted average shares from Note 4
above............................................................. 9,913,981 9,913,981
PSP11's Series A shares (see Note 4 to the Pro Forma
Consolidated Balance Sheet)....................................... 1,819,937 1,819,937
PSP11's Series B and C (see Note 4 to the Pro Forma
Consolidated Balance Sheet)....................................... 569,655 569,655
Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11
equivalents (9,913,981 shares subtracted from the product of
9,913,981 multiplied by 1.18) (see Note 4 to the Pro Forma
Consolidated Balance Sheet)....................................... 1,784,517 1,784,517
--------------- ---------------
Post-Merger pro forma weighted average Common Stock common
shares............................................................... 14,088,090 14,088,090
=============== ===============
</TABLE>
7. MINORITY INTEREST:
------------------
Minority interest represents ownership interests of OP Units in the
consolidated Operating Partnership which are not owned by AOPP. The OP
Units, subject to certain conditions of the Operating Partnership
Agreement, are convertible into Common Shares of AOPP on a one-for-one
basis. Pro forma weighted average OP Units outstanding during each periods
owned by minority interests totaled 7,670,733 (after adjustment for the
conversion factor of 1.18). The following summarizes the ownership
interests in the Pro forma Consolidated Financial Statements:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER DECEMBER 31,
30, 1997 1996
-------------------- --------------------
<S> <C> <C>
Pro forma AOPP Common Shares outstanding.............................. 14,088,090 14,088,090
Pro forma OP Units owned by minority interests which are
convertible into AOPP Common Shares.............................. 7,670,733 7,670,733
------------- -------------
Total AOPP Common Shares outstanding assuming
conversion of OP Units........................................... 21,758,823 21,758,823
============= =============
Percentage ownership of AOPP Common Shares outstanding................ 64.7% 64.7%
Percentage ownership of minority interests............................ 35.3% 35.3%
------------- -------------
Total ownership interest......................................... 100.0% 100.0%
============= =============
</TABLE>
PF-33
<PAGE>
Appendix A
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 17th day of December, 1997, by and
among PUBLIC STORAGE PROPERTIES XI, INC., a California corporation ("PSP11"),
AMERICAN OFFICE PARK PROPERTIES, INC., a California corporation ("AOPP") and
PUBLIC STORAGE, INC., a California corporation ("PSI").
A. The parties intend that this Agreement shall amend and restate in its
entirety the Agreement and Plan of Reorganization dated as of August 18, 1997
and shall constitute a Plan of Reorganization for purposes of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Plan of Reorganization provides for (i) the merger of AOPP with and into PSP11
in accordance with the applicable provisions of the General Corporation Law of
California (the "GCLC") and an Agreement of Merger substantially in the form
attached hereto as Exhibit A ("Merger Agreement") and (ii) the tax-deferred
like-kind exchange (the "Exchange") in which PSP11 will transfer to PSI the 13
properties listed on Exhibit B hereto (the "PSP11 Exchange Properties") and PSI
will transfer to PSP11 the 11 properties listed on Exhibit C hereto (the "PSI
Exchange Properties").
B. PSP11, AOPP and PSI believe that it is in the best interests of such
corporations and their respective shareholders to enter into and complete this
Agreement and they have approved this Agreement and the transactions
contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. ADOPTION OF PLAN. The parties hereby adopt the Plan of Reorganization
hereinafter set forth.
2. THE MERGER AND THE EXCHANGE.
2.1 COMPLETION OF THE MERGER AND THE EXCHANGE. At the Effective Time
(as defined below), (i) AOPP will be merged with and into PSP11 (the "Merger")
in accordance with the terms, conditions and provisions of this Agreement and
the Merger Agreement and (ii) the Exchange will be consummated in accordance
with the terms, conditions and provisions of this Agreement. The Merger shall
become effective at the time at which the Merger Agreement, together with the
requisite Officers' Certificates of PSP11 and AOPP, are filed with the
California Secretary of State in accordance with the GCLC (the "Effective
Time"). PSP11 and AOPP are sometimes collectively referred to herein as the
"Constituent Corporations" and PSP11, as the surviving corporation of the
Merger, is sometimes referred to herein as the "Surviving Corporation."
2.2 EFFECT OF THE MERGER AND EXCHANGE. At the Effective Time:
2.2.1 CONSTITUENT CORPORATIONS. The separate corporate existence
of AOPP shall cease and the Surviving Corporation shall thereupon succeed,
without other transfer, to all the rights and property of AOPP and shall be
subject to all the debts and liabilities of AOPP in the same manner as if the
Surviving Corporation had itself incurred them; all rights of creditors and all
liens upon the property of each of the Constituent Corporations shall be
preserved unimpaired, provided that such liens upon property of AOPP shall be
limited to the property affected thereby immediately prior to the Effective
Time; and any action or proceeding pending by or against AOPP may be prosecuted
to judgment, which shall bind the Surviving Corporation, or the Surviving
Corporation may be proceeded against or substituted in its place.
2.2.2 ARTICLES AND BYLAWS. Except as amended by the Merger
Agreement, the Articles of Incorporation and the Bylaws of PSP11, as in effect
at the Effective Time, shall continue to be the Articles of Incorporation and
the Bylaws of the Surviving Corporation until changed as provided by law and
their respective
A-1
<PAGE>
provisions; provided that such Articles of Incorporation and Bylaws may be
amended and restated following the Effective Time in forms reasonably acceptable
to the Surviving Corporation.
2.2.3 DIRECTORS. The directors of the Surviving Corporation
immediately following the Merger shall be the following:
(i) Ronald L. Havner, Jr.
Harvey Lenkin
Vern O. Curtis
Jack D. Steele
and
(ii) the other persons listed in the Proxy Statement and
Prospectus provided for in Section 7.5 hereof. Such persons shall
continue as directors of the Surviving Corporation until their
successors are elected and qualified as provided by law and in
accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation. If any of the above named individuals is
unable to serve as a director of the Surviving Corporation at the
Effective Time, a successor will be selected by the remaining above
named individuals.
2.2.4 OFFICERS. The executive officers of the Surviving
Corporation immediately following the Merger shall be the following:
Ronald L. Havner, Jr.
Mary Jayne Howard
Such persons shall continue as officers of the Surviving Corporation
until their successors are elected and qualified as provided by law and in
accordance with the Articles of Incorporation and Bylaws of the Surviving
Corporation.
2.2.5 NAME. At the Effective Time, the name of the Surviving
Corporation shall be changed to "PS Business Parks, Inc."
2.3 COMMON STOCK SERIES A OF PSP11. All outstanding shares of Common
Stock Series A ($.01 par value) of PSP11 (the "PSP11 Shares") would continue to
be owned by holders of PSP11 Shares or converted into the right to receive cash
as follows:
2.3.1 CASH ELECTION. At the Effective Time, subject to Section
2.7.1 hereof, each PSP11 Share as to which a cash election has been made in
accordance with the provisions of Section 2.6 hereof and has not been revoked,
relinquished or lost pursuant to Section 2.6 hereof (a "Series A Cash Election
Share") shall be converted into and shall represent the right to receive $20.50
in cash. As soon as practicable after the Effective Time, the registered
holders of Series A Cash Election Shares shall be paid the cash to which they
are entitled hereunder in respect of such Series A Cash Election Shares.
2.3.2 NO CASH ELECTION. At the Effective Time, subject to Section
2.12 hereof, each PSP11 Share (other than Series A Cash Election Shares) shall
continue to be owned by the holders of the PSP11 Shares.
2.4 COMMON STOCK SERIES B AND C OF PSP11. All outstanding shares of
Common Stock Series B and C ($.01 par value) of PSP11 (the "PSP11 Series B and C
Shares") would be converted into the right to receive cash or PSP11 Shares as
follows:
A-2
<PAGE>
2.4.1 CASH ELECTION. At the Effective Time, subject to Section 2.7.2
hereof, each PSP11 Series B and C Share as to which a cash election has been
made in accordance with the provisions of Section 2.6 hereof and has not been
revoked, relinquished or lost pursuant to Section 2.6 hereof (collectively, the
"Series B and C Cash Election Shares") shall be converted into and shall
represent the right to receive $17.71 in cash. As soon as practicable after the
Effective Time, the registered holders of Series B and C Cash Election Shares
shall be paid the cash to which they are entitled hereunder in respect of such
Series B and C Cash Election Shares.
2.4.2 NO CASH ELECTION. At the Effective Time, subject to Section
2.12 hereof, each PSP11 Series B and C Share (other than Series B and C Cash
Election Shares) shall be converted into 0.8641 PSP11 Shares. If PSP11 should
split or combine the PSP11 Shares or pay a stock dividend prior to the Effective
Time, such conversion number will be appropriately adjusted to reflect such
action.
2.5 AOPP SHARES. All outstanding shares of Common Stock ($.10 par
value) of AOPP (the "AOPP Shares") would be converted into the right to receive
cash or PSP11 Shares as follows:
2.5.1 CASH ELECTION. At the Effective Time, subject to Section
2.7.3 hereof, each AOPP Share as to which a cash election has been made in
accordance with the provisions of Section 2.6 hereof and has not been revoked,
relinquished or lost pursuant to Section 2.6 hereof (collectively, the "AOPP
Cash Election Shares" and with the Series A Cash Election Shares, and the Series
B and C Cash Election Shares, the "Cash Election Shares") shall be converted
into and shall represent the right to receive $24.19 in cash. As soon as
practicable after the Effective Time, the registered holders of AOPP Cash
Election Shares shall be paid the cash to which they are entitled hereunder in
respect of such AOPP Cash Election Shares.
2.5.2 NO CASH ELECTION. At the Effective Time, subject to Section
2.12 hereof, each AOPP Share (other than AOPP Cash Election Shares) shall be
converted into 1.18 PSP11 Shares. If PSP11 should split or combine the PSP11
Shares or pay a stock dividend prior to the Effective Time, such conversion
number will be appropriately adjusted to reflect such number.
2.6 PROCEDURE FOR CASH ELECTION. At the time of the mailing of the
Proxy Statement and Prospectus provided for in Section 7.5 hereof, PSP11 will
send to (i) each holder of record of PSP11 Shares and PSP11 Series B and C
Shares at the record date for the PSP11 meeting of shareholders referred to in
Section 7.2.1 hereof and (ii) each holder of record of AOPP Shares at the record
date for the AOPP meeting of shareholders referred to in Section 7.2.2 hereof a
cash election form (the "Form of Election") providing such holder with the
option to elect to receive the cash election payment contemplated by Section
2.3.1, 2.4.1 or 2.5.1 hereof with respect to such holder's shares. Any such
election to receive such cash payment shall have been properly made only if
American Stock Transfer & Trust Company (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 day of such meeting of shareholders, a Form of
Election properly completed and accompanied by certificates for the shares to
which such Form of Election relates (or an appropriate guarantee of delivery in
a form and on terms satisfactory to PSP11), 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 day of
the respective meeting of shareholders referred to in Section 7.2.1 or 7.2.2
hereof. 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
has been abandoned. If a Form of Election is revoked pursuant to this Section
2.6, the certificate or certificates or any guarantee of delivery in respect of
the PSP11 Shares, PSP11 Series B and C Shares or AOPP Shares to which such Form
of Election relates shall be promptly returned to the person submitting the same
to the Exchange Agent. The Exchange Agent may determine whether or not
elections to receive cash have been properly made or revoked pursuant to this
Section 2.6, 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 PSP11 Shares, PSP11 Series B and C Shares and AOPP Shares
covered thereby shall not be treated as Cash Election Shares, and shall be
treated in the Merger as provided in Section 2.3.2, 2.4.2 or 2.5.2 hereof. The
Exchange Agent may, with the mutual agreement of PSP11 and AOPP, establish such
procedures, not inconsistent with this Section 2.6, as may be necessary or
desirable to implement this Section 2.6.
A-3
<PAGE>
2.7 PROCEDURE FOR PRORATION.
2.7.1 PSP11 SHARES.
2.7.1.1 NO PRORATION. If the aggregate number of Series A
Cash Election Shares is 20% or less than the number of PSP11 Shares outstanding
as of the record date for the meeting of shareholders of PSP11 referred to in
Section 7.2.1, then each such Series A Cash Election Share shall be converted in
the Merger into the right to receive $20.50 in cash.
2.7.1.2 PRORATION. If the aggregate number of Series A Cash
Election Shares exceeds 20%, then each such Series A Cash Election Share shall
be converted in the Merger into the right to receive cash as follows: the number
of Series A Cash Election Shares that shall be converted into the right to
receive $20.50 in cash shall equal the number obtained by multiplying (i) 20% of
the outstanding PSP11 Shares by (ii) a fraction of which the numerator shall be
the number of Series A Cash Election Shares owned by such holder and the
denominator shall be the aggregate number of Series A Cash Election Shares. The
balance of such Series A Cash Election Shares shall be treated in accordance
with the provisions of Section 2.3.2 hereof. Notwithstanding the foregoing,
PSP11, in its sole discretion, may allow such Series A Cash Election Shares to
receive $20.50 in cash even if the aggregate number of Series A Cash Election
Shares exceeds 20% of the number of PSP11 Shares outstanding as of the record
date for the meeting of shareholders of PSP11 referred to in Section 7.2.1.
2.7.2 PSP11 SERIES B AND C SHARES.
2.7.2.1 NO PRORATION. If the aggregate number of Series B
and C Cash Election Shares is 20% or less than the number of PSP11 Series B and
C Shares outstanding as of the record date for the meeting of shareholders of
PSP11 referred to in Section 7.2.1, then each such Series B and C Cash Election
Share shall be converted in the Merger into the right to receive $17.71 in cash.
2.7.2.2 PRORATION. If the aggregate number of Series B and
C Cash Election Shares exceeds 20%, then each such Series B and C Cash Election
Share shall be converted in the Merger into the right to receive cash as
follows: the number of Series B and C Cash Election Shares that shall be
converted into the right to receive $17.71 in cash shall equal the number
obtained by multiplying (i) 20% of the outstanding PSP11 Series B and C Shares
by (ii) a fraction of which the numerator shall be the number of Series B and C
Cash Election Shares owned by such holder and the denominator shall be the
aggregate number of Series B and C Cash Election Shares. The balance of such
Series B and C Cash Election Shares shall be treated in accordance with the
provisions of Section 2.4.2 hereof. Notwithstanding the foregoing, PSP11, in its
sole discretion, may allow such Series B and C Cash Election Shares to receive
$17.71 in cash even if the aggregate number of Series B and C Cash Election
Shares exceeds 20% of the number of PSP11 Shares outstanding as of the record
date for the meeting of shareholders of PSP11 referred to in Section 7.2.1.
2.7.3 AOPP SHARES.
2.7.3.1 NO PRORATION. If the aggregate number of AOPP Cash
Election Shares is 20% or less than the number of AOPP Shares outstanding as of
the record date for the meeting of shareholders of AOPP referred to in Section
7.2.2, then each such AOPP Cash Election Share shall be converted in the Merger
into the right to receive $24.19 in cash.
2.7.3.2 PRORATION. If the aggregate number of AOPP Cash
Election Shares exceeds 20%, then each such AOPP Cash Election Share shall be
converted in the Merger into the right to receive cash as follows: the number
of AOPP Cash Election Shares that shall be converted into the right to receive
$24.19 in cash shall equal the number obtained by multiplying (i) 20% of the
outstanding AOPP Shares by (ii) a fraction of which the numerator shall be the
number of AOPP Cash Election Shares owned by such holder and the denominator
shall be the aggregate number of AOPP Cash Election Shares. The balance of such
AOPP Cash Election Shares shall be treated in accordance with the provisions of
Section 2.5.2 hereof. Notwithstanding the foregoing, PSP11, in its sole
discretion, may allow such AOPP Cash Election Shares to receive $24.19 in cash
even if the aggregate number of AOPP Cash
A-4
<PAGE>
Election Shares exceeds 20% of the number of AOPP Shares outstanding as of the
record date for the meeting of shareholders of AOPP referred to in Section
7.2.2.
2.8 EXCHANGE OF CERTIFICATES. After the Effective Time, each holder
of a certificate theretofore evidencing outstanding PSP11 Series B and C Shares
and AOPP Shares which were converted into PSP11 Shares pursuant hereto, upon
surrender of such certificate to the Exchange Agent or such other agent or
agents as shall be appointed by the Surviving Corporation, shall be entitled to
receive a certificate representing the number of whole PSP11 Shares into which
the PSP11 Shares theretofore represented by the certificate so surrendered shall
have been converted as provided in Section 2.3.2 hereof and cash payment in lieu
of fractional share interests, if any, as provided in Section 2.11 hereof. As
soon as practicable after the Effective Time, the Exchange Agent will send a
notice and a transmittal form to each holder of record at the Effective Time of
PSP11 Series B and C Shares and AOPP Shares whose stock shall have been
converted into PSP11 Shares, advising such holder of the effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent certificates
evidencing PSP11 Series B and C Shares and AOPP Shares in exchange for
certificates evidencing PSP11 Shares.
2.9 STATUS UNTIL SURRENDERED. Until surrendered as provided in
Section 2.8 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP11 Series B and C Shares and AOPP Shares (other than
Dissenting Shares (as defined below), if any) will be deemed for all corporate
purposes to evidence ownership of the number of whole PSP11 Shares into which
the PSP11 Series B and C Shares and AOPP Shares evidenced thereby were
converted. However, until such outstanding certificates formerly evidencing
PSP11 Series B and C Shares and AOPP Shares are so surrendered, no dividend
payable to holders of record of PSP11 Shares shall be paid to the holders of
such outstanding certificates in respect of PSP11 Series B and C Shares and AOPP
Shares, but upon surrender of such certificates by such holders there shall be
paid to such holders the amount of any dividends (without interest) theretofore
paid with respect to such whole PSP11 Shares as of any record date on or
subsequent to the Effective Time and the amount of any cash (without interest)
payable to such holder in lieu of fractional share interests pursuant to Section
2.11 hereof.
2.10 TRANSFER OF SHARES. After the Effective Time, there shall be no
further registration of transfers of PSP11 Series B and C Shares or AOPP Shares
on the respective corporate records and, if certificates formerly evidencing
such shares are presented to the Surviving Corporation, they shall be cancelled
and exchanged for certificates evidencing PSP11 Shares and cash in lieu of
fractional share interests as herein provided.
2.11 NO FRACTIONAL SHARES. Notwithstanding any other term or
provision of this Agreement, no fractional PSP11 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 AOPP
Shares or of PSP11 Series B and C Shares who would otherwise be entitled to such
fractional share will, upon surrender of the certificate representing such
shares, receive a whole PSP11 Share if such fractional share to which such
holder would otherwise have been entitled is .5 of a PSP11 Share or more, and
such fractional share shall be disregarded if it represents less than .5 of a
PSP11 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 PSP11 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 American
Stock Exchange, Inc. of the PSP11 Shares at the Effective Time by (ii) the
fractional interest.
2.12 DISSENTING SHARES. PSP11 Shares, PSP11 Series B and C Shares and
AOPP Shares held by a holder who has demanded and perfected his right to an
appraisal of such shares in accordance with Section 1300 et seq. of the GCLC and
who has not effectively withdrawn or lost his right to appraisal ("Dissenting
Shares") shall not continue to be owned by the holder thereof or converted into
or represent the right to receive cash and/or PSP11 Shares, but the holder
thereof shall be entitled only to such rights as are granted by Section 1300 et
seq. of the GCLC. Each holder of Dissenting Shares who becomes entitled to
payment for PSP11 Shares, PSP11 Series B and C Shares or AOPP Shares pursuant to
these provisions of the GCLC shall receive payment therefor from the Surviving
Corporation in accordance therewith. If any holder of PSP11 Shares, PSP11
Series B and C Shares or AOPP Shares who demands appraisal in accordance with
Section 1300 et seq. of the GCLC shall effectively withdraw with the consent of
the Surviving Corporation or lose (through failure to perfect or otherwise) his
right to appraisal with respect
A-5
<PAGE>
to PSP11 Shares, PSP11 Series B and C Shares or AOPP Shares, such shares shall
continue to be owned by the holder thereof or shall automatically be converted
into the right to receive PSP11 Shares pursuant to Section 2.3.2, 2.4.2 or 2.5.2
hereof, as the case may be.
2.13 ASSUMPTION OF AOPP OPTIONS. At the Effective Time, each
outstanding option to purchase AOPP Shares (an "AOPP Option") granted under
AOPP's 1997 Stock Option and Incentive Plan (the "AOPP Plan") shall be assumed
by PSP11 and, whether vested or unvested, shall be converted into, and shall be
deemed to constitute, an option to acquire, on the same terms and conditions
applicable to the AOPP Option, the number of shares of PSP11 Shares that the
holder of the AOPP Option would have received in the Merger if the AOPP Option
had been exercised in full immediately prior to the Effective Time, irrespective
of whether the AOPP Option was in fact then exercisable (a "Converted Option").
The exercise price per share of a Converted Option shall be the aggregate
exercise price of the AOPP Option divided by the number of PSP11 Shares
purchasable upon exercise of the Converted Option. As soon as practicable after
the Effective Time, PSP11 shall deliver to each holder of an AOPP Option an
appropriate notice setting forth the holder's rights pursuant thereto. PSP11
shall comply with the terms of each AOPP Option and take all corporate action
necessary to reserve for issuance a sufficient number of PSP11 Shares for
delivery upon exercise of the Converted Options.
2.14 EXCHANGE OF DEEDS. At the Effective Time, (i) PSP11 will receive
from escrow deeds for the PSI Exchange Properties and (ii) PSI will receive from
escrow deeds for the PSP11 Exchange Properties. PSP11 and PSI acknowledge that
the PSP11 Exchange Properties, and the PSI Exchange Properties, have the
respective values set forth in Exhibits B and C hereto. PSP11 and PSI also
acknowledge that the Exchange is intended to qualify, as to each of PSP11 and
PSI, for "like-kind exchange" treatment under Section 1031 of the Code.
3. CLOSING.
3.1 TIME AND PLACE OF CLOSING. If this Agreement is approved by the
shareholders of PSP11, a meeting (the "Closing") shall take place as promptly as
practicable thereafter at which the parties will exchange certificates and other
documents as required by this Agreement. Such Closing shall take place at such
time and place as PSP11 may designate. The date of the Closing shall be
referred to as the "Closing Date."
3.2 EXECUTION AND FILING OF MERGER AGREEMENT. At or before the Closing
and after shareholder approval by PSP11 and AOPP, PSP11 and AOPP shall execute
and deliver the Merger Agreement, together with the requisite Officers'
Certificates, for filing with the California Secretary of State. The Merger
Agreement, together with the requisite Officers' Certificates, shall be duly
filed with the California Secretary of State in accordance with the GCLC as soon
as practicable following the Closing.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSP11. PSP11 represents,
warrants and agrees with AOPP and PSI that:
4.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of PSP11, (i) the execution, delivery and performance of this
Agreement by PSP11 has been duly authorized and approved by all necessary
corporate action of PSP11 and (ii) PSP11 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.2 ORGANIZATION AND RELATED MATTERS. PSP11 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 PSP11. PSP11 has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
A-6
<PAGE>
4.3 CAPITAL STOCK. The authorized capital stock of PSP11 consists
solely of (i) 2,828,929 shares of Common Stock Series A ($.01 par value),
1,819,937 of which were issued and outstanding as of December 16, 1997, (ii)
184,453 shares of Common Stock Series B ($.01 par value), all of which were
issued and outstanding as of December 16, 1997 and (iii) 522,618 shares of
Common Stock Series C ($.01 par value), all of which were issued and outstanding
as of December 16, 1997 (47,824 of which will be cancelled immediately prior to
the Merger). All of the issued and outstanding shares of capital stock of PSP11
have been duly and validly authorized and issued, and are fully paid and
nonassessable. There are no options or agreements to which PSP11 is a party or
by which it is bound calling for or requiring the issuance of any of PSP11's
capital stock, except (A) the PSP11 Common Stock Series B and C is convertible
into PSP11 Shares in accordance with PSP11's Articles of Incorporation and (B)
as provided in this Agreement.
4.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of the
Merger and of this Agreement by the shareholders of PSP11, neither the execution
and delivery of this Agreement nor the consummation by PSP11 of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which PSP11 is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of PSP11's real property, (E) as may be required by any applicable
state securities or takeover laws, or (F) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on PSP11
or adversely affect the ability of PSP11 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 PSP11 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
PSP11 or adversely affect the ability of PSP11 to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PSP11 or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSP11 or adversely affect the ability of PSP11 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 PSP11, threatened against PSP11 or
involving any of its properties or assets.
4.6 SEC REPORTS. Since January 1, 1994, PSP11 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 "PSP11 SEC Reports").
None of the PSP11 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
PSP11 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 PSP11
as of their respective dates, and the results of operations of PSP11 for the
periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
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4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1997, the
business of PSP11 has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS.
None of the information supplied or to be supplied by PSP11 for inclusion or
incorporation by reference in the S-4 Registration Statement or the Proxy
Statement and Prospectus (as such terms are defined in Section 7.5 hereof) will
(i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meeting of the
shareholders of PSP11, 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 PSP11 is currently in full
force and effect and PSP11 has reported all claims and occurrences to the extent
required by such insurance.
4.11 PSP11 EXCHANGE PROPERTIES. PSP11 has valid and insurable fee
simple title to the PSP11 Exchange Properties, free and clear of all liens and
encumbrances, subject to certain matters that do not materially impair the use
or value of the respective PSP11 Exchange Property to which they relate.
4.12 PSI EXCHANGE PROPERTIES. PSP11 agrees that it will not dispose
of the PSI Exchange Properties for at least a period of two years after the
Effective Time.
4.13 DISCLOSURE. The representations and warranties by PSP11 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 AOPP. AOPP hereby
represents, warrants and agrees with PSP11 and PSI that:
5.1 AUTHORIZATION. Subject to approval of this Agreement by the
shareholders of AOPP, (i) the execution, delivery and performance of this
Agreement by AOPP has been duly authorized and approved by all necessary
corporate action of AOPP and (ii) AOPP has all necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
5.2 ORGANIZATION AND RELATED MATTERS. AOPP owns properties indirectly
through three wholly owned corporations or limited liability companies and is
the general partner of American Office Park Properties, L.P. AOPP and these
entities are collectively referred to as the "AOPP Entities." Each of the AOPP
Entities is 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 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 AOPP.
5.3 CAPITAL STOCK. The authorized capital stock of AOPP consists
solely of (i) 100,000,000 shares of Common Stock ($.10 par value), 3,579,277.83
of which were issued and outstanding as of December 16, 1997 and (ii)
100,000,000 shares of Preferred Stock ($.10 par value), none of which were
issued and outstanding as of December 16, 1997. All of the issued and
outstanding shares of capital stock or other equity interest of each of the AOPP
Entities have been duly and validly authorized and issued, and are fully paid
and nonassessable.
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5.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement nor the consummation by AOPP of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which AOPP is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of AOPP's real property, (E) as may be required by any applicable
state securities or takeover laws, or (F) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on AOPP
or adversely affect the ability of AOPP 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 AOPP 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
AOPP or adversely affect the ability of AOPP 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 AOPP or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on AOPP or adversely affect the ability of AOPP 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 AOPP, threatened against any of the
AOPP Entities or involving any of their properties or assets.
5.6 FINANCIAL STATEMENTS. The financial statements of AOPP as of and
for the periods ended December 31, 1994, 1995 and 1996 and September 30, 1996
and 1997, 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 AOPP as of their
respective dates, and the results of operations of AOPP for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments). Each of the AOPP Entities has
filed all tax returns required to be filed and has paid all taxes required to be
paid.
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1997, the
business of the AOPP Entities 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.
5.8 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS.
None of the information supplied or to be supplied by AOPP for inclusion or
incorporation by reference in the S-4 Registration Statement or the Proxy
Statement and Prospectus (as those terms are defined in Section 7.5 hereof) will
(i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meeting of the
shareholders of PSP11, 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.
5.9 INSURANCE. All material insurance of the AOPP Entities is
currently in full force and effect, and AOPP has reported all claims and
occurrences to the extent required by such insurance.
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5.10 DISCLOSURE. The representations and warranties by AOPP 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.
5.11 COMPLIANCE WITH LAWS. The use and operation of the properties of
the AOPP Entities are in compliance in all material respects with all laws which
are material to their ownership and operation. Notwithstanding the foregoing,
no representation or warranty is made herein regarding compliance of these
properties with ADA or OSHA, except that no AOPP Entity has received written
notice that any of these properties is not in compliance with ADA or OSHA. All
material licenses and entitlements required in connection with the ownership,
construction, use, or occupancy of these properties have been obtained and are
in full force and effect and in good standing, free from violation. No AOPP
Entity has received written notice that any of these properties is in violation
of any law which is material to the ownership and operation of these properties.
5.12 TITLE MATTERS. Each of the AOPP Entities has good and marketable
title in fee simple absolute to each of its properties; except that one of the
properties is ground leased by an AOPP Entity, in which case it has the right to
occupy such property pursuant to a legally valid and binding ground lease. All
of these properties are owned or ground leased free and clear of all liens and
encumbrances, other than certain matters, none of which interfere in any
material respect with the existing or intended ownership, occupancy, use,
operation, maintenance or repair of these properties.
5.13 ENVIRONMENTAL MATTERS. Except as may be disclosed in reports
delivered to PSP11, (i) no AOPP Entities have engaged in or knowingly permitted
any operations or activities in any way involving the handling, manufacture,
treatment, storage, use, generation, release, discharge, refining, dumping or
disposal of any hazardous materials on, under, in or about the properties of the
AOPP Entities or transported any hazardous materials to, from or across these
properties, except in all cases in compliance with environmental requirements;
and (ii) to the knowledge of the AOPP Entities, no hazardous materials are
presently constructed, deposited, stored or otherwise located on, under, in or
about any of these properties, except in all cases in compliance with
environmental requirements.
5.14 LEASES. The leases described on the rent rolls delivered to
PSP11 are all of the leases affecting the properties of the AOPP Entities as of
the date hereof. The rent rolls are true, complete and accurate. Except as set
forth in the rent rolls, no rent has been paid under any lease more than one
month in advance. Except for the leases described on the rent rolls, there are
no other leases, licenses or other agreements affecting the occupancy of any of
the properties of the AOPP Entities. No AOPP Entity has received written notice
that there exists any uncured breach or default under any lease, including,
without limitation, any ground lease by any AOPP Entity affecting any of these
properties, and to the knowledge of AOPP Entities, no pending breach or default
under any lease by any AOPP Entity exists.
5.15 CONTRACTS. Other than as disclosed in the Proxy Statement and
Prospectus, none of the AOPP Entities is bound by any contract outside the
ordinary course of business. No AOPP Entity has received written notice that
there exists any uncured breach or default under any material contract by any
AOPP Entity affecting any of its properties, and to the knowledge of AOPP
Entities, no pending breach or default exists.
5.16 REIT STATUS. AOPP has been operated since January 1, 1997 so as
to qualify as a real estate investment trust under Section 856 of the Internal
Revenue Code of 1986. AOPP does not have any earnings or profits that are
attributable to a C corporation taxable year.
6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSI. PSI hereby
represents, warrants and agrees with PSP11 and AOPP that:
6.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement by PSI has 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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6.2 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.
6.3 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS.
None of the information supplied or to be supplied by PSI for inclusion or
incorporation by reference in the S-4 Registration Statement or the Proxy
Statement and Prospectus (as those terms are defined in Section 7.5 hereof) will
(i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meeting of the
shareholders of PSP11, 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.
6.4 PSI EXCHANGE PROPERTIES. PSI has valid and insurable fee simple
title to the PSI Exchange Properties, free and clear of all liens and
encumbrances, subject to certain matters that do not materially impair the use
or value of the respective PSI Exchange Property to which they relate. PSI has
not engaged in or knowingly permitted any operations or activities in any way
involving the handling, manufacture, treatment, storage, use, generation,
release, discharge, refining, dumping or disposal of any hazardous materials on,
under, in or about the PSI Exchange Properties, or transported any hazardous
materials to, from or across the PSI Exchange Properties, except in all cases in
compliance with environmental requirements; and to the knowledge of PSI, no
hazardous materials are presently constructed, deposited, stored, or otherwise
located on, under, in or about the PSI Exchange Properties, except in all cases
in compliance with environmental requirements. The leases described on the rent
rolls delivered to PSP11 are all of the leases affecting the PSI Exchange
Properties as of the date hereof. The rent rolls are true, complete and
accurate. Except as set forth in the rent rolls, no rent has been paid under
any lease more than one month in advance. Except for the leases described on
such rent rolls, there are no other leases, licenses or other agreements
affecting the occupancy of any of the PSI Exchange Properties. PSI has not
received written notice that there exists any uncured breach or default under
any lease, and to the knowledge of PSI, no pending breach or default under any
lease by PSI exists.
6.5 PSP11 EXCHANGE PROPERTIES. PSI agrees that it will not dispose of
the PSP11 Exchange Properties for at least a period of two years after the
Effective Time.
7. COVENANTS AND AGREEMENTS.
7.1 ORDINARY COURSE. Except as contemplated by this Agreement, during
the period from the date of this Agreement to the Effective Time, each of PSP11
and AOPP 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. Without the consent
of the other, PSP11 and AOPP will not issue any capital stock or debt securities
convertible into capital stock or enter into any material contracts. PSP11
hereby consents to the issuance of up to 4,482,852 shares of AOPP common stock
in connection with the acquisition of properties from a state pension plan and
sales of AOPP common stock to institutional investors, provided that the terms
of the agreements for such issuances are as described in the Proxy Statement and
Prospectus in all material respects. Each of PSP11 and AOPP 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.
7.2 MEETING OF SHAREHOLDERS.
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7.2.1 PSP11. PSP11 will take all action necessary in accordance
with applicable law to convene a meeting of its shareholders as promptly as
practicable to consider and vote upon approval of this Agreement, it being
understood that (i) the principal terms of the Agreement must be approved by the
affirmative vote of a majority of the outstanding shares of Common Stock Series
A, Common Stock Series B and Common Stock Series C of PSP11, counted together as
a single class, and (ii) the shares of Common Stock Series B and Common Stock
Series C of PSP11 will be voted with the holders of a majority of the
unaffiliated shares of Common Stock Series A of PSP11.
7.2.2 AOPP. AOPP will take all action necessary in accordance
with applicable law to convene a meeting of its shareholders as promptly as
practicable to consider and vote upon approval of this Agreement.
7.3 TAX REPORTING. Each of PSP11 and AOPP agrees to report the Merger
for federal and state income tax purposes, as a reorganization of the type
described in Section 368(a)(1)(A) of the Code.
7.4 ACQUISITION PROPOSALS.
7.4.1 PSP11. PSP11 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
PSP11, or any purchase of all or any significant portion of the assets of PSP11,
or any equity interest in PSP11, other than transactions in the ordinary course
of business or the transactions contemplated hereby or described in the Proxy
Statement and Prospectus (a "PSP11 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 a PSP11 Acquisition Proposal;
provided, however, that the Board of Directors on behalf of PSP11 may furnish or
cause to be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
and discussions might cause the members of the Board of Directors to breach
their fiduciary duty to PSP11's shareholders under applicable law as advised by
counsel. PSP11 will notify AOPP 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 PSP11,
and will keep AOPP informed of the status and terms of any such proposals and
any such negotiations or discussions.
7.4.2 AOPP. AOPP 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
AOPP, or any purchase of all or any significant portion of the assets of AOPP,
or any equity interest in AOPP, other than transactions in the ordinary course
of business or the transactions contemplated hereby or described in the Proxy
Statement and Prospectus (an "AOPP 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 AOPP Acquisition Proposal;
provided, however, that the Board of Directors on behalf of AOPP may furnish or
cause to be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
and discussions might cause the members of the Board of Directors to breach
their fiduciary duty to AOPP's shareholders under applicable law as advised by
counsel. AOPP will notify PSP11 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 AOPP,
and will keep PSP11 informed of the status and terms of any such proposals and
any such negotiations or discussions.
7.5 REGISTRATION AND PROXY STATEMENTS. PSP11 and AOPP will promptly
prepare and file with the SEC a preliminary proxy statement in connection with
the vote of shareholders of PSP11 with respect to the Merger. PSP11 will, as
promptly as practicable, prepare and file with the SEC a registration statement
on Form S-4 (the "S-4 Registration Statement"), containing a proxy
statement/prospectus, in connection with the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the PSP11 Shares to be issued
to holders of AOPP Shares in the Merger (such proxy statement/prospectus,
together with any amendments thereof or supplements thereto, in the form or
forms to be mailed or delivered to the shareholders of PSP11 and AOPP, being
herein called the "Proxy Statement and Prospectus"). PSP11 and AOPP will each
use its 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
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under federal or state securities laws, and PSP11 and AOPP will use their best
efforts to cause the Proxy Statement and Prospectus to be mailed to their
respective shareholders at the earliest practicable date. PSP11 agrees that (i)
if at any time prior to the vote of shareholders of PSP11 and AOPP with respect
to the Merger any event with respect to PSP11 or the Merger should occur which
is required to be described in an amendment of, or a supplement to, the Proxy
Statement and Prospectus or the S-4 Registration Statement, such event shall be
so described, and such amendment or supplement shall be promptly filed with the
SEC and, as required by law, disseminated to the shareholders of PSP11 and AOPP
and (ii) the Proxy Statement and Prospectus will (with respect to PSP11) comply
as to form in all material respects with the requirements of the federal
securities laws. AOPP agrees that (i) if at any time prior to the vote of
shareholders of PSP11 and AOPP with respect to the Merger any event with respect
to AOPP or the Merger should occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement and Prospectus or the S-4
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the shareholders of PSP11 and AOPP and (ii) the Proxy Statement
and Prospectus will (with respect to AOPP) comply as to form in all material
respects with the requirements of the federal securities laws.
7.6 BEST EFFORTS. Each of PSP11 and AOPP 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.
7.7 REGISTRATION AND LISTING OF PSP11 SHARES. PSP11 will use its best
efforts to register under the applicable provisions of the Securities Act the
PSP11 Shares to be issued in the Merger and to cause such shares to be listed
for trading on the AMEX upon official notice of issuance.
7.8 DISTRIBUTIONS. Neither PSP11 nor AOPP will, at any time prior to
the Effective Time, declare or pay any cash distribution on its capital stock or
make any other distribution of assets to its shareholders, except (i) regular
quarterly dividends consistent with prior practice and (ii) cash distributions
required to satisfy REIT distribution requirements.
7.9 AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS. Except for the
amendments included in Exhibit D hereto, neither PSP11 nor AOPP will, at any
time prior to the Effective Time, amend its respective articles of incorporation
or bylaws.
8. CONDITIONS.
8.1 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:
8.1.1 SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall have been duly approved by both the shareholders of
PSP11 and the shareholders of AOPP as contemplated by Sections 7.2.1 and 7.2.2
hereof.
8.1.2 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 PSP11, AOPP or PSI.
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8.1.3 LITIGATION. No court or governmental or regulatory authority
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) or taken any action which
prohibits the consummation of the transactions contemplated by this Agreement;
provided, however, that the party invoking this condition shall use its best
efforts to have any such judgment, decree, injunction or other order vacated.
8.1.4 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 shares of PSP11 Common Stock to be
issued in the Merger shall have been received.
8.1.5 LISTING OF PSP11 SHARES ON AMEX. The shares of PSP11 Common
Stock to be issued in the Merger shall have been approved for listing on the
AMEX upon official notice of issuance.
8.1.6 PSP11 FAIRNESS OPINION. Prior to the mailing of the Proxy
Statement and Prospectus to the shareholders of PSP11 and AOPP, the Board of
Directors of PSP11 shall have received the opinion of Jefferies & Company, Inc.
in form and substance satisfactory to it to the effect that the terms of the
Merger are, from a financial point of view, fair to the public shareholders of
PSP11, and such opinion shall not have been withdrawn or revoked.
8.1.7 TAX OPINION. The Board of Directors of PSP11 and AOPP shall
have received a legal opinion of Hogan & Hartson L.L.P. that the Merger will
qualify as a tax-free reorganization under Section 368(a) of the Code.
8.1.8 PSI BOARD APPROVAL. This Agreement and the transactions
contemplated hereby shall have been duly approved by the Board of Directors of
PSI.
8.1.9 MERGER AND EXCHANGE. The Merger and the Exchange are
conditioned on each other.
8.2 CONDITIONS TO OBLIGATIONS OF PSP11. The obligations of PSP11 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 PSP11 to the extent permitted by applicable law:
8.2.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of AOPP and PSI contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date (except to the extent they
relate to a particular date), and AOPP and PSI shall have performed or complied
with all agreements and covenants required by this Agreement to be performed or
complied with by them at or prior to the Closing.
8.2.2 DEEDS AND CASH. PSI shall have delivered into escrow deeds,
in form and substance satisfactory to PSP11, for the PSI Exchange Properties.
8.2.3 CERTIFICATE OF OFFICERS. PSP11 shall have received such
certificates of officers of AOPP and PSI as PSP11 may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to it of the Chief Executive Officers and the Chief Financial Officers of AOPP
and PSI to the effect that, to the best of their knowledge, all representations
and warranties of their respective corporation 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 their respective corporation has
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with at or prior to the Closing.
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8.2.4 TITLE TO PROPERTIES; ENVIRONMENTAL AUDITS. PSP11 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 AOPP and each of
the PSI Exchange Properties.
8.2.5 DISSENTING SHARES. None of the AOPP Shares shall have
become Dissenting Shares.
8.2.6 PSP11 shall have approved all material contracts entered
into by AOPP after execution of this Agreement and be satisfied that appropriate
disclosure with respect to any such contract has been made to the shareholders
of PSP11 and AOPP.
8.3 CONDITIONS TO OBLIGATIONS OF AOPP. The obligations of AOPP 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 AOPP to the extent permitted by applicable law.
8.3.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSP11 and PSI contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date (except to the extent they
relate to a particular date), and PSP11 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 them at or prior to the Closing.
8.3.2 CERTIFICATE OF OFFICERS. AOPP shall have received such
certificates of officers of PSP11 and PSI as AOPP may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to it of the Chief Executive Officers and the Chief Financial Officers of PSP11
and PSI to the effect that, to the best of their knowledge, all representations
and warranties of their respective corporation 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 their respective corporation has
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with at or prior to the Closing.
8.3.3 TITLE TO PROPERTIES; ENVIRONMENTAL AUDITS. AOPP 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 PSP11, excluding
the PSP11 Exchange Properties.
8.3.4 DISSENTING SHARES. Less than 5% of the outstanding PSP11
Shares shall have become Dissenting Shares.
8.4 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.
8.4.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS.
Each of the representations and warranties of PSP11 and AOPP 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 PSP11 and AOPP 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 them at or prior to the Closing.
8.4.2 DEEDS. PSP11 shall have delivered into escrow deeds, in
form and satisfactory to PSI, for the PSP11 Exchange Properties.
8.4.3 CERTIFICATE OF OFFICERS. PSI shall have received such
certificates of officers of PSP11 and AOPP as PSI may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to it of the Chief Executive Officers and the Chief Financial Officers of PSP11
and AOPP to the effect that, to the best of their knowledge, all representations
and warranties of their respective corporation 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
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Date, and their respective corporation has performed or complied with all
agreements and covenants required by this Agreement to be performed or complied
with at or prior to the Closing.
9. TERMINATION.
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after shareholder approval, by the mutual written consent of PSP11, AOPP and
PSI.
9.2 TERMINATION BY PSP11, AOPP OR PSI. This Agreement may be
terminated and the Merger and the Exchange may be abandoned by action of the
Board of Directors of any of PSP11, AOPP or PSI if (i) both the Merger and the
Exchange shall not have been consummated by December 31, 1998 (provided that the
right to terminate this Agreement under this Section 9.2(i) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); (ii) any court of competent jurisdiction in the
United States or some other governmental body or regulatory authority shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable; or
(iii) the shareholders of either PSP11 or AOPP shall have failed to approve, or
have dissented in excess of the limits set forth in Sections 8.2.5 and 8.3.4
with respect to, this Agreement and the transactions contemplated hereby at its
respective meeting of shareholders.
9.3 TERMINATION BY PSP11. This Agreement may be terminated by PSP11
and the Merger and the Exchange may be abandoned at any time prior to the
Effective Time, if (i) AOPP or 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 AOPP or PSI, respectively, 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 AOPP or PSI contained in this
Agreement shall not be true in all material respects when made, which inaccuracy
or breach (if capable of cure) has not been cured within five business days
following notice to such party of the inaccuracy or breach, or on and as of the
Closing as if made on and as of the Closing Date.
9.4 TERMINATION BY AOPP. This Agreement may be terminated by AOPP and
the Merger and the Exchange may be abandoned at any time prior to the Effective
Time, before or after shareholder approval, if (i) PSP11 or 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
PSP11 or PSI, respectively, 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 PSP11 or 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 such party of the inaccuracy
or breach, or on and as of the Closing as if made on and as of the Closing Date.
9.5 TERMINATION BY PSI. This Agreement may be terminated by PSI and
the Merger and the Exchange may be abandoned at any time prior to the Effective
Time, before or after shareholder approval, if (i) PSP11 or AOPP 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
PSP11 or AOPP, respectively, 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 PSP11 or AOPP 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 such party of the inaccuracy
or breach, or on and as of the Closing as if made on and as of the Closing Date.
9.6 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and abandonment of the Merger and the Exchange pursuant to
this Section 9, 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
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any person who controls a party within the meaning of the Securities Act, except
as provided in Section 10.1 and except that nothing herein will relieve any
party from liability for any breach of this Agreement.
10. MISCELLANEOUS.
10.1 PAYMENT OF EXPENSES. If the Merger and Exchange are consummated,
the Surviving Corporation shall pay all the expenses incident to preparing for,
entering into and carrying out this Agreement and the consummation of the
transactions contemplated hereby. If the Merger and Exchange are not
consummated, each of PSP11, AOPP and PSI shall pay its own expenses, except that
PSP11, AOPP and PSI shall each pay one-third of any expenses incurred in
connection with the printing of the S-4 Registration Statement and the Proxy
Statement and Prospectus, the real estate appraisals and environmental audits of
the PSP11 Exchange Properties, the PSI Exchange Properties and the properties of
AOPP 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.
10.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
respective representations and warranties of PSP11, AOPP and PSI 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 10.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance at or after the Effective
Time.
10.3 MODIFICATION OR AMENDMENT. The parties may modify or amend this
Agreement by written agreement authorized by the Boards of Directors and
executed and delivered by officers of the respective parties; provided, however,
that after approval of this Agreement by the shareholders of PSP11 or AOPP, no
amendment shall be made which changes any of the principal terms of the Merger
or this Agreement, without the approval of the shareholders of such corporation.
10.4 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.
10.5 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.
10.6 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."
10.7 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.
10.8 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.
10.9 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 10.9:
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If to PSP11:
Mr. Vern O. Curtis
14158 NW Bronson Creek Drive
Portland, Oregon 97229
and
Mr. Jack D. Steele
4725 N. Camino Sumo
Tucson, Arizona 85718
If to AOPP:
American Office Park Properties, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: Ronald L. Havner, Jr.
Chief Executive Officer
If to PSI:
Public Storage, Inc.
701 Western Avenue, Suite 200
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.
10.10 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.
10.11 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.
10.12 ENTIRE AGREEMENT. This Agreement, including the Merger
Agreement, embodies the entire agreement and understanding between the parties
pertaining to the subject matter hereof, and supersedes all prior agreements,
understandings, negotiations, representations and discussions, whether written
or oral.
10.13 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.
10.14 FURTHER ACTION. If at any time after the Effective Time, the
Surviving Corporation shall determine that any assignments, transfers, deeds or
other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of AOPP, the officers of either Constituent Corporation are fully
authorized in the name of AOPP or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
PUBLIC STORAGE PROPERTIES XI, INC.
By: /s/ B. WAYNE HUGHES
------------------------------
B. Wayne Hughes
Chief Executive Officer
AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ RONALD L. HAVNER, JR.
------------------------------
Ronald L. Havner, Jr.
Chief Executive Officer
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
------------------------------
Harvey Lenkin
President
A-19
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Exhibit A to
Appendix A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this _____ day
of _____________, 1998, by and between PUBLIC STORAGE PROPERTIES XI, INC., a
California corporation ("PSP11") and AMERICAN OFFICE PARK PROPERTIES, INC., a
California corporation ("AOPP") with reference to the following:
A. PSP11 was incorporated in 1990 under the laws of California, and on the
date hereof has outstanding _______________ shares of Common Stock Series A,
$.01 par value (the "PSP11 Shares"),__________ shares of Common Stock Series B
and __________ shares of Common Stock Series C.
B. AOPP was incorporated in 1997 under the laws of California, and on the
date hereof its authorized capital stock consists of 100,000,000 shares of
Common Stock, $.10 par value (the "AOPP Shares"), ___________ of which are
issued and outstanding and 100,000,000 shares of Preferred Stock ($.10 par
value), none of which are issued and outstanding.
C. PSP11, AOPP and Public Storage, Inc. ("PSI") have entered into an
Amended and Restated Agreement and Plan of Reorganization dated as of December
17, 1997 (the "Plan"), setting forth certain representations, warranties,
conditions and agreements pertaining to the Merger (as defined below).
D. The Boards of Directors of PSP11, AOPP and PSI have approved the Plan
and this Agreement of Merger, and the requisite shareholder approval has been
obtained.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
---------
1.1 THE MERGER. At the Effective Time (as defined below), AOPP will be
merged with and into PSP11 (the "Merger") and PSP11 shall be the surviving
corporation. PSP11 and AOPP are sometimes collectively referred to herein as
the "Constituent Corporations" and PSP11, as the surviving corporation of the
Merger, is sometimes referred to herein as the "Surviving Corporation."
1.2 EFFECTIVE TIME. The Merger shall become effective at the time at
which this Agreement, together with the requisite Officers' Certificates of
PSP11 and AOPP, are filed with the California Secretary of State (the "Effective
Time").
1.3 EFFECT OF THE MERGER. At the Effective Time:
(a) The separate corporate existence of AOPP shall cease and the
Surviving Corporation shall thereupon succeed, without other transfer, to all
the rights and property of AOPP and shall be subject to all the debts and
liabilities of AOPP in the same manner as if the Surviving Corporation had
itself incurred them; all rights of creditors and all liens upon the property of
AOPP shall be preserved unimpaired, provided that such liens upon property of
AOPP shall be limited to the property affected thereby immediately prior to the
Effective Time; and any action or proceeding pending by or against AOPP may be
prosecuted to judgment, which shall bind the Surviving Corporation, or the
Surviving Corporation may be proceeded against or substituted in its place.
E.A-1
<PAGE>
(b) The Articles of Incorporation of PSP11, as amended in the
following respects at the Effective Time, shall continue to be the Articles of
Incorporation of the Surviving Corporation until changed as provided by law and
its respective provisions.
(i) Article I shall be amended to read as follows:
The name of this corporation is PS Business Parks, Inc.
(ii) Section (a) of Article III shall be amended to read as
follows:
(a) General. This corporation is authorized to issue only
-------
Common Stock (referred to herein either as "Common Stock" or "Common
shares"). The total number of Common shares which this corporation is
authorized to issue shall be ______________________________ (__________)
of the par value of One Cent ($.01) each. The Common shares shall be
considered one class and shall be divided into three series, of which
______________________________ (__________) shares will constitute
Common Stock Series A, one hundred eighty-four thousand four hundred
fifty-three (184,453) shares will constitute Common Stock Series B and
five hundred twenty-two thousand six hundred eighteen (522,618) shares
will constitute Common Stock Series C. The Common Stock Series A,
Common Stock Series B and Common Stock Series C shall be of equal rank
and shall vote together as a class, except as otherwise required by the
California Corporations Code, and shall entitle the holders thereof to
the same rights and privileges, except as expressly provided in Sections
(b) through (d) of this Article III.
ARTICLE II
----------
2.1 COMMON STOCK SERIES A OF PSP11. Each outstanding share of Common
Stock Series A ($.01 par value) of PSP11 (the "PSP11 Shares") would continue to
be owned by holders of PSP11 Shares or converted into the right to receive cash
as follows:
(a) At the Effective Time, subject to Section 2.7.1 of the Plan,
each PSP11 Share as to which a cash election has been made in accordance with
the provisions of Section 2.6 of the Plan and has not been revoked, relinquished
or lost pursuant to Section 2.6 of the Plan (the "Series A Cash Election
Shares") shall be converted into and shall represent the right to receive $20.50
in cash. As soon as practicable after the Effective Time, the registered holders
of Cash Election Shares shall be paid the cash to which they are entitled
hereunder in respect of such Series A Cash Election Shares.
(b) At the Effective Time, subject to Section 2.12 of the Plan,
each PSP11 Share (other than Series A Cash Election Shares) shall continue to be
owned by the holders of the PSP11 Shares.
2.2 COMMON STOCK SERIES B AND C OF PSP11. Each outstanding share of
Common Stock Series B and C ($.01 par value) of PSP11 (the "PSP11 Series B and C
Shares") would be converted into the right to receive cash or PSP11 Shares as
follows:
(a) At the Effective Time, subject to Section 2.7.2 of the Plan,
each PSP11 Series B and C Share as to which a cash election has been made in
accordance with the provisions of Section 2.6 of the Plan and has not been
revoked, relinquished or lost pursuant to Section 2.6 of the Plan (the "Series B
and C Cash Election Shares") shall be converted into and shall represent the
right to receive $17.71 in cash. As soon as practicable after the Effective
Time, the registered holders of Series B and C Cash Election Shares shall be
paid the cash to which they are entitled hereunder in respect of such Series B
and C Cash Election Shares.
(b) At the Effective Time, subject to Section 2.12 of the Plan,
each PSP11 Series B and C Share (other than Series B and C Cash Election Shares)
shall be converted into 0.8641 PSP11 Shares.
E.A-2
<PAGE>
2.3 AOPP SHARES. Each outstanding share of Common Stock ($.10 par
value) of AOPP (the "AOPP Shares") would be converted into the right to receive
cash or PSP11 Shares as follows:
(a) At the Effective Time, subject to Section 2.7.3 of the Plan,
each AOPP Share as to which a cash election has been made in accordance with the
provisions of Section 2.6 of the Plan and has not been revoked, relinquished or
lost pursuant to Section 2.6 of the Plan (the "AOPP Cash Election Shares") shall
be converted into and shall represent the right to receive $24.19 in cash. As
soon as practicable after the Effective Time, the registered holders of AOPP
Cash Election Shares shall be paid the cash to which they are entitled hereunder
in respect of such AOPP Cash Election Shares.
(b) At the Effective Time, subject to Section 2.12 of the Plan,
each AOPP Share (other than AOPP Cash Election Shares) shall be converted into
1.18 PSP11 Shares.
2.4 EXCHANGE OF CERTIFICATES. After the Effective Time, each holder of
a certificate theretofore evidencing outstanding PSP11 Series B and C Shares and
AOPP Shares which were converted into PSP11 Shares pursuant hereto, upon
surrender of such certificate to American Stock Transfer & Trust Company (the
"Exchange Agent") or such other agent or agents as shall be appointed by the
Surviving Corporation, shall be entitled to receive a certificate representing
the number of whole PSP11 Shares into which the PSP11 Series B and C Shares and
AOPP Shares theretofore represented by the certificate so surrendered shall have
been converted and cash payment in lieu of fractional share interests, if any.
As soon as practicable after the Effective Time, the Exchange Agent will send a
notice and a transmittal form to each holder of PSP11 Series B and C Shares and
AOPP Shares of record at the Effective Time whose stock shall have been
converted into PSP11 Shares, advising such holder of the effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent certificates
evidencing PSP11 Series B and C Shares and AOPP Shares in exchange for
certificates evidencing PSP11 Shares.
2.5 STATUS UNTIL SURRENDERED. Until surrendered as provided in Section
2.4 hereof, each outstanding certificate which, prior to the Effective Time,
represented PSP11 Series B and C Shares and AOPP Shares (other than Dissenting
Shares (as defined below), if any) will be deemed for all corporate purposes to
evidence ownership of the number of whole PSP11 Shares into which the PSP11
Series B and C Shares and AOPP Shares evidenced thereby were converted.
However, until such outstanding certificates formerly evidencing PSP11 Series B
and C Shares and AOPP Shares are so surrendered, no dividend payable to holders
of record of PSP11 Shares shall be paid to the holders of such outstanding
certificates in respect of PSP11 Series B and C Shares and AOPP Shares, but upon
surrender of such certificates by such holders there shall be paid to such
holders the amount of any dividends (without interest) theretofore paid with
respect to such whole PSP11 Shares as of any record date on or subsequent to the
Effective Time and the amount of any cash (without interest) payable to such
holder in lieu of fractional share interests.
2.6 TRANSFER OF SHARES. After the Effective Time, there shall be no
further registration of transfers of PSP11 Series B and C Shares and AOPP Shares
on the corporate records and, if certificates formerly evidencing such shares
are presented to the Surviving Corporation, they shall be cancelled and
exchanged for certificates evidencing PSP11 Shares and cash in lieu of
fractional share interests as herein provided.
2.7 NO FRACTIONAL SHARES. Notwithstanding any other term or provision
of this Agreement or the Plan, no fractional PSP11 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 AOPP
Shares or of PSP11 Series B and C Shares who would otherwise be entitled to such
fractional share will, upon surrender of the certificate representing such
shares, receive a whole PSP11 Share if such fractional share to which such
holder would otherwise have been entitled is .5 of a PSP11 Share or more, and
such fractional share shall be disregarded if it represents less than .5 of a
PSP11 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 PSP11 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 American Stock
Exchange, Inc. of the PSP11 Shares at the Effective Time by (ii) the fractional
interest.
E.A-3
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2.8 DISSENTING SHARES. PSP11 Shares, PSP11 Series B and C Shares and
AOPP Shares held by a holder who has demanded and perfected a right to an
appraisal of such shares in accordance with Section 1300 et seq. of the General
Corporation Law of California (the "GCLC") and who has not effectively withdrawn
or lost such right to appraisal ("Dissenting Shares") shall not continue to be
owned by the holder thereof or converted into or represent the right to receive
cash and/or PSP11 Shares, but the holder thereof shall be entitled only to such
rights as are granted by Section 1300 et seq. of the GCLC. Each holder of
Dissenting Shares who becomes entitled to payment for PSP11 Shares, PSP11 Series
B and C Shares or AOPP Shares pursuant to these provisions of the GCLC shall
receive payment therefor from the Surviving Corporation in accordance therewith.
If any holder of PSP11 Shares, PSP11 Series B and C Shares or AOPP Shares who
demands appraisal in accordance with Section 1300 et seq. of the GCLC shall
effectively withdraw with the consent of the Surviving Corporation or lose
(through failure to perfect or otherwise) the right to appraisal with respect to
PSP11 Shares, PSP11 Series B and C Shares or AOPP Shares, such shares shall
automatically be converted into the right to receive PSP11 Shares pursuant to
Section 2.1(b), 2.2(b) or 2.3(b) hereof, as the case may be.
2.9 ASSUMPTION OF AOPP OPTIONS. At the Effective Time, each
outstanding option to purchase AOPP Shares (an "AOPP Option") granted under
AOPP's 1997 Stock Option and Incentive Plan (the "AOPP Plan") shall be assumed
by PSP11 and, whether vested or unvested, shall be converted into, and shall be
deemed to constitute, an option to acquire, on the same terms and conditions
applicable to the AOPP Option, the number of shares of PSP11 Shares that the
holder of the AOPP Option would have received in the Merger if the AOPP Option
had been exercised in full immediately prior to the Effective Time, irrespective
of whether the AOPP Option was in fact then exercisable (a "Converted Option").
The exercise price per share of a Converted Option shall be the aggregate
exercise price of the AOPP Option divided by the number of PSP11 Shares
purchasable upon exercise of the Converted Option. As soon as practicable after
the Effective Time, PSP11 shall deliver to each holder of an AOPP Option an
appropriate notice setting forth the holder's rights pursuant thereto. PSP11
shall comply with the terms of each AOPP Option and take all corporate action
necessary to reserve for issuance a sufficient number of PSP11 Shares for
delivery upon exercise of the Converted Options.
ARTICLE III
-----------
3.1 HEADINGS. The descriptive headings contained in the Sections of
this Agreement are for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
3.2 PARTIES IN INTEREST. This Agreement, and the rights, interests and
obligations created by this Agreement, shall bind and inure to the benefit of
the parties and their respective successors and permitted assigns, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 FURTHER ACTION. If at any time after the Effective Time, the
Surviving Corporation shall determine that any assignments, transfers, deeds or
other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of AOPP, the officers of either Constituent Corporation are fully
authorized in the name of AOPP or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
3.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the principles of conflict of laws thereof.
E.A-4
<PAGE>
3.6 ABANDONMENT OF MERGER. The Constituent Corporations have the
power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PUBLIC STORAGE PROPERTIES XI, INC.
By: _________________________________
B. Wayne Hughes
Chairman of the Board of Directors and
Chief Executive Officer
By: _________________________________
Obren B. Gerich
Secretary
AMERICAN OFFICE PARK PROPERTIES, INC.
By: _________________________________
Ronald L. Havner, Jr.
Chief Executive Officer
By: _________________________________
Mary Jayne Howard
Assistant Secretary
E.A-5
<PAGE>
Appendix B-1
THE NICHOLSON GROUP, LTD.
555 Industrial Drive
Suite 207
Hartland, Wisconsin 53029
Phone (414) 369-5400 Fax (414) 369-5401
- --------------------------------------------------------------------------------
August 1, 1997
PUBLIC STORAGE PROPERTIES XI, INC.
701 Western Avenue, Suite 200
Glendale, California 91201
Subject: Public Storage Properties XI, Inc.: A Fifteen Property Portfolio
(11 Self-Storage Properties, 2 Business Park Properties &
2 Combination Properties)
<TABLE>
<CAPTION>
Self-Storage Properties
- -----------------------
<S> <C>
Project #01101 Branford, Connecticut
Project #01102 Houston, Texas
Project #01103 Las Vegas, Nevada
Project #01104 San Francisco, California
Project #01106 Pasadena, California
Project #01107 Tempe, Arizona
Project #01108 Las Vegas, Nevada
Project #01109 Houston, Texas
Project #01114 Nesconset, New York
Project #01115 Austin, Texas
Project #01118 Arlington, Texas
<CAPTION>
Business Park Properties
- ------------------------
<S> <C>
Project #01105 Overland Park, Kansas
Project #01116 South San Francisco, California
<CAPTION>
Combination Self-Storage & Business Park Properties
- ---------------------------------------------------
<S> <C>
Project #01110 & 01111 Phoenix, Arizona
Project #01112 & 01113 Phoenix, Arizona
</TABLE>
We have completed a limited appraisal of the real estate identified above and
submit our findings in this Restricted Appraisal Report. We understand that our
valuation opinion will be utilized in conjunction with an exchange of properties
with Public Storage, Inc. and with a recapitalization of Public Storage
Properties XI, Inc. This report may be included or referred to in solicitation
materials filed with the Securities and Exchange Commission and distributed to
shareholders of Public Storage Properties XI, Inc.
This report is a Restricted Appraisal Report which is intended to comply with
the reporting requirements set forth under Standards Rule 2-2(c) of the Uniform
Standards of Professional Appraisal Practice for a Restricted Appraisal Report.
As such, it does not include discussions of the data, reasoning, and analyses
that were used in the appraisal process to develop the appraiser's opinion of
value. Supporting documentation concerning the data, reasoning, and analyses is
retained in the appraiser's file. The depth of discussion contained in this
report is specific to the needs of the client and for the intended use stated
above. The appraiser is not responsible for unauthorized use of this report.
<PAGE>
Public Storage Properties XI, Inc.
Page 2
- --------------------------------------------------------------------------------
Furthermore, as agreed, this report is the result of a limited appraisal process
in that certain allowable departures from specific guidelines of the Uniform
Standards of Appraisal Practice were invoked. The valuation analysis has
considered all appropriate approaches to value: the Cost, Income Capitalization
and Sales Comparison approaches. Our appraisal is limited in that we have relied
primarily on the Income Capitalization Approach to value. The results were then
compared to the indicated value by the Sales Comparison Approach which used a
regression analysis of sales of self-storage facilities located throughout the
nation. The Cost Approach was not considered an appropriate approach to value.
Given the income-producing nature of the subject properties, the Income
Capitalization Approach is considered the most applicable approach to value.
Utilizing this methodology, in our opinion, we have performed all actions
necessary to ensure a fair valuation of the portfolio.
For the Self-Storage Properties, the general analytical process that was
undertaken included a review of each property's unit mix, rental rates and
historical financial statements. Following these reviews, a stabilized level of
operating performance was projected for each property. The value estimate by the
Income Capitalization Approach was then made using direct capitalization and a
discounted cash flow analysis. As additional support for the indicated value for
the self-storage properties, we prepared a regression analysis on sales of self-
storage properties that have occurred over the last several years. Based upon a
correlation of these methodologies, we arrived at an opinion of value for the
portfolio of properties. Lastly, as a reasonableness check, the resultant
property and portfolio level capitalization rates were compared to reported
capitalization rates of recent and pending transactions of self-storage property
portfolios, some of which involved Public Storage, Inc., an affiliate of Public
Storage Properties XI, Inc., as a party to the transaction.
For the Business Park Properties, the general analytical process that was
undertaken included a review of each property's rent roll and historical
financial statements. Following these reviews, a stabilized level of operating
performance was projected for each property. The value estimate was then made
using direct capitalization and a discounted cash flow analysis. Considering the
high occupancy rates, the stable operating levels and the relative short-term
leases at rates reasonably reflective of market rents, the techniques utilized
are reliable methods of estimating market value for each of the business park
properties. Furthermore, based on our review of the leases in-place, no
significant adjustments to the indicated values by direct capitalization were
necessary for income stabilization factors. Based upon a correlation of these
methodologies, we arrived at an opinion of value for the properties.
Historical operating statements, unit mix, net rentable area, rental rates, rent
rolls, lease summaries and other property-specific data for the properties
appraised were furnished by Public Storage, Inc. These financial operating
statements and other information have been accepted as correctly representing
operations and conditions of the subject properties.
<PAGE>
Public Storage Properties XI, Inc.
Page 3
- --------------------------------------------------------------------------------
The properties that are the subject of this limited appraisal were personally
inspected during October, 1996.
Assets included within the scope of our valuation include land, land
improvements, building improvements, and all fixed service equipment. Assets
excluded are furniture, fixtures, machinery or equipment, personal property,
supplies, materials on hand, inventories, company records, and any current or
intangible assets that may exist.
We have made no investigations of, nor assume any responsibility for the
existence or impact of any hazardous substance, which may or may not be present
on the properties, in the development of our limited appraisal opinion.
Market value is defined as:
"the most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the consummation of
a sale as of a specified date and the passing of title from seller to buyer
under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised and acting in what they
consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale."
Fee Simple Interest (Estate) is defined as:
"Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat."
(Note that the interest appraised for the business park properties is as
encumbered by the leases that are in place at each of the properties).
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>
Public Storage Properties XI, Inc.
Page 4
- --------------------------------------------------------------------------------
Based upon the analyses as described, it is our opinion that, as of May 1, 1997,
the market value of the fee simple interest of the entire Public Storage
Properties XI, Inc. 15-property portfolio is:
FORTY-EIGHT MILLION DOLLARS
($48,000,000)
Furthermore, based upon the analyses as described herein, it is our opinion
that, as of May 1, 1997, the market value of the fee simple interest of the
self-storage facilities and the combination self-storage and business park
properties (13 properties) of Public Storage Properties XI, Inc. is:
FORTY-TWO MILLION FOUR-HUNDRED THOUSAND DOLLARS
($42,400,000)
Our compensation was not contingent upon the reporting of a predetermined value
or direction in value that favors the cause of the client, the amount of the
value estimate, the attainment of a stipulated result, the occurrence of a
subsequent event, or the approval of a loan.
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
The undersigned certifies that they have the professional qualifications and
competency necessary to complete this appraisal assignment in an appropriate
manner.
No investigation was made of the title to, or any liabilities against the
property appraised.
Respectfully submitted,
THE NICHOLSON GROUP, LTD
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
Professional Assistance By:
Ann M. Donohoo
Michael J. Tompkins
Duncan O. Douglas
attachments/97026
<PAGE>
Public Storage Properties XI, Inc.
Page 5
- --------------------------------------------------------------------------------
EXHIBIT A
ASSUMPTIONS AND LIMITING CONDITIONS
As agreed upon with the client prior to the preparation of this appraisal, this
is a Limited Appraisal; it invokes the Departure Provision of the Uniform
Standards of Professional Appraisal Practice. The intended user of this report
is warned that the reliability of the value conclusion provided may be impacted
to the degree there is a departure from specific guidelines of USPAP. Given
that the Departure Provision has been invoked, it is our opinion that we have
performed actions necessary to develop an opinion as to the market value of the
portfolio.
This is a Restricted Report which is intended to comply with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards of
Professional Appraisal Practice for a Restricted Appraisal Report. As such, it
does not include discussion of the data, reasoning, and analyses that were used
in the appraisal process to develop the appraiser's opinion of value.
Supporting documentation concerning the data, reasoning, and analyses is
retained in the appraiser's file. The information contained in this report is
specific to the needs of the client and for the intended use stated in this
report. The appraiser is not responsible for unauthorized use of the report.
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property appraised.
The appraisal presumes, unless otherwise noted, that the owner's claim is valid,
the property rights are good and marketable, and there are no encumbrances which
cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, coal, or other subsurface mineral and
use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remediation cost.
<PAGE>
Public Storage Properties XI, Inc.
Page 6
- --------------------------------------------------------------------------------
ASSUMPTIONS AND LIMITING CONDITIONS, PAGE 2
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. Unless otherwise noted, this date represents the last
date of our physical inspection of the property. The value opinion herein
rendered is based on the status of the national business economy and the
purchasing power of the U.S. dollar as of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this appraisal report is a member or candidate
of the Appraisal Institute. The Bylaws and Regulations of the Institute require
each member and candidate to control the use and distribution of each appraisal
report signed by them.
Except as specifically presented in the letter of transmittal, possession of
this report or any copy thereof does not carry with it the right of publication
and no portion of this report (especially any conclusion of value, the identity
of the appraiser or the firm with which he/she is connected, or any reference to
the Appraisal Institute or the designations awarded by this organization) shall
be disseminated to the public through prospectus, advertising, public relations,
news, or any other means of communication without the written consent and
approval of The Nicholson Group, Ltd.
<PAGE>
Public Storage Properties XI, Inc.
Page 7
- --------------------------------------------------------------------------------
EXHIBIT B
APPRAISAL CERTIFICATION
I certify that, to the best of my knowledge and belief:
. the statements of fact contained in this report are true and accurate.
. the reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal, unbiased
professional analyses, opinions, and conclusions.
. I have no present or prospective interest in the properties that are the
subject of this report, and I have no personal interest or bias with respect
to the parties involved.
. my compensation is not contingent upon the reporting of a predetermined value
or direction in value that favors the cause of the client, the amount of the
value estimate, the attainment of a stipulated result, or the occurrence of a
subsequent event.
. this appraisal assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
. my analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Code of
Professional Ethics and the Standards of Professional Appraisal Practice of
the Appraisal Institute and in conformance with the Uniform Standards of
Professional Appraisal Practice.
. I certify that the use of this report is subject to the requirements of the
Appraisal Institute relating to review by its duly authorized individuals.
. I have not inspected the properties that are the subject of this report,
however, the properties were inspected by representatives of my firm.
. 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 competed the
requirements under the continuing education program of the Appraisal
Institute.
/s/ Lawrence R. Nicholson
Lawrence R. Nicholson, MAI
<PAGE>
Appendix B-2
[LETTERHEAD OF CHARLES R. WILSON & ASSOCIATES, INC. APPEARS HERE]
April 30, 1997
PUBLIC STORAGE, INC.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Re: Market Value Appraisal
Job File 970291
Business Park
- -------------
01621/01623 3914 Murphy Canyon Road San Diego, CA
01716/01721 5610 General Washington Drive Alexandria, VA
01719 6370-6450 Lusk Boulevard San Diego, CA
01813/01819 6640 Lusk Boulevard San Diego, CA
01904/01916 2551 San Ramon Valley Blvd San Ramon, CA
01911/01917 7406 Alban Station Road Springfield, VA
Gentlemen:
According to your request and authorization, we have prepared a limited
appraisal of the above-referenced portfolio described in the attached document,
entitled Property Identification and Classification, and formed an opinion of
their Fee Simple and Leased Fee Market Value. The accompanying appraisal report,
of which this letter is a part, briefly describes each property and method of
appraisal.
This report is presented in a restricted format and cannot be fully understood
without additional information supporting the appraisal, which has been retained
in the working files of the appraiser.
PURPOSE OF APPRAISAL
- --------------------
The purpose of the appraisal is to estimate the aggregate market value of the
portfolio in connection with a proposed exchange transaction involving each
property with Public Storage, Inc. (PSI).
This report, presented in a restricted format, is intended for use only by the
clients or their advisors. It may be referred to in solicitation materials and
distributed to shareholders in connection with the proposed exchange
transaction.
SCOPE OF ASSIGNMENT
- -------------------
The accompanying report describes the appraisal process undertaken. In
accordance with our agreement, the scope of this assignment has been limited, as
described herein, but is in conformity with the Departure Provision of Uniform
Standards of Professional Appraisal Practice (USPAP). The client must consider
the value may be impacted to the degree there is a departure from specific USPAP
Guidelines. However, this valuation analysis has utilized the two most
appropriate approaches to value. We did not consider the Cost Approach to be
applicable. Based upon our contact with knowledgeable commercial office and
industrial facilities investors, owners, and managers, little reliance is placed
upon the Cost Approach, particularly as to properties the age and type of those
included in the portfolio. Therefore, we have employed both the Income and Sales
Comparison Approaches. We have relied most heavily on the Income Approach which
is supported by actual market data found in the Sales Comparison Approach. In
our opinion, we have performed all actions necessary to ensure an accurate
valuation of the portfolio.
<PAGE>
Market Value Appraisal
PUBLIC STORAGE, INC.
Page 2
Your attention is directed to the Assumptions and Limiting Conditions and
description of the appraisal process set forth on the accompanying pages which
are an integral part our report. Only the summary conclusions are presented in
this report.
VALUE CONCLUSIONS
- -----------------
Aggregate Market Value
The market value estimate set forth herein is a gross value estimate and does
not include either a premium or a discount a potential buyer may assign to a
portfolio of properties as a result of its size. Based on our experience with
buyers and sellers of properties of the type included in the portfolio, it would
be inappropriate to assign either a premium or discount. Furthermore, the market
value estimate herein assumes that the properties would be disposed of in an
orderly manner, allowing sufficient time for exposure of each property on the
open market.
Based upon the analysis made, it is our opinion that the Fee Simple and Leased
Fee Market Value of the Portfolio, as of March 17, 1997, is:
FORTY TWO MILLION NINE HUNDRED THOUSAND DOLLARS
------------------------------------------------
($42,900,000 )
--------------
Sincerely
CHARLES R. WILSON & ASSOCIATES, INC.
/s/ Charles R. Wilson
- ---------------------
Charles Ray Wilson, MAI, CRE
State of California
Certification No. AG002172
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
NATURE OF ASSIGNMENT AND DEFINITIONS
This report sets forth a summary of the analysis and valuation conclusions. In
accordance with our agreement, the Limited Appraisal presented in a restricted
report format represents a departure from a full narrative appraisal but has
been prepared in conformity with the Departure Provision of the Uniform
Standards of Professional Appraisal Practice Guidelines.
PROPERTY IDENTIFICATION
The subject properties are located in 6 separate locations in 2 states and are
specifically identified by the street address below:
<TABLE>
<CAPTION>
Rentable Appraisal
Business Park Area Value
- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
01621/01623 3914 Murphy Canyon Road San Diego, CA 164,064 $ 9,800,000
01716/01721 5610 General Washington Drive Alexandria, VA 113,493 $ 7,400,000
01719 6370-6450 Lusk Boulevard San Diego, CA 117,813 $ 6,400,000
01813/01819 6640 Lusk Boulevard San Diego, CA 140,017 $ 7,800,000
01904/01916 2551 San Ramon Valley Blvd San Ramon, CA 52,149 $ 5,000,000
01911/01917 7406 Alban Station Road Springfield, VA 68,200 $ 6,500,000
------- -----------
655,736 $42,900,000
</TABLE>
PURPOSE, FUNCTION AND SCOPE OF THE APPRAISAL
The purpose of this appraisal is to estimate the Fee Simple and Leased Fee
Market Value of the portfolio and to present a summary of conclusions.
The function of this appraisal is for use only by our client, PSI, and their
advisors in connection with a proposed exchange transaction involving the
properties into PSI.
The scope of this assignment is in accordance with an agreement between Charles
R. Wilson & Associates, Inc., and PSI. In connection with this portfolio
valuation, the following actions have been taken as described more fully in the
section entitled Valuation Methodology.
. Inspections were conducted by Charles R. Wilson, MAI, CRE, or a
representative of Charles R. Wilson & Associates, Inc.
. Physical descriptive information was provided by the subject's on-site
managers and from previous appraisals of the subject properties performed
by Charles R. Wilson & Associates, Inc.
. Demographic information including population trends, household income,
employment, average housing prices and rental rates was obtained from
Scan/US Inc.
. A rental survey of competitive properties was provided by on-site managers
of the subject facilities. The information was verified by inspections,
phone calls, and other sources.
. Historical income and expense information on each of the subject properties
was provided by PSI and compared to the operating information of comparable
facilities.
. In the cash flow analysis, the actual operating history of each of the
subject properties was evaluated based on the experience of Charles R.
Wilson & Associates, Inc.
. Discount rates, capitalization rates, and growth rates for income and
expenses were derived from data on actual sales of similar properties,
surveys of operators/investors throughout the United States, and our market
experience over the past twenty years.
. The Sales Comparison Approach is based on sales of comparable properties in
the markets in which the subject facility is located.
3
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
PROPERTY RIGHTS APPRAISED
The property rights appraised consist of the Fee Simple and Leased Fee Estates.
According to the Appraisal Institute, Dictionary of Real Estate Appraisal, 3rd
Edition, 1993,
"Fee Simple Estate" is defined on page 140 as: "Absolute ownership
unencumbered by any other interest or estate; subject only to the
limitations of governmental powers of taxation, eminent domain, police
power, and, escheat."
"Leased Fee Estate" is defined on page 140 as: "An ownership interest held
by a landlord with the rights of use and occupancy conveyed by lease to
others."
MARKET VALUE DEFINITION
The following Market Value definition is based on Uniform Standards of
Professional Appraisal Practice regulations and standards.
"Market Value" means 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. Buyer and seller are well informed or well advised, and acting in what they
consider their own best interest;
3. A reasonable time is allowed for exposure on the open market;
4. Payment is made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale.
Source: Office of the Comptroller of the Currency under 12 CRF, part 34, Subpart
C-Appraisals, 34.43 Definitions [f].
VALUATION METHODOLOGY
Analysis and Valuation of the subject properties involved determining the
highest and best use of the sites, estimating the value of the subjects by
current appraisal theory, and reconciling to a final estimate of value.
The term "highest and best use," as used in this report, is defined as follows:
"The reasonably probable and legal use of vacant land or an improved property,
which is physically possible, appropriately supported, financially feasible, and
that results in the highest value."
SOURCE: Appraisal Institute, The Dictionary of Real Estate Appraisal, 3rd
Edition, 1993, p. 171.
In considering the highest and best use of the properties in this portfolio, we
believe that each facility is producing net operating income in excess of a
reasonable land value. Therefore, we have concluded that the Highest and Best
Use of each property, as improved and as if vacant, is its existing use as a
business park. No other use would warrant their removal or alteration from their
current and intended use.
This valuation analysis has considered all appropriate approaches to value,
namely: the Cost, Income, and Sales Comparison Approach.
The Cost Approach is based upon the proposition that the informed purchaser
would pay no more than the cost of producing a substitute property with the same
utility as the subject property. The Cost Approach is particularly
4
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
applicable when the property being appraised involves relatively new
improvements which represent the highest and best use of the land and when
relatively unique or specialized improvements are located on the site and for
which there exists no comparable properties in the marketplace.
The Income Capitalization Approach is a procedure in appraisal analysis which
converts the anticipated benefits (dollar income or amenities) to be derived
from the ownership of property into a value estimate. The Income Capitalization
Approach is widely applied in appraising income producing properties.
Anticipated future income and/or reversions are discounted to a present worth
figure through the capitalization process.
The Sales Comparison Approach is based upon the principle that an informed
purchaser would pay no more for a property than the cost of acquiring an
existing property with the same utility. This approach is applicable when an
active market provides sufficient quantities of reliable data which can be
verified from authoritative sources. The Sales Comparison Approach is relatively
unreliable in an inactive market or in estimating the value of properties for
which no real comparable sales data is available.
In all instances, we considered the Income and Sales Comparison Approaches to be
most applicable for the subject properties. Based on our contact with property
buyers and sellers and others knowledgeable of recent transactions, today's
investors do not rely on the Cost Approach, particularly as to properties the
age and type of those included in the portfolio. Therefore, we have employed
both the Income and Sales Comparison Approaches to value the facilities.
Inspections were made of each property and interviews with property management
personnel were conducted to learn of any deferred maintenance items which need
correcting, as well as general information on the overall condition of the
property. Demographic information on each market was reviewed to gain insight
about local economic trends. Consideration has been given to significant
variations in quality among the various portfolio of properties including:
property income potential, quality of location and construction, tenant appeal,
access, viability and potential competition.
VALUATION ANALYSIS
Income Approach
- ---------------
The Income Approach utilized the yield capitalization method. The analysis was
premised upon a survey of competitive properties in order to determine market
rental rates, occupancy, and expense levels. In addition, we reviewed each
facility's previous three year's operating statements.
In our analysis, we estimated the gross potential income of each facility,
taking existing leases and current market rates into account. Accordingly, we
reviewed the subject leases, the recent operating history of the properties, and
surveyed current rentals in the market to determine an appropriate rent. In
addition, based on market conditions and specific property operating history,
tenant reimbursements and miscellaneous income amounts were determined in
arriving at rental income. From this, an allowance for vacancy and turnover time
was deducted. Operating expenses based on market conditions and prior property
operating history were deducted from rental income in determining net operating
income.
In applying the yield capitalization, a ten-year cash flow analysis of the
facility ending in 2007 was prepared. Using the investment criteria discussed
above, the income and expenses were increased 3.0% annually based on local
market conditions. The residual value was determined by capitalizing the
eleventh year income at a terminal capitalization rate ranging between 10.5% and
11% and then deducting 2% to 4% for sales costs. The yearly cash flows and the
property's residual values were discounted to present worth using a discount
rate ranging between 12.0% and 12.5%.
The indicated value based upon the Income approach is $42,750,000.
5
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
Sales Comparison Approach
- -------------------------
The Sales Comparison Approach was prepared using a direct comparison to similar
properties that have sold in the same or similar markets. Differences in the
time of sale, location, and physical characteristics between the sale
comparables and the subject property was taken into consideration.
The value based on the Sales Comparison Approach is $43,660,000.
Value Conclusion
Although the departure provision has been invoked, it is our opinion that we
have performed actions necessary to develop an opinion as to the market value of
the portfolio.
The value conclusion from the Income and Sales Comparison Approaches was
reconciled into our final value conclusion of $42,900,000. In the final
analysis, both Income and Sales Comparison Approaches were considered, but most
reliance was placed upon the Income Approach.
6
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
GENERAL ASSUMPTIONS & LIMITING CONDITIONS
Standards Rule ("S.R.") 2-1 of the "Standards of Professional Practice" of the
Appraisal Institute requires the appraiser to "clearly and accurately disclose
any extraordinary assumption or limiting condition that directly affects an
appraisal analysis, opinion, or conclusion." In compliance with S.R. 2-1, and to
assist the reader in interpreting this report, such assumptions and limiting
conditions are set forth as follows:
1. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the letter of transmittal. Further, the
dollar amount of any value opinion rendered in this report is based upon
the purchasing power of the American dollar existing on that date.
2. The appraiser assumes no responsibility for economic or physical factors
which may affect the opinions in the report which occur after the date of
the letter transmitting the report.
3. Forecasts of anticipated revenue and expenses were based on our analysis of
market trends, economic conditions, and historical operating results of the
properties. Such forecasts are dependent on assumptions as to future
economic, social and political conditions, as well as market related
activity. They represent our opinion of current investor attributes and
motivations applicable to the class of property appraised, and no warranty
or representation that these forecasts will materialize is implied.
4. The information furnished by others is believed to be reliable. However, no
warranty is given for its accuracy.
5. No opinion as to title is rendered. Data related to ownership and legal
description was obtained from public records and is considered reliable.
Title is assumed to be marketable and free and clear of all liens,
encumbrances, easements and restrictions except those specifically
discussed in the report. The properties are appraised assuming they will be
under responsible ownership and competent management, and available for
their highest and best use.
6. The appraiser reserves the right to make such adjustments to the analyses,
opinions and conclusions set forth in this report as may be required by
consideration of additional data or more reliable data that may become
available.
7. The appraiser assumes no responsibility for hidden or unapparent conditions
of the properties, subsoil, or structures that render them more or less
valuable. No responsibility is assumed for arranging for engineering
studies that may be required to discover them.
8. The properties are appraised assuming that all applicable zoning and use
regulations and restrictions have been complied with, unless otherwise
stated.
9. The properties are appraised assuming that all required licenses,
certificates of occupancy, consents, or other legislative or administrative
authority from any local, state, or national government or private entity
or organization have been, or can be, obtained or renewed for any use on
which the value estimate contained in this report is based, unless
otherwise stated.
10. No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area was taken from sources
considered reliable, and no encroachment of real property improvements is
considered to exist.
11. No soil tests or environmental studies were reviewed. The appraised value
assumes that there are no sub-surface, toxic waste or building material
hazards in or on the properties that would adversely affect their existing
or potential use.
12. Unless specifically stated, this appraisal does not take into consideration
the possibility of the existence of asbestos, PCB transformers, or other
toxic, hazardous, or contaminated substances and/or underground storage
tanks (hazardous material), or the cost of encapsulation or removing
thereof.
13. No opinion is expressed as to the value of subsurface oil, gas or mineral
rights or whether the properties are subject to surface entry for the
exploration or removal of such materials except as is expressly stated.
7
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
14. Maps, plats and exhibits included in this report are for illustration only
as an aid in visualizing matters discussed within the report. They should
not be considered as surveys or relied upon for any other purpose, nor
should they be removed from, reproduced, or used apart from this report.
15. No opinion is intended to be expressed for matters which require legal
expertise or specialized investigation or knowledge beyond that customarily
employed by real estate appraisers.
16. Except as consented to in the letter of transmittal, possession of this
report, or a copy of it, does not carry with it the right of publication.
It may not be used for any purpose by any person other than the party to
whom it is addressed without the written consent of the appraiser, and in
any event only with proper written qualification and only in its entirety.
17. Testimony or attendance in court or at any other hearing is not required by
reason of rendering this appraisal, unless such arrangements are made a
reasonable time in advance relative to such additional employment.
18. Disclosure of the contents of this appraisal report is governed by the By-
Laws and Regulations of the Appraisal Institute.
19. Except as consented to in the letter of transmittal, neither all nor any
part of the contents of this report (especially any conclusions as to
value, the identity of the appraisers, or any reference to the Appraisal
Institute, or the MAI or CRE designation) shall be disseminated to the
public through advertising media, public relations media, news media, sales
media, or any other public means of communication without the prior written
consent and approval of the author.
8
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
SPECIFIC ASSUMPTIONS AND LIMITING CONDITIONS
1. The physical description and current condition of each subject property was
based upon a combination of previous appraisals, inspections by
representatives of Charles R. Wilson & Associates, Inc., and information
provided by Public Storage, Inc. Charles R. Wilson & Associates, Inc.,
assumes no responsibility for the soundness of structural members nor for
the condition of mechanical equipment, plumbing or electrical components.
2. Pursuant to the Engagement Agreement, the content of the appraisal report
has been limited as presented herein. This report is not intended to meet
the requirements of Title XI of the Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989. Therefore, federally regulated
institutions should not rely on this report for financing purposes.
3. The portfolio valuation reported herein does not reflect any premium or
discount a potential buyer may assign to the portfolio of properties as a
result of its size. Neither a premium nor a discount is appropriate based
on our experience with buyers and sellers of business park facilities.
4. This valuation analysis assumes that capitalization and discount rates used
in the market for valuing individual properties are appropriate to apply to
a portfolio's cash flow for the purpose of estimating the portfolio's fair
market value.
5. This valuation covers only the real properties described herein and only
applies to the valuation problems as stated and does not include
consideration of mineral rights or related right of entry, nor personal
property or the removal thereof. Values reported herein are not intended to
be valid in any other context, nor are any conclusions as to unit values
applicable to any other property or utilization than that specifically
identified herein. No value has been assigned to any personal property,
fixtures or intangible items that are not real property, except for that
equipment and personal property considered usual and incidental to the
operation of the facilities such as office supplies, computer systems, etc.
6. This report invokes the Departure Provision as follows:
Standard Rule 1-2 (c), states that the appraiser must, "consider easements,
restrictions, encumbrances, reservations, covenants, contracts,
declarations, special assessments, ordinances, or other items of a similar
nature". The effect of any easements, encumbrances, and similar items were
not taken into consideration in this valuation analysis. We were not
provided copies of title reports, deed restrictions or similar items nor
are we aware of any restrictions or similar items existing that could have
an impact on our valuation of the portfolio. At the request of the clients,
this valuation analysis does not consider any such restrictions.
7. For properties located in California, real estate taxes used in the Income
Approach are adjusted to reflect a fair sale as is standard practice in
California in compliance with Proposition 13.
9
<PAGE>
Appraisal: PUBLIC STORAGE, INC.
CERTIFICATION
The appraiser certifies, to the best of his knowledge and belief, that:
- - 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 the appraisers'
personal, unbiased professional analyses, opinions and conclusions.
- - The appraiser has no present or prospective interest in the property that
is the subject of this report and no personal interest or bias with respect
to the parties involved.
- - The appraisers' compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a stipulated
result, or the occurrence of a subsequent event.
- - Receipt of the appraisal assignment was not based upon a requested minimum
value, a specific value or approval of a loan.
- - The appraiser's analyses, opinions, and conclusions were developed and this
report has been prepared in conformity with the agreement between Charles
R. Wilson & Associates, Inc., and Public Storage Properties, Inc. The
appraisers have relied upon the departure provisions of Uniform Standards
of Professional Appraisal Practice (USPAP).
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
- - As of the effective date of this report, April 30, 1997, Charles R. Wilson,
MAI, CRE has completed the requirements of the continuing education program
of the Appraisal Institute.
- - Inspections of the properties in this portfolio were made by Charles R.
Wilson, MAI, CRE or a representative of Charles R. Wilson & Associates,
Inc., in March 1997.
- - Our firm's analyses, opinions and conclusions were not developed nor is
this report intended to comply with the appraisal related mandates within
Title XI of the Federal Financial Institution's Reform, Recovery and
Enforcement Act of 1989 (FIRREA).
- - The date of this report, April 30, 1997, indicates the perspective of the
appraisers on the market conditions as of the effective date of the
appraisal.
- - The appraiser's estimate of aggregate As Is Market Value for the portfolio
as of March 17, 1997 in Fee Simple estate is: $42,900,000.
- - The appraisers have extensive experience in appraising properties similar
to the portfolio.
Respectfully submitted,
CHARLES R. WILSON & ASSOCIATES, INC.
/s/ Charles R. Wilson
- -------------------------------
Charles Ray Wilson, MAI, CRE
State of California
Certification No. AG002172
10
<PAGE>
Appendix C
----------
[JEFFERIES & COMPANY, INC. LETTERHEAD]
February 2, 1998
Special Committee of the Board of Directors
PUBLIC STORAGE PROPERTIES XI, INC.
701 Western Avenue
Suite 200
Glendale, CA 91201
To the Members of the Special Committee of the Board of Directors:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the public holders (the "PSP XI
Shareholders") of the outstanding Series A common shares, par value $.01 per
share (the "PSP XI Common Shares"), of Public Storage Properties XI, Inc., a
California corporation, ("PSP XI" or the "Company") of the Consideration (as
defined below) to be paid by PSP XI pursuant to the Proposed Transaction (as
defined below). Under the terms of the Agreement (as defined below), (i)
American Office Park Properties, Inc., a California corporation ("AOPP"), will
merge with and into PSP XI, (ii) each holder of the outstanding common shares of
AOPP will have the right to elect to receive $24.19 in cash per AOPP common
share (up to 20% of the common stock of AOPP) or to have such shares converted
into PSP XI Common Shares at a rate of 1.18 PSP XI Common Shares for each AOPP
common share outstanding as of the effective date (the "AOPP Conversion Rate"),
(iii) PSP XI Shareholders will have the option to convert their PSP XI Common
Shares into cash whereby, if 20% or less of the outstanding PSP XI Common Shares
elect to receive cash, such holders would receive $20.50 in cash per PSP XI
Common Share, and if holders of more than 20% of the outstanding PSP XI Common
Shares elect to receive cash, then cash will be distributed on a pro rata basis
to such PSP XI Common Shareholders, (iv) 47,824 PSP XI Series C Common Shares
will be canceled and each holder of the remaining outstanding Series B and
Series C common shares of PSP XI (collectively, the "PSP XI Series B and Series
C Common Shares") will have the right to elect to receive $17.71 in cash (up to
20% of the outstanding PSP XI Series B and C Common Shares) per PSP XI Series B
and Series C Common Share or to have such shares converted into PSP XI Common
Shares at a rate (the "Series B and C Conversion Rate") of .8641 PSP XI Common
Shares for each PSP XI Series B and Series C Common Share, (v) PSP XI will
exchange its 13 self-storage facilities with Public Storage, Inc. ("PSI") for 11
commercial office/industrial facilities (the "Exchange," and, together with the
AOPP Conversion Rate and the Series B and C Conversion Rate, the
"Consideration"), (vi) AOPP will cease to exist as a corporation, and (vii) PSP
XI will be the surviving entity and change its name to "PS Business Parks, Inc."
(collectively, the "Proposed Transaction"), all upon the terms and conditions
presently set forth in the Amended and Restated Agreement and Plan of
Reorganization, dated December 17, 1997 (the "Agreement"), by and among PSP XI,
AOPP and Public Storage, Inc. ("PSI"). The affirmative vote of holders of a
majority of all of the series of outstanding common shares of PSP XI is
necessary for approval of the Proposed
<PAGE>
Special Committee of the Board of Directors
PUBLIC STORAGE PROPERTIES XI, INC.
February 2, 1998
Page 2
Transaction. The terms and conditions of the Proposed Transaction are more fully
set forth in the Agreement.
Jefferies & Company, Inc. ("Jefferies"), as part of its investment banking
business, is regularly engaged in the evaluation of capital structures, the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, financial
restructurings and other financial services. We are currently acting as
financial advisor to the Company in connection with the Proposed Transaction and
received a fee for delivering this opinion. PSP XI has agreed to indemnify
Jefferies against certain liabilities arising out of or in connection with the
services rendered by Jefferies under such engagement. In the ordinary course of
our business, we may trade the securities of PSP XI for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in those securities.
In conducting our analysis and arriving at the opinion expressed herein, we
have, among other things, (i) reviewed the Agreement (including any schedules
and exhibits thereto); (ii) reviewed certain financial and other information
that was publicly available; (iii) reviewed information furnished to us by PSI,
PSP XI and AOPP, including certain internal financial analyses, budgets, reports
and other information prepared by the respective managements of the companies;
(iv) held discussions with various members of senior management of the Company
and AOPP concerning each company's historical and current operations, financial
conditions and prospects, as well as the strategic and operating benefits
anticipated by each company from the Proposed Transaction; (v) reviewed the
proxy statement and prospectus filed by PSP XI with the Securities and Exchange
Commission on February 2, 1998; (vi) reviewed the share price and trading
history of PSP XI's publicly traded securities from August 12, 1996 to August
12, 1997; (vii) reviewed the valuations of publicly traded companies which we
deemed comparable to PSP XI and AOPP; (viii) prepared discounted cash flow
analyses of PSP XI and AOPP on both stand-alone and combined bases; and (ix)
analyzed the combined funds from operations and funds available for distribution
per share of the combined company. In addition, we have conducted such other
reviews, analyses and inquiries relating to PSP XI, AOPP and the properties that
are the subject of the Exchange as we considered appropriate in rendering this
opinion.
In our review and analysis and in rendering this opinion, we have relied
upon, but have not assumed any responsibility to independently investigate or
verify, the accuracy, completeness and fair presentation of all financial and
other information that was provided to us by PSI, PSP XI or AOPP or that was
publicly available to us (including, without limitation, the information
described above and the financial projections and financial models prepared by
PSP XI and AOPP regarding the estimated future performance of the respective
companies before and after giving effect to the Proposed Transaction). This
opinion is expressly conditioned upon such information (whether written or oral)
being complete, accurate and fair in all respects.
With respect to the financial projections and financial models provided to
and examined by us, we note that projecting future results of any company is
inherently subject to vast uncertainty. You have informed us, however, and we
have assumed that such projections and models were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the
<PAGE>
Special Committee of the Board of Directors
PUBLIC STORAGE PROPERTIES XI, INC.
February 2, 1998
Page 3
respective managements of the companies as to the future performance of each
company. In addition, although we have performed sensitivity analyses thereon,
in rendering this opinion we have assumed that each company will perform in
accordance with such projections and models for all periods specified therein.
Although such projections and models did not form the principal basis for our
opinion, but rather constituted one of many items that we employed, changes to
such projections and models could affect the opinion rendered herein. We have
assumed that the Proposed Transaction will be reported as a tax-free
reorganization and will be treated as a "reverse purchase" for accounting
purposes.
In our review, we did not obtain any independent evaluation or appraisal of
the assets or liabilities of, nor conducted a comprehensive physical inspection
of any of the assets of, AOPP, nor have we been furnished with any such
evaluations or appraisals for AOPP or reports of such physical inspections for
AOPP, nor have we assumed any responsibility to obtain any such evaluations,
appraisals or inspections for AOPP. In addition, we have not assumed any
responsibility for conducting a physical inspection of the properties or
facilities that are the subject of the Exchange or for making or obtaining an
independent valuation or appraisal of such assets. Our opinion is based on
economic, monetary, political, regulatory, market and other conditions existing
and which can be evaluated as of the date hereof (including, without limitation,
current market prices of the PSP XI Common Shares); however, such conditions are
-------
subject to rapid and unpredictable change and such changes could affect the
conclusions expressed herein. We have made no independent investigation of any
legal or accounting matters affecting PSP XI or AOPP, and we have assumed the
correctness of all legal and accounting advice given to such parties and their
respective boards of directors, including, without limitation, advice as to the
accounting and tax consequences (including the effect of the Proposed
Transaction on PSP XI's continuing status as a "real estate investment trust"
under the Internal Revenue Code of 1986, as amended) of the Proposed Transaction
to PSP XI, AOPP and their respective shareholders.
In rendering this opinion we have also assumed that: (i) the Proposed
Transaction will be consummated on the terms described in the Agreement without
any waiver of any material terms or conditions and that the conditions to the
consummation of the Proposed Transaction set forth in the Agreement will be
satisfied without material expense; (ii) there is not now, and there will not as
a result of the consummation of the transactions contemplated by the Agreement
be, any default, or event of default, under any indenture, credit agreement or
other material agreement or instrument to which PSP XI, AOPP or any of their
respective subsidiaries or affiliates is a party; (iii) all material assets and
liabilities (contingent or otherwise, known or unknown) of PSP XI and AOPP are
as set forth in their respective consolidated financial statements; and (iv) all
of the AOPP common shares and the PSP XI Series B and Series C Common Shares
will be converted into PSP XI Common Shares.
Moreover, in rendering the opinion set forth below we note that the
consummation of the Proposed Transaction is conditioned upon the approval of the
shareholders of PSP XI, and we are not recommending that PSP XI, its Special
Committee of the Board of Directors, its Board of Directors, any of its security
holders or any other person should take any specific action in connection with
the Proposed Transaction. Our opinion does not constitute a recommendation of
the Proposed Transaction over any alternative transactions which may be
available to PSP XI, and does not address PSP XI's
<PAGE>
Special Committee of the Board of Directors
PUBLIC STORAGE PROPERTIES XI, INC.
February 2, 1998
Page 4
underlying business decision to effect the Proposed Transaction. Finally, we are
not opining as to the market value or the prices at which any of the securities
of PSP XI may trade at any time.
Based upon and subject to the foregoing, and upon such other matters as we
consider relevant, it is our opinion as investment bankers that, as of the date
hereof, the Consideration, taken as a whole, is fair to the PSP XI Shareholders
from a financial point of view.
This opinion does not constitute a recommendation to any shareholder of PSP
XI (or any other person) as to how such person should vote with respect to the
Proposed Transaction or any other matter, including any proposed amendment to
the articles of incorporation or by-laws of PSP XI. We expressly disclaim any
undertaking or obligation to advise any person of any change in any fact or
matter affecting our opinion of which we become aware after the date hereof.
This opinion may be reproduced in full in any proxy statement or prospectus
mailed to shareholders of PSP XI in connection with the Proposed Transaction but
may not otherwise be disclosed publicly in any manner without our prior written
approval. In furnishing this opinion, we do not admit that we are experts
within the meaning of the term "experts" as used in the Securities Act of 1933,
as amended, or the rules and regulations promulgated thereunder.
Sincerely,
/S/ JEFFERIES & COMPANY, INC.
<PAGE>
Appendix D
GENERAL CORPORATION LAW OF CALIFORNIA
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value of the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by
the Board of Governors of the Federal Reserve System, and the notice of
meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not
apply to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization, or
which were held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph (B)
of this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with
Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
D-1
<PAGE>
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
D-2
<PAGE>
(S) 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares
is in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT -- PAYMENT COSTS.
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the
D-3
<PAGE>
corporation of the certificates for the shares described in the judgment. Any
party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
D-4
<PAGE>
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of
shares whose terms and provisions specifically set forth the amount to be paid
in respect to such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this
chapter to demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for the
shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10-days prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE>
Appendix E-1
PROPOSED AMENDMENT TO PSP11'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION
Set forth are proposed amendments that would amend Article III of PSP11's
Amended and Restated Articles of Incorporation. Article III would read in its
entirety as follows:
"III
3.01 This corporation is authorized to issue only three classes of shares
to be designated respectively "Preferred Stock," "Common Stock" and "Equity
Stock" and referred to herein either as Preferred Stock or Preferred shares,
Common Stock or Common shares or Equity Stock or Equity shares. The total number
of shares which this corporation is authorized to issue is Two Hundred Fifty
Million (250,000,000); the number of Preferred shares shall be Fifty Million
(50,000,000) of the par value of One Cent ($.01) each, the number of Common
shares shall be One Hundred Million (100,000,000) of the par value of One Cent
($.01) each and the number of Equity shares shall be One Hundred Million
(100,000,000) of the par value of One Cent ($.01) each. Upon the amendment of
this article to read as herein set forth, each outstanding share of Common Stock
Series A is converted into or reconstituted as one share of Common Stock.
3.02 The Preferred shares may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Preferred shares and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights
granted to or imposed upon any wholly unissued series of Preferred shares
including the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices and the liquidation preference, and, within the
limits and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares then outstanding) the
number of shares of any such series subsequent to the issue of shares of that
series. In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
3.03 (a) Subject to any preference with respect to the Preferred shares
or the Equity shares, the Common shares shall be entitled to distributions out
of funds legally available therefor, when, as and if declared by the Board of
Directors.
(b) In the event of any liquidation, dissolution or winding up of
this corporation, whether voluntary or involuntary, subject to any preference
with respect to the Preferred shares or the Equity shares, the entire assets of
this corporation available for distribution to shareholders shall be distributed
ratably among the Common shares.
3.04 The Equity shares may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Equity shares and to determine the designation of any such series. The
Board of Directors is also authorized to determine or alter the rights granted
to or imposed upon any wholly unissued series of Equity shares including the
dividend rights,
<PAGE>
dividend rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices and the
liquidation rights, and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not below the
number of shares then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series. The dividend and
liquidation rights of the Equity shares shall be junior to the Preferred shares
and may be senior to, junior to, or pari passu with, the Common shares."
2
<PAGE>
Appendix E-2
PROPOSED AMENDMENTS TO PSP11'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION
AND AMENDED AND RESTATED BYLAWS
AMENDED AND RESTATED ARTICLES OF INCORPORATION
The following sections of PSP11's Amended and Restated Articles of
Incorporation are proposed to be deleted in their entirety:
1. Article V (which provides that the existence of PSP11 shall terminate
on December 31, 2038).
2. Article VI (which allows officers and directors of PSP11 to compete
with PSP11 for investment opportunities).
AMENDED AND RESTATED BYLAWS
The following sections of PSP11's Amended and Restated Bylaws (the
"Bylaws") are proposed to be modified (but not deleted):
1. Amend Article I, Section 4 of the Bylaws to read as follows:
"Section 4. "Independent Directors" shall mean directors who are not
affiliated with the corporation or any of its affiliates (other than by
reason of the person's status as a director of the corporation), whether by
ownership of, ownership interest in, employment by, service as an officer
of, or material business or professional relationship with the corporation
or its affiliates."
2. Amend the first paragraph of Article III, Section 8 of the Bylaws to
read as follows:
"Section 8. Voting. The shareholders entitled to vote at any meeting
------
of shareholders shall be determined in accordance with the provisions of
Section 11 of this Article III, subject to the provisions of Sections 702
to 704, inclusive, of the Corporations Code of California (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership). The shareholders' vote may be by voice vote or by ballot;
provided, however, that any election for directors must be by ballot if
demanded by any shareholder before the voting has begun. On any matter
other than elections of directors, any shareholder may vote part of the
shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, but, if the shareholder fails to
specify the number of shares which the shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is
with respect to all shares that the shareholder is entitled to vote. If a
quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than
the election of directors) shall be the act of the shareholders, unless the
vote of a greater number or voting by classes is required by California
General Corporation Law or by the articles of incorporation or by these
bylaws."
<PAGE>
3. Amend Article IX, Section 8 of the Bylaws to read as follows:
"Section 8. Restrictions on Transactions with Affiliates. The
--------------------------------------------
corporation may engage in transactions with affiliates provided that a
purchase or sale transaction with an affiliate is (i) approved by a
majority of the corporation's Independent Directors and (ii) fair to the
corporation based on an independent appraisal or fairness opinion."
4. Amend Article IX, Section 9 of the Bylaws to read as follows:
"Section 9. Repurchase of Shares. The corporation may purchase or
--------------------
reacquire its shares and invest its assets in its own shares, provided that
in each case the consent of the board of directors shall have been
obtained."
5. Amend Article IX, Section 14 of the Bylaws to read as follows:
"Section 14. Proposal for Sale or Financing of Properties. During
--------------------------------------------
1997, unless shareholders had previously approved such a proposal, the
shareholders will be presented with a proposal to approve or disapprove (a)
the sale or financing of all or substantially all of the corporation's
properties and (b) the distribution of the proceeds from such transaction
and, in the case of a sale, the liquidation of the corporation, unless the
proceeds of such sale include deferred payments, in which case the
corporation would be liquidated following receipt of all deferred payments;
provided, however, that this provision shall not be applicable if the
merger of American Office Park Properties, Inc. into the corporation is
completed. This provision may not be amended or repealed without the vote
or written consent of holders of a majority of the outstanding shares
entitled to vote."
6. Amend Article XI of the Bylaws to read as follows:
"XI
Amendments
Section 1. Amendment by Shareholders. New bylaws may be adopted or
-------------------------
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the articles of incorporation of the corporation are
amended in accordance with Section 2302 of the Corporations Code of
California and if such articles of incorporation thereafter set forth the
number of authorized directors of the corporation, the authorized number of
directors may be changed only by an amendment of the articles of
incorporation.
Section 2. Amendment by Directors. Subject to the rights of the
----------------------
shareholders as provided in Section 1 of this Article XI, to adopt, amend
or repeal bylaws, bylaws may be adopted, amended or repealed by the board
of directors; provided, however, that after the issuance of shares, the
board of directors may adopt a bylaw or amendment of a bylaw changing the
authorized number of directors only for the purpose of fixing the exact
number of directors within the limits specified in the articles of
incorporation or in Section 2 of Article IV of these bylaws, and provided
further that bylaws relating to the corporation's qualification as a real
estate investment trust (Section 12 of Article IX), bylaws requiring that a
majority of the directors be Independent Directors (Section 3 of Article
IV), bylaws relating to restrictions on transactions with affiliates
(Section 8 of Article IX) and bylaws relating to restrictions on the
repurchase by the corporation of its
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<PAGE>
shares (Section 9 of Article IX), may not be amended or repealed without
the vote or written consent of holders of a majority of the outstanding
shares entitled to vote."
The following definitions in Article I of the Bylaws are proposed to be
deleted in their entirety:
Section 3. "General Partners"; Section 5. "PSI"; Section 6.
"Partnership"; Section 7. "Partnership Agreement"; Section 8. "Public
Storage Properties REIT"; Section 9. "Purchase Price"; Section 11. "REIT
- Qualifying Income"; and Section 12. "Reorganization."
The following sections of the Bylaws are proposed to be deleted in their
entirety:
1. Article III, Section 14. Voting of Series B and Series C Shares.
--------------------------------------
2. Article IX, Section 11. Proceeds from the Sale or Financing of
--------------------------------------
the Corporation's Properties. (this Section is inapplicable upon
----------------------------
conversion of the PSP11 common stock series B and C into common stock
series A).
3. Article X, Section 2. Restrictions on Investment Objectives.
-------------------------------------
3
<PAGE>
Appendix E-3
PROPOSED AMENDMENTS TO PSP11'S AMENDED AND RESTATED
ARTICLES OF INCORPORATION AND AMENDED AND RESTATED BYLAWS
AMENDED AND RESTATED ARTICLES OF INCORPORATION
Set forth below is the proposed amendment to PSP11's Amended and Restated
Articles of Incorporation that would add new Article IV thereto. Article IV
would read in its entirety as follows:
"IV
4.01 OWNERSHIP LIMITATIONS
(a) BASIC OWNERSHIP LIMITS. Except as provided in Section 4.01(b) and
Section 4.03, no Person shall Beneficially Own shares of Common Stock or any
series of Preferred Stock or Equity Stock in excess of the Ownership Limit set
forth in this Section 4.01(a). In the case of Common Stock, the Ownership Limit
is 2.0% of the outstanding shares of Common Stock. In the case of any series of
Preferred Stock or Equity Stock, the Ownership Limit is 9.9% of the outstanding
shares of such series of Preferred Stock or Equity Stock.
(b) CERTAIN EXCEPTIONS. The limitation set forth in Section 4.01(a) shall
apply only to a Transfer of Stock or other event with respect to Stock occurring
subsequent to the effective date of the merger of American Office Park
Properties, Inc. with and into this corporation. Notwithstanding anything to
the contrary in this Section 4.01, no Person shall be deemed to exceed the
Ownership Limit set forth in Section 4.01(a) solely by reason of the Beneficial
Ownership of shares of any class of Stock to the extent such shares of Stock
were Beneficially Owned by such Person on the effective date of the merger of
American Office Park Properties, Inc. with and into this corporation (but the
Beneficial Ownership of any such shares of Stock shall be taken into account in
determining whether any subsequent Transfer or other event violates Section
4.01(a)). For purposes of the preceding sentence, in evaluating Beneficial
Ownership of any Person on the effective date of the merger, there shall also be
taken into account Beneficial Ownership of any shares that would have been
Beneficially Owned on that date if redemption rights provided in the Operating
Partnership Agreement had been exercised at that time (whether or not then
exercisable) resulting in an exchange of partnership units for shares. In
addition, no Person shall be deemed to exceed the Ownership Limit set forth in
Section 4.01(a) solely by reason of the Beneficial Ownership of shares of any
class of Stock that are treated as owned because of such Person's actual or
Beneficial Ownership of shares of Public Storage, Inc., to the extent that such
Person's actual or Beneficial Ownership of shares of Public Storage, Inc.
complies with the ownership restrictions applicable to shareholders of Public
Storage, Inc. (but the Beneficial Ownership of any such shares of Stock because
of such Person's actual or Beneficial Ownership of shares of Public Storage,
Inc. shall be taken into account in determining whether any other Transfer,
Acquisition or other event violates Section 4.01(a)).
(c) NO OWNERSHIP PRODUCING "CLOSELY HELD" STATUS. Notwithstanding any
other provisions contained in the corporation's Articles of Incorporation or
bylaws, no Person shall Beneficially Own shares of any class of Stock of this
corporation to the extent that, if effective, such Beneficial Ownership would
result in this corporation being "closely held" within the meaning of Section
856(h) of the Code (without regard to whether the ownership interest is
purportedly held during the second half of a taxable year) or otherwise would
result in this corporation failing to qualify as a REIT.
1
<PAGE>
(d) APPLICATION TO PARTNERSHIP EXCHANGE RIGHTS. It is expressly intended
that the restrictions on ownership and transfer described in this Article IV
shall apply to the redemption rights provided in the Operating Partnership
Agreement. Notwithstanding any provisions of the Operating Partnership
Agreement or any related agreements to the contrary, partners of the Partnership
shall not be entitled to exchange interests in the Partnership for Stock to the
extent the Beneficial Ownership of those shares would violate the restrictions
otherwise contained in this Article IV (taking into account the provisions of
Section 4.01(b)).
4.02 REMEDIES
(a) TRANSFERS IN TRUST. If, notwithstanding the other provisions contained
in this Article IV, at any time after the effective date of the merger of
American Office Park Properties, Inc. with and into this corporation, there is a
purported Transfer or other event that, if effective, would result in the
violation of one or more of the restrictions on ownership and transfer described
in Section 4.01, then that number of shares of Stock the Beneficial Ownership of
which otherwise would cause such Person to violate Section 4.01 (rounded up to
the next whole share) shall be automatically transferred to a Charitable Trust
for the benefit of a Charitable Beneficiary, as described in Section 4.08,
effective as of the close of business on the day immediately prior to the date
of such purported Transfer or other event, and such Person shall acquire no
rights in such shares of Stock.
(b) VOID AB INITIO. If the transfer to the Charitable Trust described in
Section 4.02(a) would not be effective for any reason to prevent any Person from
Beneficially Owning Stock in violation of Section 4.01, then the Transfer or
other event that would otherwise cause such Person to violate Section 4.01 shall
be void ab initio.
(c) NO OWNERSHIP BY LESS THAN 100 PERSONS. Notwithstanding any other
provision of the corporation's Articles of Incorporation or bylaws, any Transfer
of shares of Stock (whether or not such Transfer is the result of a transaction
engaged in through the facilities of the Exchange or any other automated inter-
dealer quotation system) that, if effective, would result in the Stock being
owned beneficially by less than 100 persons (determined under the principles of
Section 856(a)(5) of the Code) shall be void ab initio, and the intended
transferee shall acquire no rights in such shares of Stock.
(d) OTHER ACTIONS. In addition to, and without limitation by, Section
4.02(a) through (c) above, if the Board of Directors or its designees shall at
any time determine in good faith that a Transfer or other event has taken place
in violation of Article IV or that a Person intends to acquire or has attempted
to acquire, ownership, beneficial ownership (determined under the principles of
Section 856(a)(5) of the Code) or Beneficial Ownership of any Stock in violation
of Article IV (whether or not the violation is intended), the Board of Directors
or its designees shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or other event, including, but not limited
to, causing this corporation to redeem Stock, refuse to give effect to such
Transfer or other event on the books of this corporation or instituting
proceedings to enjoin such Transfer or other event; provided, however, that any
Transfer or attempted Transfer or other event in violation of Section 4.01 shall
automatically result in the transfer to the Charitable Trust described in
Section 4.02(a), without regard to any action (or non-action) by the Board of
Directors, and if applicable, such Transfer or other event shall be void ab
initio as provided above without regard to any action or inaction by the Board
of Directors or its designees.
(e) NO LIMIT ON AUTHORITY. Nothing contained in this Section 4.02 shall
limit the authority of the Board of Directors to take such other action as it
deems necessary or advisable to protect this corporation and the interests of
its stockholders by preservation of this corporation's status as a REIT.
2
<PAGE>
4.03 WAIVERS AND EXCEPTIONS
(a) BOARD MAY GRANT EXCEPTIONS. Subject to Section 4.01(c), the Board of
Directors, in its sole and absolute discretion, may grant to any Person an
exception to the Ownership Limit set forth in Section 4.01(a) with respect to
Common Stock or any series of Preferred Stock or Equity Stock if the Board of
Directors shall have determined that this corporation would not be "closely
held" within the meaning of Section 856(h) of the Code (without regard to
whether the purported Acquisition, Transfer or other event takes place during
the second half of a taxable year) and would not otherwise fail to qualify as a
REIT, after giving effect to an acquisition by such Person of Beneficial
Ownership of the maximum amount of Common Stock, Preferred Stock and Equity
Stock permitted as a result of the exception to be granted, and taking into
account the existing and permitted ownership by other Persons of the Stock of
this corporation (taking into account any other exceptions granted under this
Section 4.03(a)). If a member of the Board of Directors requests that the Board
of Directors grant an exception to the Ownership Limit with respect to such
member or with respect to any other Person if such member of the Board of
Directors would be considered to be the Beneficial Owner of shares of Stock
owned by such Person, such member of the Board of Directors shall not
participate in the decision of the Board of Directors as to whether to grant any
such exception.
(b) CONDITIONS TO EXCEPTIONS. As a condition to the granting of an
exception under Section 4.03(a) to any Person, the Board of Directors may
require such Person to provide the Board of Directors such representations and
undertakings as the Board of Directors may, in its sole and absolute discretion,
require (including, without limitation, an agreement as to a reduced Ownership
Limit for such Person with respect to the Beneficial Ownership of one or more
other classes of Stock not subject to the exception), and such Person must agree
that any violation of such representations and undertakings or attempted
violations will result in the application of the remedies set forth in Section
4.02 with respect to shares of Stock producing the violation or attempted
violation. In addition, prior to granting any exception, the Board of Directors
may require a ruling from the IRS or an opinion of counsel, in either case in
form and substance satisfactory to the Board of Directors, in its sole and
absolute discretion as it may deem necessary or advisable in order to determine
or ensure this corporation's status as a REIT, provided, however, that obtaining
a favorable ruling or opinion shall not be required for the Board of Directors
to grant an exception.
(c) TERMINATION OF RESTRICTIONS. The Board of Directors may terminate the
application of the Ownership Limits or any other or all restrictions on transfer
and ownership set forth in this Article IV at such time as the Board of
Directors determines that it is no longer in the best interests of the
corporation to attempt to, or continue to, qualify as a REIT, or that compliance
with those limits or restrictions is no longer required in order for the
corporation to qualify as a REIT.
4.04 CERTAIN DEFINITIONS
Unless the context otherwise requires, the terms defined in this Section
4.04 shall have, for all purposes, the meanings specified below (with terms
defined in the singular having comparable meanings when used in the plural).
"AFFECTED PERSON" shall have the meaning set forth in Section 4.02(a).
"BENEFICIAL OWNERSHIP" shall mean ownership of Common Stock or Preferred
Stock or Equity Stock by a Person, whether the interest in the shares of Stock
is held directly or indirectly (including by a nominee), and shall include
interests that would be treated as owned through the application of Section 544
3
<PAGE>
of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.
"BENEFICIAL OWNERSHIP EVENT" shall have the meaning set forth in Section
4.02(a).
"CHARITABLE BENEFICIARY" shall mean one or more beneficiaries of the
Charitable Trust as determined pursuant to Section 4.08, provided that each such
organization must be described in Section 501(c)(3) of the Code and
contributions to each such organization must be eligible for deduction under
each of Sections 170(b)(1)(A), 2055, and 2522 of the Code.
"CHARITABLE TRUST" shall mean the trust created pursuant to Section
4.08(a).
"CHARITABLE TRUSTEE" shall mean the Person that is initially appointed by
this corporation, or any successor subsequently designated by this corporation,
to serve as trustee of the Charitable Trust provided that such Person is
unaffiliated with this corporation or the Purported Owner.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"EXCHANGE" shall mean the New York Stock Exchange or the American Stock
Exchange.
"IRS" shall mean the United States Internal Revenue Service.
"MARKET PRICE" shall mean, with respect to any class or series of Stock,
the last reported sales price on the Exchange of such shares on the day
immediately preceding the relevant date, or if such shares are not then traded
on the Exchange, the last reported sales price of such shares on the day
immediately preceding the relevant date as reported on any exchange or quotation
system or for which such shares may be traded, provided, however, that if the
Board of Directors determines in good faith that a lower price is appropriate,
then the Market Price shall be such lower price as determined in good faith by
the Board of Directors, or if such shares are not then traded over any exchange
or quotation system, the Market Price shall be the price determined in good
faith by the Board of Directors of this corporation as the fair market value of
shares on the relevant date.
"OPERATING PARTNERSHIP AGREEMENT" shall mean that certain Agreement of
Limited Partnership of American Office Park Properties, L.P. dated January 1,
1997, as amended from time to time.
"OWNERSHIP LIMIT" shall mean the maximum amount of Common Stock and/or
Preferred Stock and/or Equity Stock that may be Beneficially Owned by a Person
under Section 4.01(a), determined without regard to any exception or waiver that
may be granted under Section 4.03 (but taking into account ownership permitted
under Section 4.01(b)).
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity; but does not include, to the
extent appropriate to facilitate a public offering or private placement of
Stock, an underwriter that participates in such a public offering or private
placement provided that the ownership of Stock by such underwriter would not
result in this corporation being "closely held" within the meaning of Section
856(h) of the Code and would not otherwise result in this corporation failing to
qualify as a REIT.
4
<PAGE>
"PURPORTED OWNER" shall mean, with respect to any purported Acquisition
that would result in a violation of the limitations in Section 4.01, the Person
who would have owned shares of Stock if such Acquisition had been valid under
Section 4.01 and, if appropriate in the context, shall also mean any Person who
would have been the record owner of the shares that the Purported Owner would
have so owned.
"REIT" shall mean a "real estate investment trust" within the meaning of
Section 856 of the Code.
"STOCK" shall mean shares of stock of this corporation that are Common
Stock or Preferred Stock or Equity Stock.
"TRANSFER" shall mean any issuance, sale, transfer, gift, assignment,
devise or other disposition of Stock, as well as any other event that causes a
Person to acquire Beneficial Ownership, including (i) the granting or exercise
of any option or warrant, convertible security, pledge, security interest, or
similar right to acquire Stock or entering into any agreement for the sale,
transfer or other disposition of Stock or (ii) the sale, transfer, assignment or
other disposition of any securities (or rights convertible into or exchangeable
for Stock), (iii) a change in the capital structure of the corporation, (iv) a
change in the relationship between two or more Persons that causes a change in
ownership of Stock by application of Section 544 of the Code, as modified by
Section 856(h), or (v) Transfers of interests in other entities that result in
changes in Beneficial Ownership of Stock; in each case, whether voluntarily or
involuntarily, whether owned of record or beneficially or Beneficially, and
whether by operation of law or otherwise. (For purposes of this Article 4, the
right of a limited partner under the Operating Partnership Agreement to require
the partnership to redeem the partner's limited partnership units shall not be
considered to be an option or similar right to acquire Stock.)
4.05 REPORTING OF TRANSFERS AND OWNERSHIP
(a) NOTICE OF RESTRICTED TRANSFERS. Any Person who acquires or attempts or
intends to acquire Stock or other securities in violation of Article IV or any
Person who is a transferee in a Transfer or is otherwise affected by an event
other than a Transfer that results in a violation of Article IV, shall
immediately give written notice to this corporation of such event, or in the
case of such a proposed or attempted event, give at least 15 days prior written
notice to this corporation of such event, and shall provide to this corporation
such other information as this corporation may request in order to determine the
effect, if any, of such acquisition, ownership or other event on this
corporation's status as a REIT and to ensure compliance with the limitations set
forth in this Article IV.
(b) OWNERS REQUIRED TO PROVIDE INFORMATION. From and after the effective
date of the merger of American Office Park Properties, Inc. with and into this
corporation, each Person who is a beneficial owner or Beneficial Owner of Stock
and each Person (including the stockholder of record) who is holding Stock for a
Beneficial Owner shall provide to this corporation such information as this
corporation may request, in good faith, in order to determine this corporation's
status as a REIT, to ensure compliance with the limitations set forth in this
Article IV, to comply with the requirements of any taxing authority or
governmental agency, or to determine any such compliance.
4.06 AMBIGUITY
In the case of an ambiguity or uncertainty in the interpretation or
application of any of the provisions of this Article IV, including any
definition contained in Section 4.04, the Board of Directors shall have the
power to determine the interpretation or application of the provisions with
respect to any situation based on the facts known to it. The value of
outstanding shares of any class or series of the Stock
5
<PAGE>
of the Corporation may be determined by the Board of Directors in good faith,
and any such determination shall be conclusive. If any provision of Article IV
requires an action by the Board of Directors but does not provide specific
guidance with respect to such action, the Board of Directors shall have the
power to determine the action to be taken so long as such action is not contrary
to the provisions of Article IV.
4.07 LEGEND
Each certificate for shares of any class of Stock shall bear substantially
the following legend or such other legend as the corporation may from time-to-
time determine to be appropriate:
"The shares of Stock represented by this certificate are subject to
restrictions on ownership and transfer for the purpose of assisting this
corporation to maintain its status as a Real Estate Investment Trust under
the Internal Revenue Code of 1986, as amended. Except as set forth in
Article IV of this corporation's Articles of Incorporation, no person may
Beneficially Own (i) more than 2.0% of the outstanding shares of Common
Stock of this corporation, or (ii) more than 9.9% of the outstanding shares
of any series of Preferred Stock or Equity Stock of this corporation, with
certain further restrictions and exceptions as are set forth in this
corporation's Articles of Incorporation. Any Person who attempts to own or
Beneficially Own Stock in excess of the above limitations must notify this
corporation in writing at least 15 days prior to such attempt. If any of
the restrictions on transfer or ownership set forth in Article IV of the
Articles of Incorporation are violated, the Stock represented hereby will
be automatically transferred to the Charitable Trustee of a Charitable
Trust for the benefit of a Charitable Beneficiary pursuant to the terms of
Article IV of the Articles of Incorporation. In addition, attempted
transfers of Stock in violation of the limitations described above (as
modified or expanded upon in Article IV of the Articles of Incorporation),
may be void ab initio. All capitalized terms in this legend have the
meanings defined in this corporation's Articles of Incorporation, as the
same may be amended from time to time. This corporation will furnish to
the holder hereof, upon request and without charge, a complete written
statement of the terms and conditions of Article IV of the Articles of
Incorporation. Requests for such documents may be directed to the
corporate secretary."
4.08 TRANSFER OF STOCK IN TRUST
(a) OWNERSHIP IN TRUST; STATUS OF SHARES HELD IN CHARITABLE TRUST. Upon
any purported Transfer (whether or not such Transfer is the result of a
transaction engaged in through the facilities of the Exchange or any other
automated inter-dealer quotation system) or other event that results in the
transfer of Stock to a Charitable Trust pursuant to Section 4.02, such shares of
Stock shall be deemed to have been transferred to the Charitable Trustee in its
capacity as Charitable Trustee for the exclusive benefit of one or more
Charitable Beneficiaries. Each Charitable Beneficiary shall be designated by
this corporation as provided in Section 4.08(f). Shares of Stock so held in
Charitable Trust shall remain issued and outstanding shares of Stock of the
Corporation and shall be entitled to the same rights and privileges on identical
terms and conditions as are all other issued and outstanding shares of Stock of
the same class and series.
The Purported Owner shall not benefit economically from ownership of
any shares of Stock held in Charitable Trust by the Charitable Trustee, shall
have no rights to dividends and shall not possess any rights to vote or other
rights attributable to the shares held in Charitable Trust. The Purported Owner
of shares of Stock in violation of Section 4.01 shall have no claim, cause of
action, or any other recourse whatsoever against the purported transferor of
such shares.
6
<PAGE>
(b) DISTRIBUTION AND DIVIDEND RIGHTS. The Charitable Trustee shall have
all rights to distributions and dividends with respect to shares of Stock held
in the Charitable Trust, which rights shall be exercised for the exclusive
benefit of the Charitable Beneficiary. Any distributions or dividend declared
but unpaid shall be paid when due to the Charitable Trustee. Any distributions
or dividends paid prior to the discovery by this corporation that the shares of
Stock have been transferred to the Charitable Trustee with respect to such
shares shall be paid over to the Charitable Trustee by the recipient upon
demand. The corporation may take all measures that it determines reasonably
necessary to recover the amount of any such distribution, including, if
necessary, withholding any portion of future distributions payable on shares of
Stock of the Purported Owner or amounts otherwise payable to the Purported Owner
(such as pursuant to Section 4.08(d)); and, as soon as reasonably practicable
following the corporation's receipt or withholding thereof, shall pay over to
the Charitable Trustee, the distributions so received or withheld, as the case
may be. Any distributions or dividends so paid over to the Charitable Trustee
shall be held in trust for the Charitable Beneficiary.
(c) RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of or any distribution of the assets of
this corporation, the Charitable Trustee shall be entitled to receive, ratably
with each other holder of Stock of the class or series of Stock that is held in
the Charitable Trust, that portion of the assets of this corporation available
for distribution to the holders of such class or series (determined based upon
the ratio that the number of shares of such class or series of Stock held by the
Charitable Trustee bears to the total number of shares of such class or series
of Stock then outstanding). The Charitable Trustee shall distribute any such
assets received in respect of the Stock held in the Charitable Trust in any
liquidation, dissolution or winding up of, or distribution of the assets of the
Corporation in accordance with Section 4.08(d).
(d) SALE OF SHARES BY CHARITABLE TRUSTEE. As reasonably promptly as
possible after receiving notice from this corporation that shares of Stock have
been transferred to the Charitable Trust, in an orderly fashion so as not to
affect the Market Price of the shares held in the Charitable Trust materially
and adversely, the Charitable Trustee shall sell the shares held in Charitable
Trust to a Person, designated by the Charitable Trustee, whose ownership of the
shares of Stock held in the Charitable Trust would not violate the ownership
limitations set forth in Section 4.01. Upon such sale, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Charitable
Trustee shall distribute the net proceeds of the sale to the Purported Owner and
to the Charitable Beneficiary as provided in this Section 4.08(d).
The Charitable Trustee shall first pay all reasonable expenses of the
Charitable Trust and of the corporation incurred in connection with the
formation of the Charitable Trust and disposition of the shares. The Purported
Owner shall receive out of any excess the lesser of (1) (x) the price per share
such Purported Owner paid for the Stock in the purported Transfer that resulted
in the transfer of shares of Stock to the Charitable Trust, or (y) if the
Transfer or other event that resulted in the transfer of shares of Stock to the
Charitable Trust was not a transaction in which the Purported Owner gave full
value for such shares of Stock, 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 such shares of Stock to the Charitable Trust and (2) the price per share
received by the Charitable Trustee from the sale or other disposition of the
shares held in the Charitable Trust. Any net sales proceeds in excess of the
amount payable to the Purported Owner shall be immediately paid to the
Charitable Beneficiary.
If, prior to the discovery by this corporation that shares of Stock
have been transferred to the Charitable Trustee, such shares are sold by the
Purported Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Charitable Trust and (ii) to the extent that the Purported Owner
received an amount for such shares that exceeds the amount such Purported Owner
was entitled to receive pursuant to this Section 4.08(d), such excess shall be
paid to the Charitable Trustee upon demand.
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<PAGE>
The Charitable Trustee shall have the right and power (but not the
obligation) to offer any share of Stock held in the Charitable Trust for sale to
this corporation on such terms and conditions as the Charitable Trustee shall
determine appropriate.
Each Charitable Beneficiary and Purported Owner waive any and all
claims that they may have against the Charitable Trustee and the corporation
arising out of the disposition of shares, except for claims arising out of the
gross negligence or willful misconduct of such Charitable Trustee or the
corporation, or the Charitable Trustee's or the corporation's failure to make
payments in accordance with Section 4.08.
(e) VOTING AND NOTICE RIGHTS. The Charitable Trustee shall have all
voting rights and rights to receive any notice of any meetings, which rights
shall be exercised for the exclusive benefit of the Charitable Beneficiary. The
Purported Owner shall have no voting rights with respect to shares held in
Charitable Trust. Any vote by or on behalf of a Purported Owner as a holder of
shares of Stock prior to the discovery by the corporation that the shares of
Stock have been transferred to the Charitable Trust shall be subject to
rescission by the Charitable Trustee if the rescission is permitted by
applicable law and the Board of Directors concludes that the rescission will not
materially and adversely affect the corporation. In the case of any such
rescission, to the extent permitted by applicable law, any such votes shall be
void ab initio with respect to the shares held by the Charitable Trustee.
Notwithstanding the provisions of this Article IV, until the
corporation has received notification that shares of Stock have been transferred
to the Charitable Trustee, the corporation shall be entitled to rely on its
share transfer and other stockholder records for purposes of preparing lists of
stockholders entitled to vote at meetings, determining the validity and
authority of proxies and otherwise conducting votes of stockholders.
(f) DESIGNATION OF CHARITABLE BENEFICIARY(IES). By written notice to the
Charitable Trustee, this corporation shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the Charitable
Trust such that (1) the shares of Stock held in the Charitable Trust would not
violate the restrictions set forth in Section 4.01 in the hands of such
Charitable Beneficiary and (2) each Charitable Beneficiary is described in
Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under each of Sections 170(b)(1)(A), 2055, and 2522 of
the Code.
4.09 SETTLEMENT
Nothing in this Article IV shall preclude the settlement of any transaction
entered into through the facilities of the Exchange (but the fact that
settlement of a transaction is permitted shall not negate the effect of any
other provision and all of the provisions shall apply to the purported
transferee of the shares of Stock in such transaction)."
AMENDED AND RESTATED BYLAWS
The following sections of PSP11's Amended and Restated Bylaws (the
"Bylaws"), which relate to the ownership limitation contained in the Bylaws, are
proposed to be deleted in their entirety:
1. Article IX, Section 7. Shareholders' Disclosure; Directors' Right
------------------------------------------
to Refuse To Transfer Shares; Limitation on Holdings; Repurchase of Shares.
---------------------------------------------------------------------------
2. Article IX, Section 10. Legend.
-------
8
<PAGE>
Appendix E-4
PROPOSED AMENDMENT TO PSP11'S AMENDED AND RESTATED BYLAWS
AMENDED AND RESTATED BYLAWS
Set forth below is the proposed amendment to Article IV, Section 2 of
PSP11's Amended and Restated Bylaws. Article IV, Section 2 would read in its
entirety as follows:
"Section 2. Number and Qualification of Directors. The number of
-------------------------------------
directors of the corporation shall be not less than five (5) nor more than
nine (9). The exact number of directors shall be seven (7) until changed,
within the limits specified above, by a bylaw amending this Section 2, duly
adopted by the board of directors or by the shareholders. The indefinite
number of directors may be changed, or a definite number fixed without
provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by
the vote or written consent of holders of a majority of the outstanding
shares entitled to vote; subject, however, to such additional voting
requirement or limitation as is imposed under applicable law in the case of
an amendment reducing the number of directors to a number less than five
(5)."
<PAGE>
Appendix F
AMERICAN OFFICE PARK PROPERTIES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
American Office Park Properties, Inc., a California corporation (the
"Company"), sets forth herein the terms of its 1997 Stock Option and Incentive
Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to enhance the Company's ability to attract and
retain highly qualified officers, key employees, outside directors, and other
persons who provide services to the Company, to advance the interests of the
Company by providing such persons with stronger incentives to continue to serve
the Company and its affiliates (as defined herein) and to expend maximum effort
to improve the business results and earnings of the Company. The Plan is
intended to accomplish this objective by providing to eligible persons an
opportunity to acquire or increase a direct proprietary interest in the
operations and future success of the Company. To this end, the Plan provides
for the grant of stock options, restricted stock and restricted stock units in
accordance with the terms hereof. Stock options granted under the Plan may be
non-qualified stock options or incentive stock options, as provided herein,
except that stock options granted to outside directors and non-employee Service
Providers shall in all cases be non-qualified stock options.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including
Award Agreements), the following definitions shall apply:
2.1 "affiliate" of, or person "affiliated" with, a person means any
company or other trade or business that controls, is controlled by or is under
common control with such person within the meaning of Rule 405 of Regulation C
under the 1933 Act (as defined herein).
2.2 "Award Agreement" means the stock option agreement, restricted
stock agreement, restricted stock unit agreement or other written agreement
between the Company and a Grantee that evidences and sets out the terms and
conditions of a Grant.
2.3 "Benefit Arrangement" shall have the meaning set forth in SECTION
13 hereof.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Code" means the Internal Revenue Code of 1986, as now in effect
or as hereafter amended.
2.6 "Committee" means a Committee of, and designated from time to
time by resolution of, the Board, which shall consist of no fewer than two
members of the Board, none of whom shall be an officer or other salaried
employee of the Company or any affiliate, and each of whom shall qualify in all
respects as a "non-employee director" within the meaning of Rule 16b-3 under the
Exchange Act or any successor rule or regulation and as "outside directors" as
defined in Treas. Regs. (S)1.162-27(e)(3) ("outside directors"). Anything to
the contrary notwithstanding, the requirement that all members of the Committee
1
<PAGE>
be non-employee directors and outside directors shall not apply for any period
of time during which the Company's Stock is not registered pursuant to Section
12 of the Exchange Act. Commencing on the Effective Date, and until such time
as the Board shall determine otherwise, the Committee shall be the Audit
Committee of the Board. No member of the Committee shall be liable for any
action or determination undertaken or made in good faith with respect to the
Plan or any agreement executed pursuant to the Plan.
2.7 "Company" means American Office Park Properties, Inc.
2.8 "Effective Date" means January 28, 1997.
2.9 "Exchange Act" means the Securities Exchange Act of 1934, as now
in effect or as hereafter amended.
2.10 "Fair Market Value" means the value of a share of Stock,
determined as follows: if on the Grant Date or other determination date the
Stock is listed on an established national or regional stock exchange, is
admitted to quotation on the Nasdaq National Market, or is publicly traded on an
established securities market, the Fair Market Value of a share of Stock shall
be the closing price of the Stock on such exchange or in such market (if there
is more than one such exchange or market, the principal exchange or market, as
determined by the Committee) on the Grant Date or such other determination date
(or if there is no such reported closing price, the Fair Market Value shall be
the mean between the highest bid and lowest asked prices or between the high and
low sale prices on such trading day) or, if no sale of Stock is reported for
such trading day, on the next preceding day on which any sale shall have been
reported. If the Stock is not listed on such an exchange, quoted on such system
or traded on such a market, Fair Market Value shall be the value of the Stock as
determined by the Committee in good faith.
2.11 "Grant" means an award of an Option, Restricted Stock or
Restricted Stock Units under the Plan.
2.12 "Grant Date" means (a) for Grants other than Grants to Outside
Directors, the later of (i) the date as of which the Committee approves the
Grant or (ii) the date as of which the Grantee and the Company or Service
Provider enter into the relationship resulting in the Grantee's becoming
eligible to receive a Grant, and (b) for Grants to Outside Directors, the date
on which such Grant is made in accordance with SECTION 6.3 hereof.
2.13 "Grantee" means a person who receives or holds an Option,
Restricted Stock or Restricted Stock Units under the Plan.
2.14 "Incentive Stock Option" means an "incentive stock option"
within the meaning of Section 422 of the Code, or the corresponding provision of
any subsequently enacted tax statute, as amended from time to time.
2.15 "Option" means an option to purchase one or more shares of Stock
pursuant to the Plan.
2.16 "Option Period" means the period during which Options may be
exercised as set forth in SECTION 10 hereof.
2.17 "Option Price" means the purchase price for each share of Stock
subject to an Option.
2.18 "Other Agreement" shall have the meaning set forth in SECTION 13
hereof.
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2.19 "Outside Director" means a member of the Board who is not an
officer or employee of the Company.
2.20 "Partnership" means American Office Park Properties, L.P., a
California limited partnership.
2.21 "Plan" means the American Office Park Properties, Inc. 1997
Stock Option and Incentive Plan.
2.22 "Reporting Person" means a person who is required to file
reports under Section 16(a) of the Exchange Act.
2.23 "Restricted Period" means the period during which Restricted
Stock or Restricted Stock Units are subject to restrictions or conditions
pursuant to SECTION 12.2 hereof.
2.24 "Restricted Stock" means shares of Stock, awarded to a Grantee
pursuant to SECTION 12 hereof, that are subject to restrictions and to a risk of
forfeiture.
2.25 "Restricted Stock Unit" means a unit awarded to a Grantee
pursuant to SECTION 12 hereof, which represents a conditional right to receive a
share of Stock in the future, and which is subject to restrictions and to a risk
of forfeiture.
2.26 "Securities Act" means the Securities Act of 1933, as now in
effect or as hereafter amended.
2.27 "Service Provider" means a consultant or adviser to the Company,
a manager of the Company's properties or affairs, other similar service provider
or affiliate of the Company, or any corporation or other entity in which the
Company owns at least a ninety percent (90%) economic interest, and employees of
any of the foregoing, as such persons may be designated from time to time by the
Committee pursuant to SECTION 6 hereof.
2.28 "Stock" means the common stock of the Company.
2.29 "Subsidiary" means any "subsidiary corporation" of the Company
within the meaning of Section 424(f) of the Code and any "parent corporation" of
the Company within the meaning of Section 424(e) of the Code.
2.30 "Termination Date" shall be the date upon which an Option shall
terminate or expire, as set forth in SECTION 10.2 hereof.
3. ADMINISTRATION OF THE PLAN
3.1 General. The Plan shall be administered by the Committee. The
-------
Board may remove members, add members, and fill vacancies on the Committee from
time to time, all in accordance with the Company's articles of incorporation and
by-laws and applicable law; provided, however, that each member of the Committee
--------- -------
shall at all times qualify in all respects as a "non-employee director" within
the meaning of Rule 16b-3 under the Exchange Act or any successor rule or
regulation and as "outside directors" as defined in Treas. Regs. (S)1.162-
27(e)(3) ("outside directors"). Anything to the contrary notwithstanding, the
requirement that all members of the Committee be non-employee directors and
outside directors shall
3
<PAGE>
not apply for any period of time during which the Company's Stock is not
registered pursuant to Section 12 of the Exchange Act.
3.2 Plenary Authority of the Committee. Subject to SECTION 3.4
----------------------------------
hereof, the Committee shall have such powers and authorities related to the
administration of the Plan as are consistent with the Company's articles of
incorporation and by-laws and applicable law. The Committee shall have full
power and authority to take all actions and to make all determinations required
or provided for under the Plan, any Grant or any Award Agreement, and shall have
full power and authority to take all such other actions and determinations not
inconsistent with the specific terms and provisions of the Plan that the
Committee deems to be necessary or appropriate to the administration of the
Plan, any Grant or any Award Agreement. All such actions and determinations
shall be by the affirmative vote of a majority of the members of the Committee
present at a meeting or by unanimous consent of the Committee executed in
writing in accordance with the Company's articles of incorporation and by-laws
and applicable law. The interpretation and construction by the Committee of any
provision of the Plan, any Grant or any Award Agreement shall be final and
conclusive.
3.3 Discretionary Grants. Subject to SECTION 3.4 hereof and the
--------------------
other terms and conditions of the Plan, the Committee shall have full and final
authority to designate Grantees, (i) to determine the type or types of Grant to
be made to a Grantee, (ii) to determine the number of shares of Stock to be
subject to a Grant, (iii) to establish the terms and conditions of each Grant
(including, but not limited to, the exercise price of any Option, the nature and
duration of any restriction or condition (or provision for lapse thereof)
relating to the vesting, exercise, transfer, or forfeiture of a Grant or the
shares of Stock subject thereto, and any terms or conditions that may be
necessary to qualify Options as Incentive Stock Options), (iv) to prescribe the
form of each Award Agreement evidencing a Grant, and (v) to amend, modify, or
supplement the terms of any outstanding Grant; provided, however, that the
--------- -------
Committee shall not have the authority to reduce the exercise price of any
outstanding Option other than pursuant to SECTION 16 hereof. Such authority
specifically includes the authority, in order to effectuate the purposes of the
Plan but without amending the Plan, to modify Grants to eligible individuals who
are foreign nationals or are individuals who are employed outside the United
States to recognize differences in local law, tax policy, or custom. As a
condition to any subsequent Grant, the Committee shall have the right, at its
discretion, to require Grantees to return to the Company Grants previously
awarded under the Plan. Subject to the terms and conditions of the Plan, any
such new Grant shall be upon such terms and conditions as are specified by the
Committee at the time the new Grant is made.
3.4 Grants to Outside Directors. With respect to Grants of Options
----------------------------
to Outside Directors pursuant to SECTION 6.3 hereof, the Committee's
responsibilities under the Plan shall be limited to taking all legal actions
necessary to document the Options so granted, to interpret the Award Agreements
evidencing such Options, to maintain appropriate records and reports regarding
such Options, and to take all acts authorized by this Plan or otherwise
reasonably necessary to effect the purposes hereof.
3.5 No Liability. No member of the Board or of the Committee shall
------------
be liable for any action or determination made in good faith with respect to the
Plan or any Grant or Award Agreement.
3.6 Applicability of Rule 16b-3. Those provisions of the Plan that
---------------------------
make express reference to Rule 16b-3 under the Exchange Act shall apply only to
Reporting Persons.
4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in SECTION 16 hereof, the number of
shares of Stock available for issuance under the Plan shall be 1,500,000. Stock
issued or to be issued under the Plan shall be
4
<PAGE>
authorized but unissued shares. If any shares covered by a Grant are not
purchased or are forfeited, or if a Grant otherwise terminates without delivery
of any Stock subject thereto, then the number of shares of Stock counted against
the aggregate number of shares available under the Plan with respect to such
Grant shall, to the extent of any such forfeiture or termination, again be
available for making Grants under the Plan.
5. EFFECTIVE DATE AND TERM OF THE PLAN
5.1 Effective Date. The Plan shall be effective as of the Effective
--------------
Date.
5.2 Term. The Plan has no termination date; however, no Incentive
----
Stock Option may be granted on or after the tenth anniversary of the Effective
Date.
6. GRANTS
6.1 Discretionary Grants to Company, Partnership or Subsidiary Employees.
--------------------------------------------------------------------
Grants may be made under the Plan to any employee of the Company or of the
Partnership or of any Subsidiary, including any such employee who is an officer
or director of the Company or of any Subsidiary, as the Committee shall
determine and designate from time to time; provided, however, that Grants to
-------- -------
employees of the Partnership who are not employees of the Company or of any
Subsidiary shall not be Incentive Stock Options.
6.2 Discretionary Grants to Service Providers. Grants may be made under
-----------------------------------------
the Plan to any Service Provider whose participation in the Plan is determined
by the Committee to be in the best interests of the Company and is so designated
by the Committee; provided, however, that Grants to Service Providers who are
--------- -------
not employees of the Company or of any Subsidiary shall not be Incentive Stock
Options.
6.3 Formula Option Grants to Outside Directors.
------------------------------------------
(a) Initial Grants of Options. (i) Immediately following the first
-------------------------
Annual Meeting of Shareholders of the Company held after the Effective Date,
each Outside Director then duly elected and serving shall automatically be
awarded a Grant of an Option, which shall not be an Incentive Stock Option, to
purchase 5,000 shares of Stock (which amount shall be subject to adjustment as
provided in SECTION 16 hereof) and (ii) thereafter, each Outside Director who is
initially elected to the Board shall, upon the date of his or her initial
election by the Board or the shareholders of the Company, automatically be
awarded a Grant of an Option, which shall not be an Incentive Stock Option, to
purchase 5,000 shares of Stock (which amount shall be subject to adjustment as
provided in SECTION 16 hereof).
(b) Subsequent Grants of Options. Immediately following each Annual
----------------------------
Meeting of Shareholders of the Company commencing with the second Annual Meeting
of Shareholders held after the Effective Date, each Outside Director then duly
elected and serving (other than an Outside Director initially elected to the
Board at such Annual Meeting of Shareholders) shall automatically be awarded a
Grant of an Option, which shall not be an Incentive Stock Option, to purchase
1,000 shares of Stock (which amount shall be subject to adjustment as provided
in SECTION 16 hereof).
(c) Vesting. Options granted to Outside Directors pursuant to SECTIONS
-------
6.3(a) and 6.3(b) shall vest in three equal annual installments in accordance
with the schedule set forth in the first sentence of SECTION 10.1 hereof.
5
<PAGE>
6.4 Successive Grants. An eligible person may receive more than one
-----------------
Grant, subject to such restrictions as are provided herein.
7. LIMITATIONS ON GRANTS
7.1 Limitation on Shares of Stock Subject to Grants. The maximum number
-----------------------------------------------
of shares of Stock subject to Options that can be awarded under the Plan to any
person eligible for a Grant under SECTION 6 hereof is 800,000 during the first
ten years after the Effective Date and 250,000 per year thereafter. The maximum
number of shares of Restricted Stock that can be awarded under the Plan
(including for this purpose any shares of Stock represented by Restricted Stock
Units) to any person eligible for a Grant under SECTION 6 hereof is 250,000 per
year.
7.2 Limitations on Incentive Stock Options. An Option shall constitute an
--------------------------------------
Incentive Stock Option only (i) if the Grantee of such Option is an employee of
the Company or any Subsidiary of the Company; (ii) to the extent specifically
provided in the related Award Agreement; and (iii) to the extent that the
aggregate Fair Market Value (determined at the time the Option is granted) of
the shares of Stock with respect to which all Incentive Stock Options held by
such Grantee become exercisable for the first time during any calendar year
(under the Plan and all other plans of the Grantee's employer and its
affiliates) does not exceed $100,000. To the extent that the aggregate Fair
Market Value (determined at the time of the Option is granted) of the Common
Stock with respect to which Incentive Stock Options become exercisable for the
first time by a Grantee during any calendar year (under all Incentive Stock
Option plans of the Company and any parent or subsidiary corporations) exceeds
$100,000, such Options shall be treated as non-qualified Options. The
determination of which Stock Options shall be treated as non-qualified Options
shall be made by taking Options into account in the order in which they were
granted.
8. AWARD AGREEMENT
Each Grant pursuant to the Plan shall be evidenced by an Award Agreement,
to be executed by the Company and by the Grantee, in such form or forms as the
Committee shall from time to time determine. Award Agreements granted from time
to time or at the same time need not contain similar provisions but shall be
consistent with the terms of the Plan. Each Award Agreement evidencing a Grant
of Options shall specify whether such Options are intended to be non-qualified
stock options or Incentive Stock Options.
9. OPTION PRICE
The Option Price of each Option shall be fixed by the Committee and stated
in the Award Agreement evidencing such Option. The Option Price shall be the
aggregate Fair Market Value on the Grant Date of the shares of Stock subject to
the Option; provided, however, that in the event that a Grantee would otherwise
-------- -------
be ineligible to receive an Incentive Stock Option by reason of the provisions
of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than
ten percent of the Company's outstanding Stock), the Option Price of an Option
granted to such Grantee that is intended to be an Incentive Stock Option shall
be not less than the greater of the par value of a share of Stock or 110 percent
of the Fair Market Value of a share of Stock on the Grant Date. In no case
shall the Option Price of any Option be less than the par value of a share of
Stock.
10. VESTING, TERM AND EXERCISE OF OPTIONS
10.1 Vesting and Option Period. Unless otherwise provided in an Award
-------------------------
Agreement evidencing the Grant of an Option, each Option granted under the Plan
shall become exercisable in
6
<PAGE>
accordance with the following schedule: (i) prior to the first anniversary of
the Grant Date, the Option shall not be exercisable; (ii) on the first
anniversary of the Grant Date, the Option shall become exercisable with respect
to one-third of the shares of Stock subject to such Option; (iii) on the second
anniversary of the Grant Date, the Option shall become exercisable with respect
to an additional one-third of the shares of Stock subject to such Option and
(iv) on the third anniversary of the Grant Date, the Option shall become
exercisable with respect to the remaining shares of Stock subject to such Option
and shall remain exercisable in full up to (but not including) the Termination
Date (as defined in SECTION 10.2 hereof). For purposes of this SECTION 10.1,
fractional numbers of shares of Stock subject to an Option shall be rounded down
to the next nearest whole number. The period during which any Option shall be
exercisable in accordance with the foregoing schedule shall constitute the
"Option Period" with respect to such Option.
10.2 Term. Each Option granted under the Plan shall terminate, and all
----
rights to purchase shares of Stock thereunder shall cease, upon the expiration
of ten years from the date such Option is granted, or under such circumstances
and on such date prior thereto as is set forth in the Plan or as may be fixed by
the Committee and stated in the Award Agreement relating to such Option (the
"Termination Date"); provided, however, that in the event that the Grantee would
-------- -------
otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership
of more than ten percent of the outstanding Stock), an Option granted to such
Grantee that is intended to be an Incentive Stock Option shall not be
exercisable after the expiration of five years from its Grant Date.
10.3 Acceleration. Any limitation on the exercise of an Option contained
------------
in any Award Agreement may be rescinded, modified or waived by the Committee, in
its sole discretion, at any time and from time to time after the Grant Date of
such Option, so as to accelerate the time at which the Option may be exercised.
10.4 Termination of Employment or Other Relationship. Upon the termination
-----------------------------------------------
(i) of the employment of a Grantee with the Company, the Partnership or a
Service Provider, (ii) of a Service Provider's relationship with the Company, or
(iii) of an Outside Director's service to the Company, other than, in the case
of individuals, by reason of death or "permanent and total disability" (within
the meaning of Section 22(e)(3) of the Code), any Option or portion thereof held
by such Grantee that has not vested in accordance with the provisions of SECTION
10.1 hereof shall terminate immediately, and any Option or portion thereof that
has vested in accordance with the provisions of SECTION 10.1 hereof but has not
been exercised shall terminate at the close of business on the thirtieth day
following the Grantee's termination of service, employment, or other
relationship, unless the Committee, in its discretion, extends the period during
which the Option may be exercised (which period may not be extended beyond the
original term of the Option). Upon termination of an Option or portion thereof,
the Grantee shall have no further right to purchase shares of Stock pursuant to
such Option or portion thereof. Whether a leave of absence or leave on military
or government service shall constitute a termination of employment for purposes
of the Plan shall be determined by the Committee, which determination shall be
final and conclusive. For purposes of the Plan, a termination of employment,
service or other relationship shall not be deemed to occur if the Grantee is
immediately thereafter employed with the Company, the Partnership or any other
Service Provider, or is engaged as a Service Provider or an Outside Director of
the Company. Whether a termination of a Service Provider's or an Outside
Director's relationship with the Company shall have occurred shall be determined
by the Committee, which determination shall be final and conclusive.
10.5 Rights in the Event of Death. If a Grantee dies while employed by the
----------------------------
Company, the Partnership or a Service Provider, or while serving as a Service
Provider or an Outside Director, all Options granted to such Grantee shall fully
vest on the date of death, and the executors or administrators or legatees or
distributees of such Grantee's estate shall have the right, at any time within
one year after the
7
<PAGE>
date of such Grantee's death (or such longer period as the Committee, in its
discretion, may determine prior to the expiration of such one-year period) and
prior to termination of the Option pursuant to SECTION 10.2 above, to exercise
any Option held by such Grantee at the date of such Grantee's death.
10.5 Rights in the Event of Disability. If a Grantee terminates employment
---------------------------------
with the Company, the Partnership or a Service Provider, or (if the Grantee is a
Service Provider who is an individual or is an Outside Director) ceases to
provide services to the Company, in either case by reason of the "permanent and
total disability" (within the meaning of Section 22(e)(3) of the Code) of such
Grantee, such Grantee's Options shall continue to vest, and shall be exercisable
to the extent that they are vested, for a period of one year after such
termination of employment or service (or such longer period as the Committee, in
its discretion, may determine prior to the expiration of such one-year period),
subject to earlier termination of the Option as provided in SECTION 10.2 above.
Whether a termination of employment or service is to be considered by reason of
"permanent and total disability" for purposes of the Plan shall be determined by
the Committee, which determination shall be final and conclusive.
10.7 Limitations on Exercise of Option. Notwithstanding any other
---------------------------------
provision of the Plan, in no event may any Option be exercised, in whole or in
part, prior to the date the Plan is approved by the shareholders of the Company
as provided herein, or after ten years following the date upon which the Option
is granted, or after the occurrence of an event referred to in SECTION 16 hereof
which results in termination of the Option.
10.8 Method of Exercise. An Option that is exercisable may be exercised by
------------------
the Grantee's delivery to the Company of written notice of exercise on any
business day, at the Company's principal office, addressed to the attention of
the Committee. Such notice shall specify the number of shares of Stock with
respect to which the Option is being exercised and shall be accompanied by
payment in full of the Option Price of the shares for which the Option is being
exercised. The minimum number of shares of Stock with respect to which an
Option may be exercised, in whole or in part, at any time shall be the lesser of
(i) 100 shares or such lesser number set forth in the applicable Award Agreement
and (ii) the maximum number of shares available for purchase under the Option at
the time of exercise. Payment of the Option Price for the shares purchased
pursuant to the exercise of an Option shall be made (i) in cash or in cash
equivalents; (ii) through the tender to the Company of shares of Stock, which
shares shall be valued, for purposes of determining the extent to which the
Option Price has been paid thereby, at their Fair Market Value on the date of
exercise; or (iii) by a combination of the methods described in (i) and (ii).
The Committee may provide, by inclusion of appropriate language in an Award
Agreement, that payment in full of the Option Price need not accompany the
written notice of exercise provided that the notice of exercise directs that the
certificate or certificates for the shares of Stock for which the Option is
exercised be delivered to a licensed broker acceptable to the Company as the
agent for the individual exercising the Option and, at the time such certificate
or certificates are delivered, the broker tenders to the Company cash (or cash
equivalents acceptable to the Company) equal to the Option Price for the shares
of Stock purchased pursuant to the exercise of the Option plus the amount (if
any) of federal and/or other taxes which the Company may in its judgment, be
required to withhold with respect to the exercise of the Option. An attempt to
exercise any Option granted hereunder other than as set forth above shall be
invalid and of no force and effect. Unless otherwise stated in the applicable
Award Agreement, an individual holding or exercising an Option shall have none
of the rights of a shareholder (for example, the right to receive cash or
dividend payments or distributions attributable to the subject shares of Stock
or to direct the voting of the subject shares of Stock ) until the shares of
Stock covered thereby are fully paid and issued to him. Except as provided in
SECTION 16 hereof, no adjustment shall be made for dividends, distributions or
other rights for which the record date is prior to the date of such issuance.
8
<PAGE>
Notwithstanding the foregoing, the Option Price of any Option that is
exercised by a Grantee shall be paid to the Partnership, and, upon receipt of
the Option Price, the Partnership shall purchase from the Company for delivery
pursuant to the Option a number of shares of Stock equal to the number of shares
of Stock as to which the Option has been exercised, in accordance with and
pursuant to Section 4.2(e) of the Amended and Restated Agreement of Limited
Partnership of the Partnership.
10.9 Delivery of Stock Certificates. Promptly after the exercise of an
------------------------------
Option by a Grantee and the payment in full of the Option Price, such Grantee
shall be entitled to the issuance of a stock certificate or certificates
evidencing his or her ownership of the shares of Stock subject to the Option.
11. TRANSFERABILITY OF OPTIONS
Each Option granted pursuant to this Plan shall, during a Grantee's
lifetime, be exercisable only by the Grantee or his or her permitted
transferees, and neither the Option nor any right thereunder shall be
transferable by the Grantee, by operation of law or otherwise, other than as may
be provided in the Award Agreement evidencing such Option or as may be provided
by will or the laws of descent and distribution. Except as may be provided in
the Award Agreement evidencing an Option, no Option shall be pledged or
hypothecated (by operation of law or otherwise) or subject to execution,
attachment or similar processes.
12. RESTRICTED STOCK
12.1 Grant of Restricted Stock or Restricted Stock Units. The Committee
---------------------------------------------------
may from time to time grant Restricted Stock or Restricted Stock Units to
persons eligible to receive such Grants as set forth in SECTION 6 hereof,
subject to such restrictions, conditions and other terms as the Committee may
determine.
12.2 Restrictions. At the time a Grant of Restricted Stock or Restricted
------------
Stock Units is made, the Committee shall establish a period of time (the
"Restricted Period") applicable to such Restricted Stock or Restricted Stock
Units. The minimum Restricted Period which may be provided for by the Committee
with respect to Restricted Stock or Restricted Stock Units the vesting of which
is subject solely to the passage of time and/or continued employment shall be
three years, subject to earlier expiration of the Restricted Period upon the
death, disability, retirement or other termination of service of the Grantee, or
upon a change in control of the Company, in accordance with the provisions of
the Plan. Each Grant of Restricted Stock or Restricted Stock Units may be
subject to a different Restricted Period. The Committee may, in its sole
discretion, at the time a Grant of Restricted Stock or Restricted Stock Units is
made, prescribe restrictions in addition to or other than the expiration of the
Restricted Period, including the satisfaction of corporate or individual
performance objectives, which may be applicable to all or any portion of the
Restricted Stock or Restricted Stock Units. Such performance objectives shall
be established in writing by the Committee prior to the ninetieth day of the
year in which the Grant is made and while the outcome is substantially
uncertain. Performance objectives shall be based on Stock price, market share,
sales, earnings per share, return on equity or costs. Performance objectives
may include positive results, maintaining the status quo or limiting economic
losses. Subject to the second sentence of this SECTION 12.2, the Committee also
may, in its sole discretion, shorten or terminate the Restricted Period or waive
any other restrictions applicable to all or a portion of the Restricted Stock or
Restricted Stock Units. Neither Restricted Stock nor Restricted Stock Units may
be sold, transferred, assigned, pledged or otherwise encumbered or disposed of
during the Restricted Period or prior to the satisfaction of any other
restrictions prescribed by the Committee with respect to such Restricted Stock
or Restricted Stock Units.
12.3 Restricted Stock Certificates. The Company shall issue, in the name
-----------------------------
of each Grantee to whom Restricted Stock has been granted, stock certificates
representing the total number of shares of
9
<PAGE>
Restricted Stock granted to the Grantee, as soon as reasonably practicable after
the Grant Date. The Secretary of the Company shall hold such certificates for
the Grantee's benefit until such time as the Restricted Stock is forfeited to
the Company, or the restrictions lapse.
12.4 Rights of Holders of Restricted Stock. Unless the Committee otherwise
-------------------------------------
provides in an Award Agreement, holders of Restricted Stock shall have the right
to vote such Stock and the right to receive any dividends declared or paid with
respect to such Stock. The Committee may provide that any dividends paid on
Restricted Stock must be reinvested in shares of Stock, which may or may not be
subject to the same vesting conditions and restrictions applicable to such
Restricted Stock. All distributions, if any, received by a Grantee with respect
to Restricted Stock as a result of any stock split, stock dividend, combination
of shares, or other similar transaction shall be subject to the restrictions
applicable to the original Grant.
12.5 Rights of Holders of Restricted Stock Units. Unless the Committee
-------------------------------------------
otherwise provides in an Award Agreement, holders of Restricted Stock Units
shall have no rights as shareholders of the Company. The Committee may provide
in an Award Agreement evidencing a Grant of Restricted Stock Units that the
holder of such Restricted Stock Units shall be entitled to receive, upon the
Company's payment of a cash dividend on its outstanding Stock, a cash payment
for each Restricted Stock Unit held equal to the per-share dividend paid on the
Stock. Such Award Agreement may also provide that such cash payment will be
deemed reinvested in additional Restricted Stock Units at a price per unit equal
to the Fair Market Value of a share of Stock on the date that such dividend is
paid.
12.6 Termination of Employment or Other Relationship. Upon the termination
-----------------------------------------------
of the employment of a Grantee with the Company, the Partnership or a Service
Provider, or of a Service Provider's relationship with the Company, in either
case other than, in the case of individuals, by reason of death or "permanent
and total disability" (within the meaning of Section 22(e)(3) of the Code), any
Restricted Stock or Restricted Stock Units held by such Grantee that has not
vested, or with respect to which all applicable restrictions and conditions have
not lapsed, shall immediately be deemed forfeited, unless the Committee, in its
discretion, determines otherwise. Upon forfeiture of Restricted Stock or
Restricted Stock Units, the Grantee shall have no further rights with respect to
such Grant, including but not limited to any right to vote Restricted Stock or
any right to receive dividends with respect to shares of Restricted Stock or
Restricted Stock Units. Whether a leave of absence or leave on military or
government service shall constitute a termination of employment for purposes of
the Plan shall be determined by the Committee, which determination shall be
final and conclusive. For purposes of the Plan, a termination of employment,
service or other relationship shall not be deemed to occur if the Grantee is
immediately thereafter employed with the Company, the Partnership or any other
Service Provider, or is engaged as a Service Provider. Whether a termination of
a Service Provider's relationship with the Company shall have occurred shall be
determined by the Committee, which determination shall be final and conclusive.
12.7 Rights in the Event of Death. If a Grantee dies while employed by the
----------------------------
Company, the Partnership or a Service Provider or while serving as a Service
Provider, all Restricted Stock or Restricted Stock Units granted to such Grantee
shall fully vest on the date of death, and the shares of Stock represented
thereby shall be deliverable in accordance with the terms of the Plan to the
executors, administrators, legatees or distributees of the Grantee's estate.
12.8 Rights in the Event of Disability. If a Grantee terminates employment
---------------------------------
with the Company, the Partnership or a Service Provider, or (if the Grantee is a
Service Provider who is an individual) ceases to provide services to the
Company, in either case by reason of the "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code) of such Grantee, such
Grantee's Restricted Stock or Restricted Stock Units shall continue to vest in
accordance with the applicable Award Agreement
10
<PAGE>
for a period of one year after such termination of employment or service (or
such longer period as the Committee, in its discretion, may determine prior to
the expiration of such one-year period), subject to the earlier forfeiture of
such Restricted Stock or Restricted Stock Units in accordance with the terms of
the applicable Award Agreement. Whether a termination of employment or service
is to be considered by reason of "permanent and total disability" for purposes
of the Plan shall be determined by the Committee, which determination shall be
final and conclusive.
12.9 Delivery of Stock and Payment Therefor. Upon the expiration or
--------------------------------------
termination of the Restricted Period and the satisfaction of any other
conditions prescribed by the Committee, the restrictions applicable to shares of
Restricted Stock or Restricted Stock Units shall lapse, and, upon payment by the
Grantee to the Company, in cash or by check, of the aggregate par value of the
shares of Stock represented by such Restricted Stock or Restricted Stock Units,
a stock certificate for such shares shall be delivered, free of all such
restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case
may be.
13. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement,
contract, or understanding heretofore or hereafter entered into by a Grantee
with the Company or any Subsidiary, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this paragraph (an "Other Agreement"), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect
provision of compensation to the Grantee (including groups or classes of
participants or beneficiaries of which the Grantee is a member), whether or not
such compensation is deferred, is in cash, or is in the form of a benefit to or
for the Grantee (a "Benefit Arrangement"), if the Grantee is a "disqualified
individual," as defined in Section 280G(c) of the Code, any Option, Restricted
Stock or Restricted Stock Unit held by that Grantee and any right to receive any
payment or other benefit under this Plan shall not become exercisable or vested
(i) to the extent that such right to exercise, vesting, payment, or benefit,
taking into account all other rights, payments, or benefits to or for the
Grantee under this Plan, all Other Agreements, and all Benefit Arrangements,
would cause any payment or benefit to the Grantee under this Plan to be
considered a "parachute payment" within the meaning of Section 280G(b)(2) of the
Code as then in effect (a "Parachute Payment") and (ii) if, as a result of
---
receiving a Parachute Payment, the aggregate after-tax amounts received by the
Grantee from the Company under this Plan, all Other Agreements, and all Benefit
Arrangements would be less than the maximum after-tax amount that could be
received by the Grantee without causing any such payment or benefit to be
considered a Parachute Payment. In the event that the receipt of any such right
to exercise, vesting, payment, or benefit under this Plan, in conjunction with
all other rights, payments, or benefits to or for the Grantee under any Other
Agreement or any Benefit Arrangement would cause the Grantee to be considered to
have received a Parachute Payment under this Plan that would have the effect of
decreasing the after-tax amount received by the Grantee as described in clause
(ii) of the preceding sentence, then the Grantee shall have the right, in the
Grantee's sole discretion, to designate those rights, payments, or benefits
under this Plan, any Other Agreements, and any Benefit Arrangements that should
be reduced or eliminated so as to avoid having the payment or benefit to the
Grantee under this Plan be deemed to be a Parachute Payment.
14. REQUIREMENTS OF LAW
14.1 General. The Company shall not be required to sell or issue any
-------
shares of Stock under any Grant if the sale or issuance of such shares would
constitute a violation by the Grantee, any other individual exercising an
Option, or the Company of any provision of any law or regulation of any
governmental authority, including without limitation any federal or state
securities laws or regulations. If at any time the Company shall determine, in
its discretion, that the listing, registration or qualification of
11
<PAGE>
any shares subject to a Grant upon any securities exchange or under any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares hereunder, no shares of
Stock may be issued or sold to the Grantee or any other individual exercising an
Option pursuant to such Grant unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Company, and any delay caused thereby shall in no way
affect the date of termination of the Grant. Specifically, in connection with
the Securities Act, upon the exercise of any Option or the delivery of any
shares of Restricted Stock or Stock underlying Restricted Stock Units, unless a
registration statement under such Act is in effect with respect to the shares of
Stock covered by such Grant, the Company shall not be required to sell or issue
such shares unless the Committee has received evidence satisfactory to it that
the Grantee or any other individual exercising an Option may acquire such shares
pursuant to an exemption from registration under the Securities Act. Any
determination in this connection by the Committee shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act. The Company shall not
be obligated to take any affirmative action in order to cause the exercise of an
Option or the issuance of shares of Stock pursuant to the Plan to comply with
any law or regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable until
the shares of Stock covered by such Option are registered or are exempt from
registration, the exercise of such Option (under circumstances in which the laws
of such jurisdiction apply) shall be deemed conditioned upon the effectiveness
of such registration or the availability of such an exemption. If a Grantee
acquires shares of Stock pursuant to the exercise of an Option, the Committee,
in its sole discretion, may require as a condition of issuance of shares covered
by the Option that the shares of Stock shall be subject to restrictions on
transfer. The Company may place a legend on the certificates evidencing the
shares, reflecting the fact that they are subject to restrictions on transfer
pursuant to the terms of this SECTION 14.1.
14.2 Rule 16b-3. It is the intent of the Company that Grants pursuant to
----------
the Plan and the exercise of Options granted hereunder will qualify for the
exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any
provision of the Plan or action by the Committee does not comply with the
requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Committee, and shall not affect the
validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the
Board may exercise its discretion to modify this Plan in any respect necessary
to satisfy the requirements of, or to take advantage of any features of, the
revised exemption or its replacement.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend, or
terminate the Plan as to any shares of Stock as to which Grants have not been
made; provided, however, that the Board shall not, without approval of the
-------- -------
Company's shareholders, amend the Plan such that it does not comply with the
Code. The Company may retain the right in an Award Agreement to cause a
forfeiture of the gain realized by a Grantee on account of the Grantee taking
actions in "competition with the Company," as defined in the applicable Award
Agreement. Furthermore, the Company may annul a Grant if the Grantee is an
employee of the Company or an affiliate and is terminated "for cause" as defined
in the applicable Award Agreement. Except as permitted under this SECTION 15 or
SECTION 16 hereof, no amendment, suspension, or termination of the Plan shall,
without the consent of the Grantee, alter or impair rights or obligations under
any Grant theretofore awarded under the Plan.
12
<PAGE>
16. EFFECT OF CHANGES IN CAPITALIZATION
16.1 Changes in Stock. If the number of outstanding shares of Stock is
----------------
increased or decreased or the shares of Stock are changed into or exchanged for
a different number or kind of shares or other securities of the Company on
account of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Company occurring after the Effective
Date, the number and kinds of shares for which Grants of Options, Restricted
Stock and Restricted Stock Units may be made under the Plan shall be adjusted
proportionately and accordingly by the Company. In addition, the number and
kind of shares for which Grants are outstanding shall be adjusted
proportionately and accordingly so that the proportionate interest of the
Grantee immediately following such event shall, to the extent practicable, be
the same as immediately before such event. Any such adjustment in outstanding
Options shall not change the aggregate Option Price payable with respect to
shares that are subject to the unexercised portion of the Option outstanding but
shall include a corresponding proportionate adjustment in the Option Price per
share.
16.2 Reorganization in Which the Company Is the Surviving Entity and in
------------------------------------------------------------------
Which No Change of Control Occurs. Subject to SECTION 16.3 hereof, if the
- ---------------------------------
Company shall be the surviving entity in any reorganization, merger, or
consolidation of the Company with one or more other entities, any Option
theretofore granted pursuant to the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to such
Option would have been entitled immediately following such reorganization,
merger, or consolidation, with a corresponding proportionate adjustment of the
Option Price per share so that the aggregate Option Price thereafter shall be
the same as the aggregate Option Price of the shares remaining subject to the
Option immediately prior to such reorganization, merger, or consolidation.
Subject to any contrary language in an Award Agreement evidencing a Grant of
Restricted Stock, any restrictions applicable to such Restricted Stock shall
apply as well to any replacement shares received by the Grantee as a result of
the reorganization, merger or consolidation.
16.3 Reorganization, Sale of Assets or Sale of Stock Which Involves a
----------------------------------------------------------------
Change of Control. Subject to the exceptions set forth in the last sentence of
- -----------------
this SECTION 16.3, (i) upon the occurrence of a "Change of Control" (as defined
below), all outstanding shares of Restricted Stock and Restricted Stock Units
shall be deemed to have vested, and all restrictions and conditions applicable
to such shares of Restricted Stock and Restricted Stock Units shall be deemed to
have lapsed, immediately prior to the occurrence of such Change of Control, and
(ii) fifteen days prior to the scheduled consummation of a Change of Control,
all Options outstanding hereunder shall become immediately exercisable and shall
remain exercisable for a period of fifteen days. Any exercise of an Option
during such fifteen-day period shall be conditioned upon the consummation of the
Change of Control and shall be effective only immediately before the
consummation of the Change of Control. Upon consummation of any Change of
Control, the Plan and all outstanding but unexercised Options shall terminate.
The Committee shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at which
the Company gives notice thereof to its shareholders. For purposes of this
SECTION 16.3, a "Change of Control" shall be deemed to occur upon (i) the
dissolution or liquidation of the Company or upon a merger, consolidation, or
reorganization of the Company with one or more other entities in which the
Company is not the surviving entity, (ii) a sale of substantially all of the
assets of the Company to another entity, or (iii) any transaction (including
without limitation a merger or reorganization in which the Company is the
surviving corporation) which results in any person or entity owning 50% or more
of the combined voting power of all classes of stock of the Company. This
SECTION 16.3 shall not apply to any Change of Control to the extent that (A)
provision is made in writing in connection with such Change of Control for the
continuation of the Plan or the assumption of the Options, Restricted Stock and
13
<PAGE>
Restricted Stock Units theretofore granted, or for the substitution for such
Options, Restricted Stock and Restricted Stock Units of new options, restricted
stock and restricted stock units covering the stock of a successor corporation,
or a parent, subsidiary or affiliate thereof, with appropriate adjustments as to
the number and kind of shares and exercise prices, in which event the Plan and
Options, Restricted Stock and Restricted Stock Units theretofore granted shall
continue in the manner and under the terms so provided or (B) a majority of the
full Board determines that such Change of Control shall not trigger application
of the provisions of this SECTION 16.3.
16.4 Adjustments. Adjustments under this SECTION 16 related to shares of
-----------
Stock or securities of the Company shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. No
fractional shares or other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share.
16.5 No Limitations on Company. The making of Grants pursuant to the Plan
-------------------------
shall not affect or limit in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations, or changes of its capital or
business structure or to merge, consolidate, dissolve, or liquidate, or to sell
or transfer all or any part of its business or assets.
17. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Grant or Award Agreement shall be
construed to confer upon any individual the right to remain in the employ or
service of the Company, the Partnership or any affiliate, or to interfere in any
way with any contractual or other right or authority of the Company, the
Partnership or any Service Provider either to increase or decrease the
compensation or other payments to any individual at any time, or to terminate
any employment or other relationship between any individual and the Company, the
Partnership or a Service Provider. No provision in the Plan or in any Grant
awarded or Award Agreement entered into pursuant to the Plan shall be construed
to confer upon any individual the right to remain in the service of the Company
as a director (including as an Outside Director), or shall interfere with or
restrict in any way the rights of the Company's shareholders to remove any
director pursuant to the provisions of the California General Corporation Law,
as from time to time amended. In addition, notwithstanding anything contained
in the Plan to the contrary, unless otherwise stated in the applicable Award
Agreement, no Grant awarded under the Plan shall be affected by any change of
duties or position of the Optionee (including a transfer to or from the Company,
the Partnership or a Service Provider), so long as such Grantee continues to be
a director, officer, consultant, employee, or independent contractor (as the
case may be) of the Company, the Partnership or a Service Provider. The
obligation of the Company to pay any benefits pursuant to this Plan shall be
interpreted as a contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed herein. The Plan
shall in no way be interpreted to require the Company to transfer any amounts to
a third party trustee or otherwise hold any amounts in trust or escrow for
payment to any participant or beneficiary under the terms of the Plan. No
Grantee shall have any of the rights of a shareholder with respect to the shares
of Stock subject to an Option except to the extent the certificates for such
shares of Stock shall have been issued upon the exercise of the Option.
18. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of the Company for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or particular
14
<PAGE>
individuals) as the Board in its discretion determines desirable, including,
without limitation, the granting of stock options otherwise than under the Plan.
19. WITHHOLDING TAXES
The Company, the Partnership, a Subsidiary or a Service Provider, as the
case may be, shall have the right to deduct from payments of any kind otherwise
due to a Grantee any Federal, state, or local taxes of any kind required by law
to be withheld with respect to the vesting of or other lapse of restrictions
applicable to Restricted Stock or Restricted Stock Units or upon the issuance of
any shares of Stock upon the exercise of an Option. At the time of such
vesting, lapse, or exercise, the Grantee shall pay to the Company, the
Partnership, the Subsidiary or the Service Provider, as the case may be, any
amount that the Company, the Partnership, the Subsidiary or the Service Provider
may reasonably determine to be necessary to satisfy such withholding obligation.
Subject to the prior approval of the Company, the Partnership, the Subsidiary or
the Service Provider, which may be withheld by the Company, the Partnership, the
Subsidiary or the Service Provider, as the case may be, in its sole discretion,
the Grantee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company, the Partnership, the Subsidiary or the Service Provider to
withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering
to the Company, the Partnership, the Subsidiary or the Service Provider shares
of Stock already owned by the Grantee. The shares of Stock so delivered or
withheld shall have an aggregate Fair Market Value equal to such withholding
obligations. The Fair Market Value of the shares of Stock used to satisfy such
withholding obligation shall be determined by the Company, the Partnership, the
Subsidiary or the Service Provider as of the date that the amount of tax to be
withheld is to be determined. A Grantee who has made an election pursuant to
this SECTION 19 may satisfy his or her withholding obligation only with shares
of Stock that are not subject to any repurchase, forfeiture, unfulfilled
vesting, or other similar requirements.
20. CAPTIONS
The use of captions in this Plan or any Award Agreement is for the
convenience of reference only and shall not affect the meaning of any provision
of the Plan or such Award Agreement.
21. OTHER PROVISIONS
Each Grant awarded under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Committee,
in its sole discretion.
22. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, etc.,
as the context requires.
23. SEVERABILITY
If any provision of the Plan or any Award Agreement shall be determined to
be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
15
<PAGE>
24. GOVERNING LAW
The validity and construction of this Plan and the instruments evidencing
the Grants awarded hereunder shall be governed by the laws of the State of
California.
* * *
The Plan was duly adopted and approved by the Board of Directors of
American Office Park Properties, Inc. as of the 28th day of January, 1997.
/S/ RONALD L. HAVNER, JR.
--------------------------------------------------
Ronald L. Havner, Jr.
Secretary of American Office Park Properties, Inc.
The Plan was duly amended by the Board of Directors of American Office Park
Properties, Inc. as of the 1st day of December, 1997.
/S/ RONALD L. HAVNER, JR.
--------------------------------------------------
Ronald L. Havner, Jr.
Secretary of American Office Park Properties, Inc.
Effective as of the ____ day of __________, 199__, the Plan was assumed by
Public Storage Properties XI, Inc., which subsequently changed its name to PS
Business Parks, Inc.
--------------------------------------------------
Secretary of PS Business Parks, Inc.
16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS, OFFICERS AND AGENTS.
The Company's Articles of Incorporation provide that the Company may
indemnify the agents of the Company to the maximum extent permitted under
California law. See Article VIII of the Amended and Restated Articles of
Incorporation (Exhibit 3.1) and Article VII of the Amended and Restated By-Laws
(Exhibit 3.3) which are incorporated herein by this reference. In May 1991, the
Company also entered into indemnity agreements 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, 1996 and incorporated herein
by reference.
All other financial statement schedules are omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high
and of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
S-1
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs 3.(i) and 3.(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
4. That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
5. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
6. That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
7. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
8. Except as permitted by General Instruction H to Form S-4 (in a
transaction not covered by General Instruction I), to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Glendale, State of
California, on the 2nd day of February, 1998.
PUBLIC STORAGE PROPERTIES XI, INC.
By: B. WAYNE HUGHES
----------------------------------------
B. Wayne Hughes, Chairman of the Board
Each person whose signature appears below hereby authorizes B. Wayne Hughes
and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on his behalf,
individually and in each capacity stated below, any amendment, including post-
effective amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
B. WAYNE HUGHES Chairman of the Board, Chief Executive February 2, 1998
___________________ Officer and Director (principal executive
B. Wayne Hughes officer)
DAVID P. SINGELYN Vice President and Chief Financial February 2, 1998
___________________ Officer (principal financial officer and
David P. Singelyn principal accounting officer)
VERN O. CURTIS Director February 2, 1998
________________
Vern O. Curtis
JACK D. STEELE Director February 2, 1998
________________
Jack D. Steele
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
2.1 Amended and Restated Agreement and Plan of Reorganization among
Registrant, American Office Park Properties, Inc. ("AOPP") and Public
Storage, Inc. ("PSI") dated as of December 17, 1997 (filed as Appendix
A to the Proxy Statement and Prospectus).
3.1 Amended and Restated Articles of Incorporation. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991 and
incorporated herein by reference.
3.2 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference.
3.3 Amended and Restated Bylaws, as amended. Filed herewith.
5.1 Opinion on legality. Filed herewith.
8.1 Opinion on tax matters. Filed herewith.
10.1 Amended Management Agreement dated February 21, 1995 between Registrant
and Public Storage Management, Inc. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.2 Amended Management Agreement dated February 21, 1995 between Registrant
and Public Storage Commercial Properties Group, Inc. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference.
10.3 Amendment to Amended Management Agreement dated August 8, 1995 among
Registrant, Public Storage Management, Inc. and Storage Equities, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1995 and incorporated herein by reference.
10.4 Amended Management Agreement between Storage Equities, Inc. and Public
Storage Commercial Properties Group, Inc. dated as of February 21,
1995. Filed with PSI's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
10.5 Revolving Note and Loan Agreement between Registrant and The First
National Bank of Boston dated December 29, 1995. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated herein by reference.
10.6 Revolving Loan by PSI to American Office Park Properties, L.P. (the
"Operating Partnership") dated as of December 16, 1997. Filed herewith.
*10.7 AOPP's 1997 Stock Option and Incentive Plan (filed as Appendix F to
the Proxy Statement and Prospectus).
10.8 Amended and Restated Agreement of Limited Partnership of the Operating
Partnership. Filed herewith.
10.9 Merger and Contribution Agreement dated as of December 23, 1997 among
Acquiport Two Corporation, Acquiport Three Corporation, New York State
Common Retirement Fund, the Operating Partnership, AOPP and AOPP
Acquisition Corp. Three. Filed herewith.
10.10 Agreement Among Shareholders and Company dated as of December 23, 1997
among Acquiport Two Corporation, AOPP, the Operating Partnership and
PSI. Filed herewith.
10.11 Amendment to Agreement Among Shareholders and Company dated as of
January 21, 1998 among Acquiport Two Corporation, AOPP, the Operating
Partnership and PSI. Filed herewith.
S-4
<PAGE>
10.12 Non-Competition Agreement dated as of December 23, 1997 among PSI,
AOPP, the Operating Partnership and Acquiport Two Corporation. Filed
herewith.
**10.13 Employment Agreement between AOPP and Ronald L. Havner, Jr. dated as
of December 23, 1997. Filed herewith.
**10.14 Employment Agreement between AOPP and Mary Jayne Howard dated as of
December 23, 1997. Filed herewith.
10.15 Common Stock Purchase Agreement dated as of January 23, 1998 among
AOPP and the Investors signatory thereto. Filed herewith.
10.16 Registration Rights Agreement dated as of January 30, 1998 among AOPP
and the Investors signatory thereto. Filed herewith.
23.1 Consent of Ernst & Young LLP. Filed herewith.
23.2 Consent of Coopers & Lybrand L.L.P. Filed herewith.
23.3 Consent of KPMG Peat Marwick LLP. Filed herewith.
23.4 Consent of David Goldberg (included in Exhibit 5.1).
23.5 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).
23.6 Consent of The Nicholson Group, Ltd. Filed herewith.
23.7 Consent of Charles R. Wilson & Associates, Inc. Filed herewith.
23.8 Consent of Jefferies & Company, Inc. Filed herewith.
99.1 Proxy card. Filed herewith.
99.2 Cash Election Form. Filed herewith.
99.3 Real Estate Appraisal Report by The Nicholson Group, Ltd. dated August
1, 1997 (filed as Appendix B-1 to the Proxy Statement and Prospectus).
99.4 Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc.
dated April 30, 1997 (filed as Appendix B-2 to the Proxy Statement and
Prospectus).
99.5 Opinion of Jefferies & Company, Inc. dated February 2, 1998 (filed as
Appendix C to the Proxy Statement and Prospectus).
_______________
* Compensatory benefit plan.
** Management contract.
S-5
<PAGE>
EXHIBIT 3.3
ADOPTED BY THE BOARD OF DIRECTORS MAY 13, 1991
AMENDED AND RESTATED
BYLAWS
OF
PUBLIC STORAGE PROPERTIES XI, INC.
ARTICLE I
Definitions
-----------
Section 1. "Bylaws" shall mean these bylaws as amended, restated or
modified from time to time. References in these bylaws to "hereof," "herein" and
"hereunder" shall be deemed to refer to these bylaws and shall not be limited to
the particular article or section in which such words appear.
Section 2. "Code" shall mean the Internal Revenue Code of 1986, as now
enacted or hereafter amended, or successor statutes and regulations promulgated
thereunder.
Section 3. "General Partners" shall mean PSI Associates II, Inc. and B.
Wayne Hughes.
Section 4. "Independent Directors" shall mean directors who are not
affiliated with PSI or any of its affiliates (other than by reason of the
person's status as a director of the corporation or any other real estate
investment trusts organized by or affiliated with PSI), whether by ownership
of, ownership interest in, employment by, service as an officer of, or material
business or professional relationship with PSI or its affiliates.
Section 5. "PSI" shall mean Public Storage, Inc., a California
corporation.
Section 6. "Partnership" shall mean Public Storage Properties XI, Ltd.,
a California limited partnership, which previously owned all of the properties
initially acquired by the corporation for investment.
Section 7. "Partnership Agreement" shall mean the Amended and Restated
Certificate and Agreement of Limited Partnership of the Partnership, dated as of
December 27, 1983.
Section 8. "Public Storage Properties REIT" shall mean any one of the
REITs formed to succeed to the business of (i) a public limited partnership
organized by PSI between 1980 and 1988 to develop and construct mini warehouses
and, to a lesser extent, business parks, (ii) Partners Preferred Yield, Ltd., a
California Limited Partnership, which was organized by PSI in 1987, (iii)
Partners Preferred Yield II, Ltd., a California Limited Partnership, which was
organized by PSI in 1988 or
<PAGE>
(iv) Partners Preferred Yield III, Ltd., a California Limited Partnership, which
was organized by PSI in 1988.
Section 9. "Purchase Price" shall have the same meaning as set forth in
the Partnership Agreement.
Section 10. "REIT" and "real estate investment trust" shall mean a real
estate investment trust as defined in Sections 856 to 860 of the Code.
Section 11. "REIT-Qualifying Income" shall mean that income described in
Section 856(c) of the Code, or any successor provisions.
Section 12. "Reorganization" shall mean the transactions described in
the corporation's Registration Statement on Form S-4, as amended, originally
filed with the Securities and Exchange Commission on or about June 20, 1990.
Section 13. "securities of the corporation" shall mean any securities
issued by the corporation.
Section 14. "shareholders" shall mean, as of any particular time, all
holders of record of outstanding shares at such time.
Section 15. "shares" shall mean shares of the common stock of the
corporation.
Section 16. General. Whenever a term is defined in these bylaws in the
-------
singular, the plural of such term may also be used in these bylaws as a defined
term and, similarly, whenever a term is defined in the plural, the singular of
such term may also be used as a defined term hereunder.
ARTICLE II
Offices
-------
Section 1. Principal Executive Office. The principal executive office
--------------------------
for the transaction of the business of the corporation is hereby fixed and
located at 600 North Brand Boulevard, in the City of Glendale, County of Los
Angeles, State of California. The Board of Directors may change the principal
executive office from one location to another. Any such change shall be noted on
the bylaws opposite this section, or this section may be amended to state the
new location.
Section 2. Other Offices. The board of directors may at any time
-------------
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
2
<PAGE>
ARTICLE III
Meetings of Shareholders
------------------------
Section 1. Place of Meetings. Meetings of shareholders shall be held at
-----------------
any place within or outside the State of California designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. Annual Meeting. The annual meeting of shareholders shall be
--------------
held each year on a date and at a time designated by the board of directors. The
date so designated shall be within fifteen (15) months after the last annual
meeting. At each annual meeting directors shall be elected and any other proper
business may be transacted.
Section 3. Special Meeting. A special meeting of the shareholders may be
---------------
called at any time by the board of directors, or by the chairman of the board,
or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president or the secretary of the corporation. The officer receiving the
request shall cause the notice to be promptly given to the shareholders entitled
to vote, in accordance with the provisions of Sections 4 and 5 of this Article
III, that a meeting will be held at the time requested by the person or persons
calling the meeting not less than thirty-five (35) nor more than sixty (60) days
after the receipt of the request. If the notice is not given within twenty (20)
days after receipt of the request, the person or persons requesting the meeting
may give the notice. Nothing contained in this paragraph of this Section 3 shall
be construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.
Section 4. Notice of Shareholders' Meetings. All notices of
--------------------------------
meetings of shareholders shall be sent or otherwise given in accordance with
Section 5 of this Article III not less than ten (10) nor more than sixty (60)
days before the date of the meeting. The notice shall specify the place, date
and hour of the meeting and (i) in the case of a special meeting, the general
nature of the business to be transacted, or (ii) in the case of the annual
meeting, those matters which the board of directors, at the time of giving
notice, intends to present for action by the shareholders. The notice of any
meeting at which directors are to be
3
<PAGE>
elected shall include the name of any nominee or nominees whom, at the time of
the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest within the meaning of Section 310 of the Corporations Code of
California, (ii) an amendment of the articles of incorporation pursuant to
Section 902 of the Code, (iii) a reorganization of the corporation pursuant to
Section 1201 of that Code, (iv) a voluntary dissolution of the corporation
pursuant to Section 1900 of that Code, or (v) a distribution in dissolution
other than in accordance with the rights of outstanding preferred shares
pursuant to Section 2007 of that Code, the notice shall also state the general
nature of that proposal.
Section 5. Manner of Giving Notice; Affidavit of Notice. Notice of any
--------------------------------------------
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is so given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the
corporation for a period of one (1) year from the date of the giving of the
notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the corporation giving the notice, and shall be filed and
maintained in the minute book of the corporation.
Section 6. Quorum. Subject to the requirements of Section 14 of this
-------
Article III, the presence in person or by proxy of the holders of a majority of
the shares entitled to vote in any meeting of shareholders shall constitute a
quorum for the transaction of business. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the
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withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
Section 7. Adjourned Meeting; Notice. Any shareholders' meeting, annual
-------------------------
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy, but in the absence of a quorum, no other business
may be transacted at that meeting, except as provided in Section 6 of this
Article III.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the board of directors shall set a new record
date. Notice of any such adjourned meeting shall be given to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 4 and 5 of this Article III. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
Section 8. Voting. The shareholders entitled to vote at any meeting of
------
shareholders shall be determined in accordance with the provisions of Section 11
of this Article III, subject to the provisions of Sections 702 to 704,
inclusive, of the Corporations Code of California (relating to voting shares
held by a fiduciary, in the name of a corporation or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by California General
Corporation Law or by the articles of incorporation or by these bylaws. The
approval of the shareholders shall be required for (i) the sale, exchange or
pledge of all or essentially all of the corporation's assets in a single
transaction or in a series of transactions that are part of a single plan and
(ii) the issuance of shares of, or debt securities convertible into, capital
stock of the corporation (other than shares to be issued in the Reorganization
or shares to be issued upon conversion of or in exchange for shares to be issued
in the Reorganization).
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At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 9. Waiver of Notice of Consent by Absent Shareholders. The
--------------------------------------------------
transactions of any meeting of shareholders, either annual or special, however
called and noticed and wherever held, shall be as valid as though had a meeting
duly held after regular call and notice, if a quorum be present either in person
or by proxy, and if, either before or after the meeting, each person entitled to
vote who was not present in person or by proxy, or who, though present, has at
the beginning of the meeting properly objected to the transaction of any
business because the meeting was not lawfully called or convened, or to
particular matters of business legally required to be included in the notice but
not so included, signs a written waiver of notice or a consent to a holding of
the meeting or an approval of the minutes. The waiver of notice or consent need
not specify either the business to be transacted or the purpose of any annual or
special meeting of shareholders, except that if action is taken or proposed to
be taken for approval of any of those matters specified in the second paragraph
of Section 4 of this Article III, the waiver of notice or consent shall state
the general nature of the proposal. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 10. Shareholder Action by Written Consent Without a Meeting. Any
-------------------------------------------------------
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice if a consent, in writing,
setting forth the action so taken is signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all shares entitled to vote
on that action were present and voted. In the case of election of directors,
such a consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy on the
board of directors that has not been filled by the directors by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors. All such consents shall be filed with the
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secretary of the corporation and shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares, or a personal representative of the shareholder or
their respective proxy holders may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
III. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation pursuant to Section 317 of that Code, (iii) a reorganization of the
corporation pursuant to Section 1201 of that Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares pursuant to Section 2007 of that Code, the notice shall be given at least
ten (10) days before the consummation of any action authorized by that approval.
Section 11. Record Date for Shareholder Notice, Voting, and Giving
------------------------------------------------------
Consents. For purposes of determining the shareholders entitled to notice of any
- --------
meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the California General
Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
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Section 12. Proxies. Every person entitled to vote for directors or on
-------
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Corporations Code of California.
Section 13. Inspectors of Election. Before any meeting of shareholders,
----------------------
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
(a) determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
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(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
Section 14. Voting of Series B and Series C Shares. During the period
--------------------------------------
prior to the conversion of the General Partners' Series B shares and Series C
shares into Series A shares, the General Partners, and any successor in
interest, will vote their Series B shares and Series C shares with the holders
of a majority of outstanding Unaffiliated (as defined below) Series A shares
entitled to vote (i) in all shareholder matters voted on by the General Partners
or their successors in interest as holders of Series B shares and Series C
shares, other than the election and removal of directors and other proposals
relating to the control of the corporation and its business and (ii) for certain
amendments to this Section 14 of Article III, as provided in Section 1 of
Article XI. This Section 14 does not apply to the General Partners' (or their
successors in interests) voting of their Series A shares (including Series A
shares issued upon conversion of the Series B shares and Series C shares). For
purposes of this Section 14, (a) the following will not be considered proposals
relating to the control of the corporation: (i) a proposed consolidation
(without regard to the form of such consolidation) of the corporation with one
or more other Public Storage Properties REITs or with an entity created to
succeed to or hold the properties or securities of the corporation or one or
more of the Public Storage Properties REITs or with an affiliate of PSI or B.
Wayne Hughes, (ii) a proposal for the sale of all or substantially all of the
corporation's properties made by PSI or B. Wayne Hughes, (iii) a proposal for
the sale of all or substantially all of the corporation's properties or for a
corporate reorganization as to which shareholder approval is required under
applicable law, that in either case is supported by an independent appraisal and
in either case has been approved by the Disinterested Directors (as defined
below), (iv) a proposal for the sale of all or substantially all of the
corporation's properties, or for a corporate reorganization as to which
shareholder approval is required under applicable law, to or with, as the case
may be, a person that is not a shareholder, or an affiliate of a shareholder, of
the corporation, that in either case is supported by an independent appraisal
and with respect to which the Disinterested Directors of the corporation have
abstained and (v) a proposal for the sale of all or substantially all of the
corporation's properties, or for a corporate reorganization as to which
shareholder approval is required under applicable law, to or with, as the case
may be, a shareholder, or an affiliate of a shareholder, of the corporation,
that in either case is supported by an independent appraisal and a fairness
opinion from a major investment banking firm and with respect to which the
Disinterested Directors of the corporation have abstained; (b) (b)
"Unaffiliated" means unaffiliated with PSI or B. Wayne Hughes, provided that, in
the case of a
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proposal for the sale of all or substantially all of the corporation's
properties or for a corporate reorganization as to which shareholder approval is
required under applicable law, to or with, as the case may be, a shareholder, or
an affiliate of a shareholder as set forth in clause (vi) above, Unaffiliated
means unaffiliated with PSI or B. Wayne Hughes or such shareholder; (c)
"Disinterested Directors" shall mean the original Independent Directors of the
corporation or any successor Independent Directors elected or appointed with the
approval of the holders of the Series B and Series C shares; and (d) a holder of
Series A shares shall be deemed affiliated with PSI or B. Wayne Hughes or such
shareholders, as applicable, if such holder is: (i) an "immediate family member"
(as defined below) of B. Wayne Hughes or such shareholder; (ii) a person who
directly or indirectly through one or more intermediaries controls or is
controlled by or under common control with B. Wayne Hughes or PSI or such
shareholder; (iii) a director, officer, employee or general partner of, or
serves in any similar capacity with respect to, PSI or B. Wayne Hughes or such
shareholder; (iv) a person with respect to which PSI or B. Wayne Hughes or such
shareholder serves as a director, officer, general partner, trustee or similar
capacity; (v) a person who is directly or indirectly the beneficial owner of 10%
or more of any class of equity securities of PSI or such shareholder; and (vi) a
person in which PSI or B. Wayne Hughes or such shareholder directly or
indirectly owns 10% or more of any class of equity securities. An "immediate
family member" means the spouse, parent, parent-in-law, issue, nephew, niece,
brother, sister, brother-in-law, sister-in-law, child-in-law, grandchild and
grandchild-in-law.
ARTICLE IV
Directors
---------
Section 1. Powers. Subject to the provisions of the California General
------
Corporation Law and any limitations in the articles of incorporation and these
bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
Without prejudice to these general powers and subject to the same
limitations, the directors shall have the power to:
(a) select and remove all officers, agents and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the articles of incorporation and with these bylaws; fix their
compensation; and require from them security for faithful service.
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(b) change the principal executive office or the principal
business office in the State of California from one location to another; cause
the corporation to be qualified to do business in any other state, territory,
dependency or country and conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting or meetings, including annual
meetings.
(c) adopt, make and use a corporate seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates.
(d) authorize the issuance of shares of stock of the corporation
on any lawful terms, in consideration of money paid, labor done, services
actually rendered, debts or securities cancelled, or tangible or intangible
property actually received.
(e) borrow money and incur indebtedness on behalf of the
corporation and cause to be executed and delivered for the corporation's
purposes, in the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecations and other evidences of debt and
securities.
Section 2. Number and Qualification of Directors. The number of
-------------------------------------
directors of the corporation shall be not less than three (3) nor more than five
(5). The exact number of directors shall be three (3) until changed, within the
limits specified above, by a bylaw amending this Section 2, duly adopted by the
board of directors or by the shareholders. The indefinite number of directors
may be changed, or a definite number fixed without provision for an indefinite
number, by a duly adopted amendment to the articles of incorporation or by an
amendment to this bylaw duly adopted by the vote or written consent of holders
of a majority of the outstanding shares entitled to vote; subject, however, to
such additional voting requirement or limitation as is imposed under applicable
law in the case of an amendment reducing the number of directors to a number
less than five (5).
Section 3. Independent Directors. A majority of directors of the
---------------------
corporation shall be Independent Directors, except for a period of 90 days after
the death, removal or resignation of an Independent Director.
Section 4. Election and Term of Office of Directors. Directors shall be
----------------------------------------
elected at each annual meeting of the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 5. Vacancies. Vacancies in the board of directors may be filled
---------
by a majority of the remaining directors, though less than a
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quorum, or by a sole remaining director, except that a vacancy created by the
removal of a director by the vote or written consent of the shareholders or by
court order may be filled only by the vote of a majority of the shares entitled
to vote represented at a duly held meeting at which a quorum is present, or by
the written consent of holders of a majority of the outstanding shares entitled
to vote. Each director so elected shall hold office until the next annual
meeting of the shareholders and until a successor has been elected and
qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
Section 6. Place of Meetings and Meetings by Telephone. Regular meetings
-------------------------------------------
of the board of directors may be held at any place within or outside the State
of California that has been designated from time to time by resolution of the
board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the corporation. Special meetings of the board
shall be held at any place within or outside the State of California that has
been designed in the notice of the meeting or, if not stated in the notice or
there is no notice, at the principal executive office of the corporation. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in
person at the meeting.
Section 7. Annual Meeting. Immediately following each annual meeting of
--------------
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and
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the transaction of other business. Notice of this meeting shall not be required.
Section 8. Other Regular Meetings. Other regular meetings of the
----------------------
board of directors shall be held without call at such time as shall
from time to time be fixed by the board of directors. Such regular
meetings may be held without notice.
Section 9. Special Meetings. Special meetings of the board of
----------------
directors for any purpose or purposes may be called at any time by the
chairman of the board or the president or any vice president or the
secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting. In addition, the place of the meeting need not be
specified if it is to be held at the principal executive office of the
corporation.
Section 10. Quorum. A majority of the authorized number of directors
------
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article IV. Every act or decision done or made by
a majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the board of directors, subject to the
provisions of Section 310 of the Corporations Code of California (as to approval
of contracts or transactions in which a director has a direct or indirect
material financial interest), Section 311 of that Code (as to appointment of
committees), and Section 317(e) of that Code (as to indemnification of
directors). Notwithstanding the foregoing, the following shall require the
approval of a majority of the Independent Directors: (i) allocations by PSI of
rent, compensation of personnel and related overhead expenses among the
corporation and other entities utilizing the same overhead and (ii) the
compensation payable to the directors which are not Independent Directors and to
the officers and employees of the corporation. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for that meeting.
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Section 11. Waiver of Notice. The transactions of any meeting of the
----------------
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present or who though present or who though present has prior to
the meeting or at its commencement protested the lack of proper notice to him,
signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes. The waiver of notice or consent need not specify the
purpose of the meeting. All such waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Section 12. Adjournment. A majority of the directors present, whether or
-----------
not constituting a quorum, may adjourn any meeting to another time and place.
Section 13. Notice of Adjournment. Notice of the time and place of
---------------------
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 8 of this Article IV to the directors who were not present at the
time of the adjournment.
Section 14. Action Without Meeting. Any action required or permitted to
----------------------
be taken by the board of directors may be taken without a meeting if all members
of the board shall individually or collectively consent in writing to that
action. Such action by written consent shall have the same force and effect as a
unanimous vote of the board of directors. Such written consent or consents shall
be filed with the minutes of the proceedings of the board.
Section 15. Fees and Compensation of Directors. Subject to the
----------------------------------
provisions of Section 9 of this Article IV, directors and members of committees
may receive such compensation, if any, for their services and such reimbursement
of expenses as may be fixed or determined by resolution of the board of
directors. This Section 14 shall not be construed to preclude any director from
serving the corporation in any other capacity as an officer, agent, employee or
otherwise, and receiving compensation for those services.
ARTICLE V
Committees
----------
Section 1. Committees Of Directors. The board of directors may, by
-----------------------
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may
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designate one or more directors as alternate members of any committee who may
replace any absent member at any meeting of the committee. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the General
Corporation Law of California, also requires shareholders' approval or approval
of the outstanding shares;
(b) the filling of vacancies on the board of directors or in
any committee;
(c) the fixing of compensation of the directors for serving
on the board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board
of directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation,
except at a rate or in a periodic amount or within a price range determined by
the board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of these committees.
Section 2. Meetings and Action of Committees. Meetings and action of
---------------------------------
committees shall be governed by, and held and taken in accordance with, the
provisions of Article IV of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee; special meetings of committees may also be called by resolution
of the board of directors; and notice of special meetings of committees shall
also be given to all alternate members who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE VI
Officers
--------
Section 1. Officers. The officers of the corporation shall include a
--------
president, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, a treasurer, one or more assistant secretaries, one or
more assistant treasurers and such other officers as may be appointed in
accordance with the provisions of Section 3 of this Article VI. If there is a
treasurer, he shall be the chief financial officer unless some other person is
so appointed by the board of directors. Any number of offices may be held by the
same person.
Section 2. Election of Officers. The officers of the corporation, except
--------------------
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article VI, shall be chosen by the board of directors, and
each shall service at the pleasure of the board, subject to the rights, if any,
of an officer under any contract of employment.
Section 3. Subordinate Officers. The board of directors may appoint, and
--------------------
may empower the chairman of the board or president to appoint, such other
officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the bylaws or as the board of directors may from time to time
determine.
Section 4. Removal and Resignation of Officer. Subject to the rights,
----------------------------------
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting of the board or, except in case of an officer chosen by the
board of directors, by an officer upon whom such power of removal may be
conferred by the board of directors. Any officer may resign at any time by
giving written notice to the corporation. Any resignation shall take effect at
the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
Section 5. Vacancies in Offices. A vacancy in any office because of
--------------------
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
Section 6. Chairman of the Board. The chairman of the board, if such an
---------------------
officer be elected, shall, if present, preside at meetings of
16
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the board of directors and exercise and perform such other powers and duties as
may be from time to time assigned to him by the board of directors or prescribed
by the bylaws. If there is no president, the chairman of the board shall in
addition be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 7 of this Article VI. The chairman of
the board may be the chief executive officer of the corporation, notwithstanding
that there is a president, if the board of directors so determines.
Section 7. President. Subject to such supervisory powers, if any, as may
---------
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall, subject to the control of the board of
directors, have general supervision, direction and control of the business and
the officers of the corporation. In the absence of the chairman of the board, or
if there be none, he shall preside at all meetings of the shareholders and at
all meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the office of president of a corporation
and shall have such powers and duties as may be prescribed by the board of
directors or the bylaws. The president shall be the chief executive officer of
the corporation unless the chairman of the board, if any, is so designated.
Section 8. Vice Presidents. In the absence or disability of the
---------------
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors or the bylaws and the president or the chairman of the board.
Section 9. Secretary. The secretary shall keep or cause to be kept, at
---------
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders, with the time and place of holding, whether
regular or special and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings and the proceedings.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of shareholders and
their addresses, the number and classes of shares held by each, the number and
date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by the bylaws or by
law to be given, and he shall keep the seal of the corporation if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by the bylaws.
Section 10. Chief Financial Officer. The chief financial officer shall
-----------------------
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
ARTICLE VII
Indemnification of Directors,
Officers. Employees and Other Agents
------------------------------------
The corporation shall indemnify each of its agents to the maximum extent
permitted by the California General Corporation Law, as the same exists on the
date of adoption of these bylaws or may hereafter be amended or interpreted (but
in the case of any such amendment or interpretation, only to the extent that
such amendment or interpretation permits the corporation to provide broader
indemnification rights than were permitted prior to such amendment or
interpretation), against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of the fact any such person is or was an agent of the
corporation. For purposes of this Article, an "agent" of the corporation
includes any person who is or was a director, officer, employee, or other agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, or was a director, officer, employee or
agent of a corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of such predecessor corporation.
18
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ARTICLE VIII
Records and Reports.
-------------------
Section 1. Maintenance and Inspection of Share Register. The corporation
--------------------------------------------
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the board of directors, a record of its shareholders, giving the names and
addresses of all shareholders, the number of shares and the class or series of
shares held by each shareholder and the number of certificates, if any,
representing the shares.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five (5) days prior
written demand on the corporation, and (ii) obtain from the transfer agent of
the corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the shareholders' name and addresses who
are entitled to vote for the election of directors and their shareholdings as of
the most recent record date for which that list has been compiled or as of a
date specified by the shareholder after the date of demand. This list shall be
made available to any such shareholder by the transfer agent on or before the
later of five (5) days after the demand is received or the date specified in the
demand as the date as of which the list is to be compiled. The record of
shareholders shall also be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making the demand.
Section 2. Maintenance and Inspection of Bylaws. The corporation shall
------------------------------------
keep at its principal executive office, or if its principal executive office is
not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state,
the secretary shall, upon the written request of any shareholder, furnish to
that shareholder a copy of the bylaws as amended to date.
Section 3. Maintenance and Inspection of Other Corporate Records. The
-----------------------------------------------------
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places
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designated by the board of directors or, in the absence of such designation, at
the principal executive office of the corporation. The minutes shall be kept in
written form and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any reasonable time during usual business hours, for a purpose reasonably
related to the holder's interests as a shareholder or as the holder of a voting
trust certificate. The inspection may be made in person or by an agent or
attorney and shall include the right to copy and make extracts. These rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.
Section 4. Inspection by Director. Every director shall have the
----------------------
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
Section 5. Annual Report to Shareholders. The board of directors shall
-----------------------------
cause an annual report to be sent to the shareholders not later than one hundred
twenty (120) days after the close of the fiscal year adopted by the corporation.
This report shall be sent at least fifteen (15) (or if sent by third-class mail,
thirty-five (35)) days before the annual meeting of shareholders to be held
during the next fiscal year and in the manner specified in Section 5 of Article
III of these bylaws for giving notice to shareholders of the corporation. The
annual report shall contain a balance sheet as of the end of the fiscal year and
an income statement and statement of changes in financial position for the
fiscal year, prepared in accordance with generally accepted accounting
principles applied on a consistent basis and accompanied by any report of
independent accountants.
Section 6. Disclosure on Distribution. Any distribution of income or
--------------------------
capital assets of the corporation to holders of securities of the corporation
other than its promissory notes shall be accompanied by a written statement
disclosing the source of the funds distributed. If, at the time of distribution,
this information is not available, a written explanation of the relevant
circumstances shall accompany the distribution and the written statement
disclosing the source of the funds distributed shall be sent to such holders not
later than seventy-five (75) days after the close of the fiscal year in which
the distribution was made.
Section 7. Financial Statements. A copy of any annual financial
--------------------
statement and any income statement of the corporation for each quarterly period
of each fiscal year and any accompanying balance sheet of the corporation as of
the end of each such period that has been prepared
20
<PAGE>
by the corporation shall be kept on file in the principal executive office of
the corporation for twelve (12) months, and each such statement shall be
exhibited at all reasonable times to any shareholder demanding an examination of
any such statement or a copy shall be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semiannual or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 8. Annual Statement of General Information. The corporation
---------------------------------------
shall, during the period commencing on January 1st and ending on June 30th in
each year, file with the Secretary of State of the State of California, on the
prescribed form, a statement setting forth the authorized number of directors,
the number of vacancies on the board of directors the names and complete
business or residence addresses of all incumbent directors, the names and
complete business or residence addresses of the chief executive officer,
secretary and chief financial officer, the street address of its principal
executive office or principal business office in this state, and the general
type of business constituting the principal business activity of the
corporation, together with a designation of the agent of the corporation for the
purpose of service of process, all in compliance with Section 1502 of the
Corporations Code of California.
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ARTICLE IX
General Corporate Matters
-------------------------
Section 1. Record Date for Purposes Other than Notice and Voting.
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix, in advance, a record date which shall not be more than sixty (60) days
before any such action, and in that case only shareholders of record on the date
so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date so
fixed, except as otherwise provided in the California General Corporation law.
If the board of directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 2. Checks, Drafts, Evidence of Indebtedness.
----------------------------------------
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness, issued in the name of or payable to the corporation,
shall be signed or endorsed by such person or persons and in such manner as set
from time to time shall be determined by resolution of the board of directors.
Section 3. Corporate Contracts and Instruments; How Executed.
-------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, agent or agents, to enter into any contract
or execute any instrument in the name of and on behalf of the corporation, and
this authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors or within the agency power of
an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount.
Section 4. Certificates for Shares. Each shareholder shall be
-----------------------
entitled to a certificate or certificates for shares of the capital stock of the
corporation signed in the name of the corporation by the chairman of the board
or vice chairman of the board, or the president or vice president, and by the
chief financial officer or an assistant treasurer or the secretary or any
assistant secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed on a certificate shall have
ceased to be that
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<PAGE>
officer, transfer agent or registrar before that certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
Section 5. Lost Certificates. Except as provided in this Section 5, no
-----------------
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and cancelled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
Section 6. Representation of Shares of Other Corporations. The chairman
----------------------------------------------
of the board, the president or any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority granted to these officers
to vote or represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. Shareholders' Disclosure; Directors' Right to Refuse To
-------------------------------------------------------
Transfer Shares; Limitation on Holdings; Repurchase of Shares.
- -------------------------------------------------------------
(a) The shareholders shall upon demand disclose to the directors
in writing such information with respect to direct and indirect ownership of the
shares as the directors deem necessary to comply with the requirements of any
taxing authority or governmental agency.
(b) Whenever it is deemed by them to be reasonably necessary to
protect the tax status of the corporation as a REIT, the directors may require a
statement or affidavit from each proposed transferee of shares setting forth the
number of shares already owned by him and any related person specified in the
form prescribed by the directors and, in connection therewith, if the proposed
transfer shall cause the transferee to hold Excess shares, the directors shall
have the right, but not a duty, to refuse to transfer the shares to the proposed
transferee. All contracts for the sale or other transfer of shares shall be
subject to this provision.
(c) Notwithstanding any other provision of these Bylaws to the
contrary and subject to the provisions of Section 7(f) of
23
<PAGE>
this Article IX, the corporation may prohibit any person from directly or
indirectly acquiring ownership (beneficial or otherwise) in the aggregate of
more than 4% of the outstanding shares of the corporation (the "Limit"). Shares
owned by a person or group of persons in excess of the Limit at any time shall
be deemed "Excess Shares." If any person knowingly holds Excess Shares, the
person shall immediately notify the Company of that fact. If any person
knowingly holds Excess Shares and the corporation loses its REIT qualification
under the Code or becomes a personal holding company, such person shall
indemnify and hold harmless the corporation for the full amount of any
liabilities, damages and expenses (including increased corporate taxes,
attorneys' fees and administrative costs) resulting from the corporation's loss
of its REIT qualification and the costs of requalification. For the purposes of
this Section 7 of Article IX, "person" shall have the meaning set forth in
Section 7701(a)(1) of the Code and shall also mean any partnership, limited
partnership, syndicate or other group deemed to be a "person" pursuant to
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; and a
person shall be deemed to own (i) shares actually owned by such person, (ii)
shares constructively owned by such person after applying the rules of Section
856(h) of the Code, and (iii) shares of which such person is beneficial owner as
defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934. All
shares which any person has the right to acquire upon exercise of outstanding
rights, options and warrants, and upon conversion of any securities convertible
into shares, if any, shall be considered outstanding for purposes of the Limit
if such inclusion will cause such person to own more than the Limit.
(d) The corporation may require a holder of Excess Shares to
sell the Excess Shares within 30 days of written notice given by the corporation
to such holder. If the holder does not sell the Excess Shares within such 30-day
period, the board of directors shall have the right to (i) prohibit the holder
from voting the Excess Shares, (ii) place any dividends on such Excess Shares in
an escrow account for payment when those shares are no longer classified as
Excess Shares and (iii) repurchase any or all Excess Shares as set forth below.
(e) After the 30-day period provided in Section 7(d) of this
Article IX, the directors, by notice to the holder thereof, may repurchase any
or all shares that are Excess Shares (including shares that remain or become
Excess Shares because of the decrease in outstanding shares resulting from such
repurchase), provided that such repurchase complies with the California
Corporations Code; and from and after the date of giving of such notice of
repurchase ("Repurchase Date"), the shares called for repurchase shall cease to
be outstanding and the holder thereof shall cease to be entitled to dividends,
voting rights and other benefits with respect to such shares excepting only the
right to payment by the corporation of the repurchase price determined and
payable as set forth below. The repurchase price of each Excess Share called for
repurchase shall be the lesser of (i) its fair market value as reflected by the
24
<PAGE>
average daily per share closing sales price if the shares are listed on a
national securities exchange, and if the shares are no so listed shall be the
mean between the average per share closing bid and asked prices, in each case
during the 30 calendar day period ending on the business day prior to the
Repurchase Date, or if there have been no sales on a national securities
exchange and no published bid quotations and no published asked quotations with
respect to shares during such 30 calendar day period, the repurchase price shall
be the price determined by the directors in good faith and (ii) its fair market
value as determined in clause (i) except that the 30 calendar day period shall
end on the business day prior to the date notice is given pursuant to Section
7(d) of this Article IX. Payment of such purchase price shall be made by
delivery to the holder of a non-interest bearing promissory note of the
corporation payable to the holder only to the extent that the corporation has
funds legally available for such purchase and only if any such payment under the
note would not otherwise reduce the distributions payable to the other
shareholders as if the Excess Shares were still outstanding. Payments on all
such notes in any year shall not exceed distributions otherwise allocable to the
Excess Shares and in no event more than 5% of REIT Taxable Income.
(f) The directors in their discretion may exempt from the Limit
ownership of certain designated shares while owned by a person who has provided
the directors with evidence and assurance acceptable to the directors that the
qualification of the corporation as a REIT would not be jeopardized thereby.
(g) Notwithstanding the preceding provisions, in order to
provide added assurance that ownership of the corporation's shares does not
become so concentrated as to cause the corporation to fail to qualify as a real
estate investment trust for tax purposes, any transfer of shares that would
prevent the corporation from continuing to qualify as a real estate investment
trust during any period in which the corporation intends to so qualify shall be
void ab initio and the intended transferee of the shares shall be deemed never
to have an interest in the shares. If the foregoing provision is determined to
be void or invalid for any reason, then the transferee of the shares shall be
deemed to act as agent for the corporation (or a nominee of the corporation
whose ownership interest would not result in disqualification) in acquiring the
shares, in which case the transferee shall hold the shares on behalf of the
corporation (or its nominee).
Section 8. Restrictions on Transactions with Affiliates.
--------------------------------------------
(a) The corporation shall not purchase or lease property in which
PSI or any of its affiliates have an interest. The provisions of this Section
8(a) notwithstanding, PSI or its affiliates may purchase property in their own
name and temporarily hold title thereto for the purpose of facilitating the
acquisition of such property, for the corporation, provided that such property
is purchased by the corporation for
25
<PAGE>
a price no greater than the cost of such property to PSI or its affiliates,
including development costs actually incurred by PSI or its affiliates.
(b) The corporation shall not sell or lease property to PSI or
its affiliates, except that the corporation may lease space to PSI or its
affiliates for their use, provided that (i) the terms of any such lease are
competitive with those contained in leases with persons who are not affiliated
with PSI or its affiliates, (ii) the aggregate amount of space rented pursuant
to such leases does not exceed 2% of the aggregate net rentable area of the
corporation's properties and (iii) neither PSI nor its affiliates receive any
property management fees in connection with such leases.
(c) No loans may be made by the corporation to PSI or any of its
affiliates.
(d) Except as permitted by Section 8(a) of this Article IX, the
corporation shall not acquire property from any of the following persons or
entities in which PSI or any of its affiliates has an interest: a limited or
general partnership, joint venture, unincorporated association or similar
organization other than a corporation formed and operated for the primary
purpose of investment in and the operation of or gain from an interest or
interests in real property.
(e) The compensation paid to the General Partners or their
affiliates for insurance services, property management services and real estate
brokerage services shall be competitive in price and terms with persons who are
not affiliated with the General Partners or their affiliates rendering
comparable services which could reasonably be made available to the corporation
at a meeting of the Board of Directors of said corporation held on May 13, 1991.
Section 9. Repurchase of Shares. The corporation may purchase or
--------------------
reacquire its shares and invest its assets in its own shares, provided, that (i)
in each case the consent of the board of directors shall have been obtained;
(ii) until the conversion of the Series B and Series C Shares into Series A
Shares, the corporation will not repurchase Series A Shares during any calendar
quarter unless the dividend per Series A Share paid or to be paid with respect
to such calendar quarter is at least equal to (a) the Partnership distribution
per Partnership unit paid or to be paid during the fourth calendar quarter ended
December 31, 1990 divided by (b) 25, and (iii) until the conversion of the
Series B and Series C shares into Series A shares, the corporation will not
repurchase Series A Shares in the event that after such repurchase of Series A
Shares, the Series B and Series C Shares (assuming, for this purpose, that such
Series B and Series C Shares were converted into Series A Shares on the date of
such repurchase) would represent more than 33% of the issued
26
<PAGE>
and outstanding Shares. The restriction in clause (ii) does not apply with
respect to any calendar quarter as to which the dividend has been reduced
because of lower property cash flow.
Section 10. Legend. Each certificate for shares of the corporation
------
shall bear the following legend:
"FOR THE CORPORATION TO QUALIFY AS A REIT UNDER THE INTERNAL REVENUE
CODE, NOT MORE THAN 50% OF ITS OUTSTANDING SHARES MAY BE OWNED BY FIVE
OR FEWER INDIVIDUALS. SECTION 7 OF ARTICLE IX OF THE BY-LAWS PROVIDES
THAT THE CORPORATION MAY PROHIBIT ANY PERSON FROM DIRECTLY OR
INDIRECTLY ACQUIRING OWNERSHIP (BENEFICIAL OR OTHERWISE) IN THE
AGGREGATE OF MORE THAN 4% OF THE OUTSTANDING SHARES OF THE
CORPORATION. TO ENFORCE THIS REQUIREMENT, THE DIRECTORS MAY
GENERALLY CAUSE THE CORPORATION TO REPURCHASE SHARES HELD BY ANY
PERSON IN EXCESS OF THE 4% LIMIT. A SHAREHOLDER WHO KNOWINGLY HOLDS
EXCESS SHARES IS REQUIRED TO NOTIFY AND INDEMNIFY THE CORPORATION FOR
ANY LOSSES THE CORPORATION MAY SUFFER AS A RESULT OF SUCH HOLDINGS.
THE DIRECTORS MAY REFUSE TO TRANSFER THE SHARES TO A PROPOSED
TRANSFEREE IF THE PROPOSED TRANSFER OF SHARES RESULTS IN OWNERSHIP BY
SUCH TRANSFEREE OF MORE THAN 4% OF THE OUTSTANDING SHARES. IN
ADDITION, ANY TRANSFER OF SHARES THAT WOULD CAUSE DISQUALIFICATION OF
THE CORPORATION AS A REIT SHALL BE VOID AB INITIO. THE CORPORATION
WILL FURNISH A COPY OF SECTION 7 OF ARTICLE IX OF THE BYLAWS TO THE
REGISTERED HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT
CHARGE."
Section 11. Proceeds from the Sale or Financing of the Corporation's
--------------------------------------------------------
Properties. Until the corporation's Series B and Series C shares are converted
- ----------
into Series A shares, proceeds (net of reasonable actual expenses) from the sale
or financing of the corporation's properties (after establishing reasonable
reserves consistent with prior practice) will be distributed to the holders of
the Series A shares. This Section 11 does not apply after Series B shares and
Series C shares are converted into Series A shares.
Section 12. Provisions in Conflict with Law or Regulations. The
----------------------------------------------
provisions of these bylaws are severable, and if the directors shall determine,
with the advice of counsel, that any one or more of such provisions (the
"Conflicting Provisions") are in conflict with the provisions of Section 850
through 860 of the Code or with other applicable federal or California laws and
regulations, the Conflicting Provisions shall be
27
<PAGE>
deemed never to have constituted a part of these bylaws; provided, however, that
such determination by the directors shall not affect or impair any of the
remaining provisions of these bylaws or render invalid or improper any action
taken or omitted (including but not limited to the election of directors) prior
to such determination. Such determination shall become effective when a
certificate signed by a majority of the directors setting forth any such
determination and reciting that it was duly adopted by the directors, shall be
filed with the books and records of the corporation. The directors shall not be
liable for failure to make any determination under this Section. Nothing in this
Section shall in any way limit or affect the right of the directors or the
shareholders to amend these bylaws.
Section 13. Construction. Unless the context requires otherwise, the
------------
general provisions, rules of construction and definitions in the California
General Corporation Law shall govern the construction of these bylaws.
ARTICLE X
Investment Policy
-----------------
Section 1. Statement of Investment Policy. The general investment policy
------------------------------
of the corporation shall be to engage in any lawful activity for which a
corporation may be organized under applicable law.
Section 2. Restrictions on Investment Objectives. The following
-------------------------------------
restrictions on investment objectives shall be observed:
(a) To provide a source from which to meet contingencies, the
corporation may temporarily invest its funds in short-term, highly liquid
investments where there is appropriate safety of principal, such as government
obligations, certificates of deposit, short-term debt obligations and interest-
bearing accounts.
(b) No investments shall be made in junior trust deeds and other
similar obligations except in connection with the sale of the assets of the
corporation.
(c) The corporation shall not reinvest cash flow from operations
or cash from sales or refinancing in new properties or projects.
(d) The corporation shall not obtain any loan secured by an
interest in any real estate project unless and until (i) three years shall have
elapsed since commencement of operation of such project by the Partnership, (ii)
the terms of such loan restrict the lender's recourse to the property securing
the loan, (iii) the sum of all distributions to the
28
<PAGE>
limited partners of the Partnership and to the shareholders of the corporation
which are attributable to that property (including any of the proceeds of such
borrowing which are to be distributed) are at least equal to an amount bearing
the same proportion to $42,000,000 as the amount invested in the acquisition and
developing of such property bears to the portion of the $42,000,000 available to
the Partnership for investment in all properties, (iv) the corporation obtains a
ruling from the Internal Revenue Service or an opinion of counsel that such
borrowing will not cause the corporation income allocable to qualified pension
or profit sharing plans to be treated as taxable unrelated debt-financed income
and (v) such indebtedness does not exceed 80% of the aggregate appraised values
(at the time of such financing) of the real estate projects being financed.
There shall be no restrictions on the corporation's right to obtain unsecured
loans.
(e) The corporation does not presently intend to enter into
joint venture or partnership agreements. In any event, the corporation will not
invest in investment partnerships or joint ventures unless (i) it acquires a
controlling interest in the partnership or joint venture owning the property and
(ii) duplicate property management or other fees which would cause a total of
all such fees to exceed the limits contained in these bylaws.
(f) Investments by the corporation in limited partnership
interests of partnerships shall be prohibited.
(g) The corporation will not obtain first mortgage financing,
including wrap-around deeds of trust, containing a balloon payment which does
not contain the following provisions, unless the prior approval of the
California Department of Corporations has been obtained: (i) such balloon
payment will not become due and payable prior to the earlier of (a) ten years
from the date the Partnership acquired the property, or (b) two years beyond the
anticipated holding period of the property, provided that in no event may the
balloon payment become due sooner than seven years from the date the Partnership
acquired the property, and (ii) such loan will provide for regular payments in
an amount which would be sufficient to self-liquidate the loan over a 20- to 35-
year period. The foregoing restrictions shall not apply with respect to
temporary mortgage loans which mature in less than two years (provided that the
corporation has received a commitment for permanent financing), or to secondary
financing in an amount equal to less than the ten percent of the Partnership's
purchase price of the property. The foregoing restrictions shall also not apply
in the event the corporation establishes a reserve sufficient to make a balloon
payment and holds such reserve for the purpose of making such balloon payment.
(h) The corporation shall seek to obtain an independent
appraisal or a fairness opinion, as the case may be, necessary to implement any
proposal made to shareholders referred to in Section 14 of Article III of these
bylaws.
29
<PAGE>
ARTICLE XI
Amendments
----------
Section 1. Amendment by Shareholders. New bylaws may be adopted or these
-------------------------
bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the articles of incorporation of the corporation are amended in accordance with
Section 2302 of the Corporations Code of California and if such articles of
incorporation thereafter set forth the number of authorized directors of the
corporation, the authorized number of directors may be changed only by an
amendment of the articles of incorporation. During the period prior to the
conversion of the General Partners' Series B shares and Series C shares into
Series A shares, the General Partners, and any successor in interest, will vote
their Series B shares and Series C shares with the holders of a majority of
outstanding Unaffiliated (as defined in Section 14 of Article III) Series A
shares entitled to vote on all proposals for the amendment of Section 14 of
Article III of these bylaws which would delete or curtail the obligations of the
General Partners or their successors in interests to vote their Series B shares
and Series C shares with the holders of the outstanding Unaffiliated Series A
shares entitled to vote on such proposal. The foregoing provision does not apply
to the General Partners' (or their successors in interests) voting of their
Series A shares (including Series A shares issued upon conversion of the Series
B shares and Series C shares).
Section 2. Amendment by Directors. Subject to the rights of the
----------------------
shareholders as provided in Section 1 of this Article XI, to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the board of
directors; provided, however, that after the issuance of shares, the board of
directors may adopt a bylaw or amendment of a bylaw changing the authorized
number of directors only for the purpose of fixing the exact number of directors
within the limits specified in the articles of incorporation or in Section 2 of
Article IV of these bylaws, and provided further that bylaws relating to the
voting of Series B shares and Series C shares (Section 14 of Article III),
bylaws relating to the corporation's qualification as a real estate investment
trust (Sections 7, 10 and 12 of Article IX), bylaws covering the sale, exchange
or financing of all or substantially all of the corporation's assets in a single
transaction or series of transactions that are part of a single plan (Section 8
of Article III), bylaws requiring that a majority of the directors be
Independent Directors (Section 3 of Article IV), bylaws relating to the issuance
of additional shares of capital stock or debt securities convertible into shares
of capital stock of the corporation (Section 8 of Article III), bylaws relating
to restrictions on transactions with PSI or its affiliates (Section 8 of Article
IX), bylaws relating to restrictions on the repurchase by the corporation of its
shares (Section 9 of Article IX), bylaws
30
<PAGE>
relating to the distribution of sale or financing proceeds before the Series A
shares and Series B shares are converted (Section 11 of Article IX) and bylaws
relating to restrictions on investment objectives (Section 2 of Article X) may
not be amended or repealed without the vote or written consent of holders of a
majority of the outstanding shares entitled to vote.
31
<PAGE>
Amendment to Bylaws of Public Storage Properties XI, Inc. Adopted by the
Shareholders of Public Storage Properties XI, Inc. on September 19, 1991:
RESOLVED: That Article IX of the corporation's bylaws is hereby
amended to add Section 14 which shall read as follows:
"Section 14. Proposal for Sale of Properties. During 1997, unless
-------------------------------
shareholders had previously approved such a proposal, the shareholders
will be presented with a proposal to approve or disapprove (a) the
sale of all or substantially all of the corporation's properties and
(b) the distribution of the proceeds from such sale and the
liquidation of the corporation, unless the proceeds of such sale
include deferred payments, in which case the corporation would be
liquidated following receipt of all deferred payments. This provision
may not be amended or repealed without the vote or written consent of
holders of a majority of the outstanding shares entitled to vote."
<PAGE>
AMENDMENTS TO BYLAWS
OF PUBLIC STORAGE PROPERTIES XI, INC.
ADOPTED BY THE SHAREHOLDERS OF
PUBLIC STORAGE PROPERTIES XI, INC. ON JULY 30, 1992
RESOLVED: That the first sentence of Article IX, Section 7, subsection (c)
of the corporation's Bylaws is hereby amended to read as follows:
"Notwithstanding any other provision of these Bylaws to the contrary, and
subject to the provisions of Section 7(f) of this Article IX, the
corporation may prohibit any person from directly or indirectly acquiring
ownership (beneficial or otherwise) in the aggregate of more than 5.5% of
the outstanding shares of the corporation (the 'Limit')."
RESOLVED FURTHER: That Article IX, Section 7, subsection (f) of the
corporation's Bylaws is hereby amended to read as follows:
"(f) The Limit shall not apply to the shares issued with respect to the
General Partners' interests in the Partnership or the shares of Common
Stock Series A issued in connection with the conversion of the Common
Stock Series B and Common Stock Series C to shares of Common Stock Series
A pursuant to the corporation's Articles of Incorporation or to a person
who acquires all of the corporation's shares in a single transaction. For
purposes of the foregoing sentence, 'a single transaction' shall include a
transaction whereby a party makes a tender offer that is conditioned upon
both (1) a tender of at least 51% of the corporation's outstanding shares
and (2) the closing of a subsequent merger whereby the offeror acquires
all of the remaining shares, provided, however, that these conditions are
non-waivable. For purposes of this subparagraph (f), shares issued with
respect to the General Partners' interests shall include shares issued to
a successor or transferee of the General Partners. The directors in their
discretion may exempt from the Limit ownership of certain designated
shares while owned by a person who has provided the directors with
evidence and assurance acceptable to the directors that the qualification
of the corporation as a REIT would not be jeopardized thereby."
RESOLVED FURTHER: That Article IX, Section 9 of the corporation's Bylaws is
hereby amended to read as follows:
"Section 9. Repurchase of Shares. The corporation may purchase or
--------------------
reacquire its shares and invest its assets in its own shares, provided,
that (i) in each case the consent of the board of directors shall have
been obtained; (ii) until the conversion of the Series B and Series C
Shares into Series A Shares, the corporation will not repurchase Series A
Shares during any calendar quarter unless the dividend per Series A Share
paid or to be paid with respect to such calendar quarter is at least equal
to (a) the Partnership distribution paid during the quarter ended December
31, 1990 divided by (b) 25; and (iii) until the conversion of the Series B
and Series C Shares into Series A Shares, the corporation will not
repurchase Series A Shares in the event that after such repurchase of
Series A Shares, the Series B and Series C Shares (assuming, for this
purpose, that such Series B and Series C Shares were converted into Series
A Shares on the date of such repurchase), would represent more than 33% of
the issued and outstanding Series A Shares
1
<PAGE>
(assuming, for this purpose, that such Series B and Series C Shares were
converted into Series A Shares on the date of such repurchase)."
RESOLVED FURTHER: That Article IX, Section 10 of the corporation's Bylaws is
hereby amended to read as follows:
"Section 10. Legend. Each new certificate for shares of the corporation
------
issued after approval of these Bylaw amendments by such corporation's
shareholders shall bear the following legend:
"FOR THE CORPORATION TO QUALIFY AS A REIT UNDER THE INTERNAL REVENUE
CODE, NOT MORE THAN 50% OF ITS OUTSTANDING SHARES MAY BE OWNED BY FIVE
OR FEWER INDIVIDUALS. SECTION 7 OF ARTICLE IX OF THE BYLAWS PROVIDES
THAT THE CORPORATION MAY PROHIBIT ANY PERSON (OTHER THAN THE HOLDERS
OF SHARES OF COMMON STOCK SERIES B AND COMMON STOCK SERIES C OF THE
CORPORATION OR SHARES OF COMMON STOCK SERIES A OF THE CORPORATION
ISSUED IN CONNECTION WITH THE CONVERSION OF THE SHARES OF COMMON STOCK
SERIES B AND COMMON STOCK SERIES C TO SHARES OF COMMON STOCK SERIES A
OF THE CORPORATION PURSUANT TO THE ARTICLES OF INCORPORATION OF THE
CORPORATION, OR A PERSON WHO ACQUIRES ALL OF THE OUTSTANDING SHARES OF
THE CORPORATION IN A SINGLE TRANSACTION) FROM DIRECTLY OR INDIRECTLY
ACQUIRING OWNERSHIP (BENEFICIAL OR OTHERWISE) IN THE AGGREGATE OF MORE
THAN 5.5% OF THE OUTSTANDING SHARES OF THE CORPORATION. TO ENFORCE
THIS REQUIREMENT, THE DIRECTORS MAY GENERALLY CAUSE THE CORPORATION TO
REPURCHASE SHARES HELD BY ANY PERSON IN EXCESS OF THE 5.5% LIMIT. A
SHAREHOLDER WHO KNOWINGLY HOLDS EXCESS SHARES IS REQUIRED TO NOTIFY
AND INDEMNIFY THE CORPORATION FOR ANY LOSSES THE CORPORATION MAY
SUFFER AS A RESULT OF SUCH HOLDINGS. THE DIRECTORS MAY REFUSE TO
TRANSFER THE SHARES TO A PROPOSED TRANSFEREE IF THE PROPOSED TRANSFER
OF SHARES RESULTS IN OWNERSHIP BY SUCH TRANSFEREE OF MORE THAN 5.5% OF
THE OUTSTANDING SHARES. IN ADDITION, ANY TRANSFER OF SHARES THAT
WOULD CAUSE DISQUALIFICATION OF THE CORPORATION AS A REIT SHALL BE
VOID AB INITIO. THE CORPORATION WILL FURNISH A COPY OF SECTION 7 OF
ARTICLE IX OF THE BYLAWS TO THE REGISTERED HOLDER OF THIS CERTIFICATE
UPON REQUEST AND WITHOUT FURTHER CHARGE."
RESOLVED FURTHER: That Article IX, Section 14 of the corporation's Bylaws is
hereby amended to read as follows:
"Section 14. Proposal for Sale or Financing of Properties. During 1997,
--------------------------------------------
unless shareholders had previously approved such a proposal, the
shareholders will be presented with a proposal to approve or disapprove
(a) the sale or financing of all or substantially all of the corporation's
properties and (b) the distribution of the proceeds from such transaction
and, in the case of a sale, the liquidation of the corporation, unless the
proceeds of such sale include deferred payments, in which case the
corporation would be liquidated following receipt of all deferred
payments. This provision may not be amended or repealed without the vote
or written consent of holders of a majority of the outstanding shares
entitled to vote."
2
<PAGE>
RESOLVED FURTHER: That Article X, Section 2, subsection (a) of the
corporation's Bylaws is hereby amended to read as follows:
"(a) To provide a source from which to meet contingencies, the
corporation may temporarily invest its funds in short-term, highly liquid
investments where there is appropriate safety of principal, such as
government obligations, certificates of deposit, short-term debt
obligations and interest-bearing accounts. A portion of the corporation's
reserves may be invested in the securities of REITs sponsored by PSI or
its affiliates, provided that such investments do not represent more than
1% of the corporation's assets (before accumulated depreciation) and such
investments are approved by the Independent Directors."
RESOLVED FURTHER: That Article X, Section 2 of the corporation's Bylaws is
hereby amended to add subsection (i) which shall read as follows:
"(i) No proposal for a transaction described in Article III, Section 14,
subsections (a)(i) and (iii) shall be made to the shareholders unless
accompanied by a fairness opinion from an independent nationally
recognized investment banking firm, which opinion shall include a
statement of value as to any non-cash consideration involved in the
proposal. Management shall not make any recommendation that shareholders
approve any such proposal. The Independent Directors shall not be
precluded from making a recommendation with respect to any such proposal."
3
<PAGE>
AMENDMENTS TO BYLAWS OF PUBLIC STORAGE PROPERTIES XI, INC. (PSP11)
ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 12, 1997,
TO BE EFFECTIVE UPON THE DATE OF PSP11 SHAREHOLDER APPROVAL OF
THE MERGER OF AMERICAN OFFICE PARK PROPERTIES, INC. INTO PSP11
RESOLVED: That the first paragraph of Section 5 of Article IV of the
corporation's Bylaws is hereby amended in its entirety to read as follows:
"Section 5. Vacancies. Except as otherwise agreed by the
---------
corporation, vacancies in the board of directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director, except that a vacancy created by the removal of a director by the vote
or written consent of the shareholders or by court order may be filled only by
the vote of a majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present, or by the written consent of holders of a
majority of the outstanding shares entitled to vote. Each director so elected
shall hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified."
RESOLVED FURTHER: That Section 10 of Article IV of the corporation's
Bylaws is hereby amended in its entirety to read as follows:
"Section 10. Quorum. A majority of the authorized number of
------
directors shall constitute a quorum for the transaction of business, except to
adjourn as provided in Section 11 of this Article IV. Every act or decision done
or made by a majority of the directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the board of directors,
subject to the provisions of Section 310 of the Corporations Code of California
(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of that Code (as to
appointment of committees), and Section 317(e) of that Code (as to
indemnification of directors). A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for that meeting."
RESOLVED FURTHER: That Article VII of the corporation's Bylaws is
hereby amended in its entirety to read as follows:
"ARTICLE VII
Indemnification
---------------
Section 1. Indemnification of Directors, Officers, Employees and Other
-----------------------------------------------------------
Agents. The corporation shall indemnify each of its agents to the maximum
- ------
extent permitted by the California General Corporation Law, as the same exists
on the date of adoption of this Article VII or may hereafter be amended or
interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the corporation to
provide broader indemnification rights than were permitted prior to such
amendment or interpretation), against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with any
proceeding arising
<PAGE>
by reason of the fact any such person is or was an agent of the corporation. For
purposes of this Article, an "agent" of the corporation includes any person who
is or was a director, officer, employee, or other agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, or was a director, officer, employee or agent of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
Section 2. Insurance. Upon and in the event of a determination by the
---------
board of directors of this corporation to purchase such insurance, this
corporation shall purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as such whether or not this
corporation would have the obligation to indemnify the agent against that
liability under the provisions of this Article VII."
2
<PAGE>
DAVID GOLDBERG
Vice President and General Counsel
701 Western Avenue
Glendale, California 91201-2397
February 2, 1998
Public Storage Properties XI, Inc.
701 Western Avenue
Glendale, California 91201-2397
Gentlemen:
As Vice President and General Counsel of Public Storage Properties XI, 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 16,288,000 shares of
the Company's common stock series A, par value $.01 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 Amended and
Restated Articles of Incorporation and Amended and Restated 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
Exhibit 5.1
<PAGE>
Exhibit 8.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
February 2, 1998
Public Storage Properties XI, Inc.
701 Western Ave., Suite 200
Glendale, California 91201-2397
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section
8.1.7 of the Amended and Restated Agreement and Plan of Reorganization (the
"Agreement") dated as of December 17, 1997, by and among Public Storage
Properties XI, Inc., a California corporation ("PSP11"), American Office Park
Properties, Inc., a California corporation ("AOPP") and Public Storage, Inc.
("PSI"). Pursuant to the Agreement, AOPP will merge with and into PSP11 (the
"Merger"). We have acted as legal counsel to PSP11 in connection with the
Merger. As you know, we also serve as counsel to AOPP and its principal
stockholder, Public Storage, Inc., with respect to various matters.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Agreement and in the Proxy Statement and
Prospectus filed with the Securities and Exchange Commission on or about the
date of delivery of this opinion (the "Proxy Statement and Prospectus"). All
section references, unless otherwise indicated, are to the Internal Revenue Code
of 1986, as amended (the "Code").
In connection with the preparation of this opinion, we have examined
and with your consent relied upon (without any independent investigation or
review thereof) the following documents (including all exhibits and schedules
thereto):
1. The Agreement;
2. Representations made to us by PSP11 ("PSP11 Management
Representation Letter");
3. Representations made to us by AOPP and American Office Park
Properties, L.P., a California limited partnership ("AOPP, L.P.") (the "AOPP
Management Representation Letter," together with the PSP11 Management
Representation Letter, the "Management Representation Letters");
<PAGE>
4. The Proxy Statement and Prospectus;
5. The Amended and Restated Agreement of Limited Partnership of
AOPP, L.P. dated January 1, 1997, as amended through the date hereof;
6. The Amended and Restated Articles of Incorporation of AOPP dated
as of December 30, 1996, as amended through the date hereof; and
7. The Agreement of Contribution and Merger dated December 23, 1997,
by and among AOPP, New York State Common Retirement Fund, Acquiport Two
Corporation, Acquiport Three Corporation and AOPP Acquisition Corp. Three (the
"NY Common Transaction");
8. The Common Stock Purchase Agreement, dated January 23, 1998, by
and among AOPP, ABKB/La Salle Securities Limited Partnership, Harvard Private
Capital Realty, Inc., Cohen & Steers Capital Management, Inc., Morgan Stanley
Asset Management, certain Fidelity entities and Stanford University (the "Equity
Investment Transaction");
9. Such other instruments and documents related to the formation,
organization and operation of PSP11 and AOPP or to the consummation of the
Merger and the transactions contemplated thereby as we have deemed necessary or
appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and, with your consent, are relying thereon, without any
independent investigation or review thereof) that:
1. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion is
accurate, all copies are accurate, and all signatures are genuine. We have also
assumed that there has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
2. The Merger will be consummated in accordance with, and will
qualify as a statutory merger under, applicable state law.
3. The continuity of interest requirement as specified in Treas.
Reg. (S) 1.368-1(b) and as interpreted in certain Internal Revenue Service
rulings and federal judicial decisions will be satisfied.
4. Any representation or statement made "to the knowledge" or "to
the best of the knowledge" or similarly qualified is correct without such
qualification.
2
<PAGE>
5. The Merger will be consummated in accordance with the Agreement
and as described in the Proxy Statement and Prospectus (including satisfaction
of all covenants and conditions to the obligations of the parties without
amendment or waiver thereof); each of PSP11 and AOPP will comply with all
reporting obligations with respect to the Merger required under the Code and the
Treasury Regulations thereunder; and the Agreement and all other documents and
instruments referred to therein or in the Proxy Statement and Prospectus are
valid and binding in accordance with their terms.
6. AOPP will make an election to be taxed as a REIT for its taxable
year ended December 31, 1997, and will not revoke such election for its short
taxable year ending at the Effective Time of the Merger.
7. As of December 31, 1997, AOPP did not have any undistributed
"earnings and profits" (as defined for purposes of Section 857(a)(2) of the
Code) that were accumulated in a taxable year of AOPP, Acquiport Two
Corporation, or any other "C corporation" prior to December 31, 1997.
Based upon and subject to the foregoing, as well as the limitations
set forth below, it is our opinion that:
(1) for federal income tax purposes, the Merger will constitute a
"reorganization" as defined in Section 368(a) of the Code and, as such, (i)
neither PSP11 nor AOPP will recognize taxable gain as a result of the Merger and
(ii) PSP11 Shareholders and AOPP Shareholders who do not receive any cash in
connection with the Merger (including the receipt of cash as a result of the
cash election with respect to their PSP11 shares) will not recognize taxable
gain as a result of the Merger;
(2) each of PSP11 and AOPP is organized in conformity with the
requirements for qualification as a REIT under Sections 856 through 860 of the
Code and, based on its proposed method of operation following the Merger as
described in the Proxy Statement and Prospectus and the PSP11 Management
Representation Letter, PSP11 will continue to meet the requirements for
qualification as a REIT;
(3) American Office Park Properties L.P., a California limited
partnership, will be treated as a partnership for federal income tax purposes;
and
(4) the discussion under the heading "Federal Income Tax
Considerations" in the Proxy Statement and Prospectus, to the extent that it
describes matters of law or legal conclusions, is correct in all material
respects.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
3
<PAGE>
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the IRS's practices and procedures in
issuing private letter rulings, which are not binding on the IRS except with
respect to the taxpayer that receives such a ruling) and published rulings and
procedures all as of the date hereof. An opinion of counsel merely represents
counsel's best judgment with respect to the probable outcome on the merits and
is not binding on the Internal Revenue Service or the courts. There can be no
assurance that positions contrary to our opinions will not be taken by the IRS,
or that a court considering the issues would not hold contrary to such opinions.
PSP11 has not requested a ruling from the IRS (and no ruling will be sought) as
to any of the federal income tax consequences addressed in this opinion.
Furthermore, no assurance can be given that future legislative, judicial or
administrative changes, on either a prospective or retroactive basis, would not
adversely affect the accuracy of the opinion expressed herein. Nevertheless, we
undertake no responsibility to advise you of any new developments in the
application or interpretation of the federal income tax laws.
2. This letter addresses only the specific tax opinions set forth
above. This letter does not address any other federal, state, local or foreign
tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger, including,
without limitation, the exchange by PSP11 of 13 mini-warehouse properties for 11
commercial properties owned by Public Storage, Inc. (the "Exchange") or the cash
election available to PSP11 shareholders as described in the Proxy Statement and
Prospectus ("Cash Election")). In reaching the specific tax opinions set forth
above, we have taken into consideration the consequences of the NY Common
Transaction and the Equity Investment Transaction.
3. We express no opinion regarding, among other things, the tax
consequences of the Merger (including the opinion set forth above) as applied to
specific stockholders of PSP11 that may be relevant to particular classes of
PSP11 shareholders, such as dealers in securities, corporate shareholders
subject to the alternative minimum tax, foreign persons, and holders of shares
acquired upon exercise of stock options or in other compensatory transactions.
4. No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Agreement are not
consummated in accordance with the terms of such Agreement and without waiver or
breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In particular (although not limiting the
foregoing), no opinion is
4
<PAGE>
expressed as to the tax treatment of the Exchange or the Cash Election as to
PSP11, AOPP or any PSP11 shareholder or AOPP shareholder. Also, our opinion does
not address the impact, if any, of the Merger on the tax treatment of prior
transactions undertaken by AOPP or the AOPP shareholders, including, but not
limited to, the transaction pursuant to which an AOPP shareholder received his
or her AOPP Common Stock. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
5. PSP11's qualification and taxation as a REIT depend upon both (i)
the satisfaction in the past by AOPP of the requirements for qualification and
taxation as a REIT and (ii) PSP11's ability to meet on a continuing basis,
through actual annual operating and other results, the various requirements
under the Code, as described in the Proxy Statement and Prospectus with regard
to, among other things, the sources of its gross income, the composition of its
assets, the level of its distributions to shareholders, and the diversity of its
stock ownership. Hogan & Hartson L.L.P. has relied (without any independent
investigation thereof) upon representations of PSP11 and AOPP with respect to
these matters (including those set forth in the Management Representation
Letters) and Hogan & Hartson L.L.P. has not conducted an audit or investigation
with respect to either PSP11's or AOPP's past compliance with respect to these
requirements and will not review PSP11's compliance with these requirements on a
continuing basis. Accordingly, no assurance can be given that the actual
results of PSP11 and AOPP's operations, the sources of their income, the nature
of their assets, the level of their distributions to shareholders and the
diversity of their share ownership for any given taxable year in the past or in
the future will satisfy the requirements under the Code for qualification and
taxation as a REIT. In this regard, the stock ownership limits set forth in
PSP11's Articles of Incorporation do not necessarily ensure that PSP11 will be
able to satisfy the requirement set forth in Section 856(a)(6) of the Code that
it not be closely held within the meaning of Section 856(h) of the Code for any
given taxable year.
We hereby consent to the filing of this opinion letter as Exhibit 8.1
to the Registration Statement and to the reference to this firm under the
captions "Summary - Federal Income Tax Matters," "Legal Opinions" and "Federal
Income Tax Considerations" in the Proxy Statement and Prospectus. In giving the
consent, we do not thereby admit that we are an "expert" within the meaning of
the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
5
<PAGE>
Exhibit 10.6
PUBLIC STORAGE, INC.
701 Western Avenue, Suite 200
Glendale, California 91201
December 16, 1997
American Office Park Properties, L.P.
701 Western Avenue, Suite 200
Glendale, California 91201
Re: Revolving Loan by Public Storage, Inc. to American Office Park
--------------------------------------------------------------
Properties, L.P.
----------------
Ladies and Gentlemen:
From time to time, as requested by American Office Park Properties, L.P.
(the "OP"), Public Storage, Inc. ("PSI") agrees to advance to the OP funds to be
used as needed by the OP for operations and/or acquisitions (the "Loan"). The
Loan shall be in an amount not to exceed Fifty Million and No/100 Dollars
($50,000,000).
Interest on the Loan shall accrue and be paid monthly at the thirty-day
LIBOR rate plus one and a quarter percent (1.25%) as adjusted from time to time.
The Loan will terminate, and any outstanding balance shall be repaid on the date
on which the OP or American Office Park Properties, Inc. (the "Company")
receives proceeds from a securities or debt financing sufficient in amount to
repay the Loan. Unless repaid within thirty (30) days of the date hereof, the
OP shall undertake to obtain a line of credit to repay the Loan and such line of
credit shall be established to facilitate repayment of the Loan (including all
interest thereon) within one hundred and twenty (120) days of the date hereof.
Until the date on which the Loan is repaid, the Company and the OP shall not
pledge, assign, hypothecate or otherwise transfer any of their respective
material assets.
Advances (and interest thereon) shall be reflected as book entries on the
books and records of the OP and PSI.
California law shall apply to any and all provisions of this letter
agreement.
Sincerely yours,
PUBLIC STORAGE, INC.
By: /s/ DAVID GOLDBERG
-------------------------
Name: David Goldberg
Title: Senior Vice President
<PAGE>
The above terms and conditions are hereby agreed to.
AMERICAN OFFICE PARK PROPERTIES, L.P.
By: American Office Park Properties, Inc.,
General Partner
By: /s/ RONALD L. HAVNER, JR.
-------------------------------------
Ronald L. Havner, Jr.
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
AMERICAN OFFICE PARK PROPERTIES, L.P.
[EXHIBITS TO THIS AGREEMENT HAVE BEEN OMITTED AND WILL BE FURNISHED TO THE
SECURITIES AND EXCHANGE COMMISSION UPON REQUEST]
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
AMERICAN OFFICE PARK PROPERTIES, L.P.
This Amended and Restated Agreement of Limited Partnership
("Agreement"), dated as of December 11, 1997, of American Office Park
Properties, L.P. (the "Partnership") is entered into by and among American
Office Park Properties, Inc., a California corporation (the "General Partner"),
and the Persons whose names are set forth on the attached Exhibit A as the
Limited Partners, together with any other Persons who become Partners in the
Partnership as provided below.
A. This Agreement amends and restates in its entirety that certain
Agreement of Limited Partnership of American Office Park Properties, L.P. dated
as of January 1, 1997, as amended on September 24, 1997 and December 10, 1997.
B. The Partners desire to ratify the formation of the Partnership,
and to set forth their respective rights and duties relating to the Partnership
on the terms as provided in this Agreement.
The parties agree as follows:
1. DEFINED TERMS
The following definitions shall be applied to the terms used in this
Agreement for all purposes, unless otherwise clearly indicated to the contrary.
"ACT" means the California Revised Uniform Limited Partnership Act, as
it may be amended from time to time, and any successor to such statute.
"ADDITIONAL FUNDS" shall have the meaning set forth in Section
4.1(b)(1).
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the
Partnership as a Limited Partner in accordance with the terms of this Agreement
and who is shown as such on the books and records of the Partnership.
"AFFILIATE" means, with respect to any Person, (a) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (b) any Person owning or controlling 10 percent or more of the
outstanding voting interests of such Person, (c) any Person of which such Person
owns or controls 10 percent or more of the voting interest, or (d) any officer,
director, general partner or trustee of such Person or any Person referred to in
clauses (a), (b) and (c) above.
"AGREEMENT" means this Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
<PAGE>
"ARTICLES OF INCORPORATION" means the Amended and Restated Articles of
Incorporation of the General Partner filed with the Office of the Secretary of
State of the State of California on November 13, 1995, as amended or restated
from time to time, or the articles of incorporation, as amended, of any
permitted successor by merger to the General Partner.
"ASSIGNEE" means a Person to whom one or more Partnership Units (as
defined below) have been transferred in a manner permitted under this Agreement,
but who has not become a Substituted Limited Partner, and who has the rights set
forth in Section 11.5.
"AVAILABLE CASH" means with respect to any period for which such
calculation is being made:
(a) all cash revenues and funds received by the Partnership from
whatever source (excluding the proceeds of any capital contribution) plus
the amount of any reduction (including, without limitation, a reduction
resulting because the General Partner determines such amounts are no longer
necessary) in reserves, working capital accounts or other cash or similar
balances of the Partnership referred to in clause (b)(iv) below;
(b) less the sum of the following (except to the extent made with
the proceeds of any capital contribution):
(i) all interest, principal and other debt payments made
during such period by the Partnership,
(ii) all cash expenditures (including capital expenditures)
made by the Partnership during such period,
(iii) investments in any entity (including loans made to the
entity) to the extent that such investments are not otherwise described in
clauses (b)(i) or (ii), and
(iv) the amount of any increase during such period in
reserves, working capital accounts or other cash or similar balances that
the General Partner determines is necessary or appropriate to meet the
needs of the Partnership in its sole and absolute discretion.
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in Los Angeles, California are authorized or required by
law to close.
"CAPITAL ACCOUNT" means the Capital Account maintained for a Partner
pursuant to Section 4.4.
"CERTIFICATE" means the Certificate of Limited Partnership relating to
the Partnership filed in the office of the Secretary of State of the State of
California, as amended from time to time in accordance with the terms of this
Agreement and the Act.
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<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended. Any
reference in this Agreement to a specific section or sections of the Code shall
be deemed to include a reference to any corresponding provision of future law.
"COMMON SHARES" means the shares of Common Stock, $.10 par value per
share, of the General Partner.
"EVENT OF DISSOLUTION" has the meaning set forth in Section 13.1.
"GENERAL PARTNER" means American Office Park Properties, Inc., a
California corporation, or its successors as a general partner of the
Partnership.
"GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by a
General Partner with respect to its interest as a general partner of the
Partnership. For purposes of allocations and distributions, but not for voting
purposes, a General Partnership Interest may be expressed as a number of
Partnership Units.
"IRS" means the Internal Revenue Service of the United States.
"INCAPACITY" or "INCAPACITATED" means:
(a) as to any Partner who is a natural person death or total
physical disability, as reasonably determined by the General Partner or by
an entry by a court of competent jurisdiction adjudicating such Partner as
incompetent to manage his or her Person or estate,
(b) as to any corporation that is a Partner, the filing of a
certificate of dissolution,
(c) as to any partnership or limited liability company that is a
Partner, the dissolution and commencement of winding up of the partnership
or limited liability company,
(d) as to any estate that is a Partner, the distribution by the
fiduciary of the estate's entire interest in the Partnership,
(e) as to any trustee of a trust that is a Partner, the
termination of the trust (but not the substitution of a new trustee) or
(f) as to any Partner, the bankruptcy of such Partner. For
purposes of this definition, bankruptcy of a Partner shall be deemed to
have occurred when
(i) the Partner commences a voluntary proceeding seeking
liquidation, reorganization or other relief under any bankruptcy,
insolvency or similar law now or later in effect,
(ii) the Partner executes and delivers a general assignment
for the benefit of the Partner's creditors,
(iii) the Partner files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the Partner in
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<PAGE>
any voluntary or involuntary, proceeding under any bankruptcy, or
similar law now or later in effect,
(iv) the Partner seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator for the Partner or
for all or any substantial part of the Partner's properties,
(v) any involuntary proceeding seeking liquidation,
reorganization or other relief under any bankruptcy, insolvency or
other similar law now or later in effect has not been dismissed within
60 days after its commencement,
(vi) the appointment of a trustee, receiver or liquidator
that has not been vacated or stayed within 90 days of such
appointment, or
(vii) an appointment referred to in clause (vi) is not
vacated within 90 days after the expiration of any such stay.
"INDEMNITEE" means:
(a) any Person made a party to a proceeding by reason of his or
her status as (i) a General Partner, (ii) a Limited Partner, or (iii) an
officer of the Partnership or of the General Partner, and
(b) such other Persons (including Affiliates of the General
Partner or the Partnership) as the General Partner may designate from time
to time (whether before or after the event giving rise to potential
liability), in its sole and absolute discretion.
"LIMITED PARTNER" means any Person named as a Limited Partner in
Exhibit A attached to this Agreement, as such Exhibit may be amended from time
to time, or any Substituted Limited Partner or Additional Limited Partner, in
such Person's capacity as a Limited Partner in the Partnership.
"LIMITED PARTNERSHIP INTEREST" means a Partnership Interest of a
Limited Partner (and any Partnership Interest of the General Partner other than
the General Partnership Interest) in the Partnership representing a fractional
part of the Partnership Interests of all Limited Partners.
"LIQUIDATOR" has the meaning set forth in Section 13.2.
"NEW SECURITIES" has the meaning set forth in Section 4.2(c).
"NOTICE OF REDEMPTION" means the Notice of Redemption substantially in
the form of Exhibit B to this Agreement.
"OPTION PLANS" means the option plans for Common Shares or Units, as
the case may be, restricted share plans or employee benefit plans established by
the General Partner or the Partnership.
"PARTNER" means a General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners.
-4-
<PAGE>
"PARTNERSHIP" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor to that limited partnership.
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership
and includes any and all benefits to which the holder of such a Partnership
Interest may be entitled as provided in this Agreement, together with all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Partnership Interest may be expressed as a number of Partnership
Units.
"PARTNERSHIP RECORD DATE" means the record date established by the
General Partner either (a) for the distribution of Available Cash pursuant to
Section 5.1, which shall be the same as the record date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution, or (b) for determining the Partners entitled to
vote on or consent to any proposed action for which the consent or approval of
the Partners is sought.
"PARTNERSHIP UNIT" or "UNIT" means a fractional, undivided share of
the Partnership Interests of all Partners issued pursuant to Sections 4.1 and
4.2, in such number as set forth on Exhibit A, as such Exhibit may be amended
from time to time, and as such numbers may be adjusted as a result of changes in
the Unit Adjustment Factor. The ownership of Partnership Units may be evidenced
by a non-transferable, non-negotiable certificate for Units substantially in the
form attached as Exhibit C.
"PARTNERSHIP YEAR" means the fiscal year of the Partnership, which
shall be the calendar year.
"PERCENTAGE INTEREST" means, as to a Partner, its interest in the
Partnership as determined by dividing the Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding and as
specified in the attached Exhibit A, as such Exhibit may be amended from time to
time.
"PERSON" means an individual, corporation, partnership, limited
liability company, association, trust, estate or other entity or organization.
"PREFERRED SHARES" shall mean the shares of Non-Voting Preferred
Stock, $.10 par value per share, of the General Partner.
"PROFIT" AND "LOSS" have the meaning set forth in Section 6.1(f).
"REDEEMING PARTNER" has the meaning set forth in Section 8.6(a).
"REDEMPTION AMOUNT" means an amount of cash per Partnership Unit equal
to the Value on the Valuation Date of the Common Shares that the Redeeming
Partner being redeemed would have been entitled to receive if the General
Partner were to assume the Partnership's obligation to redeem Partnership Units
of such Redeeming Partner pursuant to Section 8.6(d) by issuing Common Shares.
"REDEMPTION RIGHT" has the meaning set forth in Section 8.6(a).
-5-
<PAGE>
"REGULATIONS" means the Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the
Code.
"SECURITIES ACT" means the Securities Act of 1933, as the same shall
be amended from time to time.
"SHARES" means any Common Shares issued to a Limited Partner upon
conversion of such Limited Partner's Units pursuant to Section 8.6(d).
"SHARES AMOUNT" means a number of Common Shares equal to the number of
Partnership Units (as appropriately adjusted pursuant to changes in the Unit
Adjustment Factor) offered for redemption by a Redeeming Partner; provided that,
if the General Partner issues to all holders of Common Shares rights, options,
warrants or convertible or exchangeable securities entitling such holders to
subscribe for or purchase Shares or any other securities or property
(collectively, the "rights"), then the Shares Amount shall also include such
rights that a holder of that number of Shares would be entitled to receive.
"SPECIFIED REDEMPTION DATE" means the tenth Business Day after receipt
by the General Partner of a Notice of Redemption.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of (a) the voting power of the voting equity
securities or (b) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 11.4.
"UNIT ADJUSTMENT FACTOR" means initially 1.0 provided that in the
event that the General Partner
(a) declares or pays a dividend on its outstanding Common Shares
in Common Shares or makes a distribution to all holders of its outstanding
Common Shares in Common Shares,
(b) subdivides its outstanding Common Shares or
(c) combines its outstanding Common Shares into a smaller number
of Common Shares,
the Unit Adjustment Factor shall be adjusted to be a fraction, the numerator of
which shall be the number of Common Shares issued and outstanding on the record
date for such dividend, distribution, subdivision or combination (assuming for
such purposes that such dividend, distribution, subdivision or combination has
occurred as of such time), and the denominator of which shall be the actual
number of Common Shares (determined without the above assumption) issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination. If another entity shall become the General Partner (the "Successor
Entity"), the Unit Adjustment Factor shall be adjusted to be a fraction, the
numerator of which is the value of
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<PAGE>
one share of the predecessor General Partner, determined as of the date when the
Successor Entity becomes the General Partner, and the denominator of which is
the value of one share of the Successor Entity, determined as of that same date.
The Board of Directors of the General Partner shall determine when an adjustment
to the Unit Adjustment Factor is necessary. The Board's determination as to
whether an adjustment is necessary and the amount of such adjustment shall be
conclusive absent manifest error. Any adjustment to the Unit Adjustment Factor
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event (provided, however, if a
Notice of Redemption is given prior to such a record date but the Specified
Redemption Date is after the record date, then the change in the Unit Adjustment
Factor with respect to that Redeeming Partner shall be retroactive to the date
of the Notice of Redemption). In the event of any change in the Unit Adjustment
Factor, the number of Partnership Units held by each Partner shall be
proportionately adjusted by multiplying the number of Partnership Units held by
such Partner immediately prior to the change in the Unit Adjustment Factor by
the new Unit Adjustment Factor; the intent of this provision is for one
Partnership Unit to remain exchangeable for one Common Share without dilution.
"VALUATION DATE" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first
subsequent Business Day.
"VALUE" means, with respect to a Common Share, the average of the
daily market price for the ten (10) consecutive trading days immediately
preceding the Valuation Date. The market price for each such trading day shall
be:
(a) if the Common Shares are listed or admitted to trading on any
securities exchange or the Nasdaq National Market, the closing price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices on such day;
(b) if the Common Shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market, the last reported
sale price on such day or, if no sale takes place on such day, the average
of the closing bid and asked prices on such day, as reported by a reliable
quotation source designated by the General Partner; or
(c) if the Common Shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market and no such last
reported sale price or closing bid and asked prices are available, the
average of the reported high bid and low asked prices on such day, as
reported by a reliable quotation source designated by the General Partner,
or if there shall be no bid and asked prices on such day, the average of
the high bid and low asked prices, as so reported, on the most recent day
(not more than 10 days prior to the date in question) for which prices have
been so reported; provided that if there are no bid and asked prices
reported during the 10 days prior to the date in question, the Value of the
Common Shares shall be determined by the General Partner acting in good
faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
-7-
<PAGE>
If a holder of Common Shares would be entitled to receive rights to purchase
Common Shares ("Common Share Rights") issued to all holders of Common Shares,
then the Value of such Common Share Rights shall be determined by the General
Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate.
2. ORGANIZATIONAL MATTERS
2.1 ORGANIZATION AND FORMATION: APPLICATION OF ACT.
(a) ORGANIZATION AND FORMATION OF PARTNERSHIP. The General Partner and
the Limited Partners ratify the formation and continuation of the Partnership as
a limited partnership according to all of the terms and provisions of this
Agreement and otherwise in accordance with the Act. The General Partner is the
sole general partner and the Limited Partners are the sole limited partners of
the Partnership.
(b) APPLICATION OF ACT. The Partnership is a limited partnership
subject to the provisions of the Act and the terms and conditions set forth in
this Agreement. Except as expressly provided in this Agreement to the contrary,
the rights and obligations of the Partners and the administration and
termination of the Partnership shall be governed by the Act. No Partner has any
interest in any Partnership Property, and the Partnership Interest of each
Partner shall be personal property for all purposes.
2.2 NAME. The name of the Partnership is American Office Park Properties,
L.P. The Partnership's business may be conducted under any other name or names
deemed advisable by the General Partner, including the name of the General
Partner or any Affiliate of the General Partner. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purposes of complying with the
laws of any jurisdiction that so requires. The General Partner in its sole and
absolute discretion may change the name of the Partnership at any time and from
time to time and shall notify the Limited Partners of such change in the next
regular communication to the Limited Partners; provided that the name of the
Partnership may not be changed to include the name of any Limited Partner
without the written consent of that Limited Partner.
2.3 PRINCIPAL OFFICE. The address of the principal office of the Partnership
shall be located at 701 Western Avenue, Glendale, California 91201, or such
other place as the General Partner may from time to time designate by notice to
the Limited Partners. The Partnership may maintain offices at such other place
or places within or outside the State of California as the General Partner deems
advisable.
2.4 TERM. The term of the Partnership commenced as of January 1, 1997, and
shall continue until December 31, 2096, unless it is dissolved sooner pursuant
to the provisions of Article 13 or as otherwise provided by law.
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<PAGE>
3. PURPOSE
3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be
conducted by the Partnership is:
(a) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act,
(b) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing or the ownership of interests
in any entity engaged in (directly or indirectly) any of the foregoing and
(c) to do anything necessary or incidental to the foregoing;
provided, however, that each of the foregoing clauses (a), (b) and (c) shall be
limited and conducted in such a manner as to permit the General Partner at all
times to be classified as a REIT, unless the General Partner provides notice to
the Partnership that it intends to cease or has ceased to qualify as a REIT.
The Partners acknowledge that the status of the General Partner as a REIT inures
to the benefit of all Partners and not solely to the benefit of the General
Partner and its affiliates.
3.2 POWERS. The Partnership is empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in this
Agreement and for the protection and benefit of the Partnership; provided that
the Partnership shall not take, or refrain from taking, any action that, in the
judgment of the General Partner, in its sole and absolute discretion, (a) could
adversely affect the ability of the General Partner to continue to qualify as a
REIT, (b) could subject the General Partner to any additional taxes under
Section 857 or Section 4981 of the Code or (c) could violate any law or
regulation of any governmental body or agency having jurisdiction over the
General Partner or its securities, unless such action (or inaction) shall have
been specifically consented to by the General Partner in writing.
3.3 PARTNERSHIP ONLY FOR PURPOSES SPECIFIED. The Partnership shall be a
partnership only for the purposes specified in Section 3.1, and this Agreement
shall not be deemed to create a partnership among the Partners with respect to
any activities whatsoever other than the activities within the purposes of the
Partnership as specified in Section 3.1. Except as otherwise provided in this
Agreement, no Partner shall have any authority to act for, bind, commit or
assume any obligation or responsibility on behalf of the Partnership, its
properties or any other Partner. No Partner, in its capacity as a Partner under
this Agreement, shall be responsible or liable for any indebtedness or
obligation of another Partner, nor shall the Partnership be responsible or
liable for any indebtedness or obligation of any Partner, incurred either before
or after the execution and delivery of this Agreement by such Partner, except as
to those responsibilities, liabilities, indebtedness or obligations incurred
pursuant to and as limited by the terms of this Agreement and the Act.
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<PAGE>
3.4 REPRESENTATIONS AND WARRANTIES BY THE PARTIES.
(a) Each Partner that is an individual represents and warrants to
each other Partner that:
(i) the consummation of the transactions contemplated by this
Agreement to be performed by such Partner will not result in a breach or
violation of or a default under, any agreement by which such Partner or any
of such Partner's property is or are bound, or any statute, regulation,
order or other law to which such Partner is subject, and
(ii) such Partner shall inform the Partnership whether such
Partner is a "foreign person" within the meaning of Section 1445(f) of the
Code.
(b) Each Partner that is not an individual represents and warrants to
each other Partner that:
(i) all transactions contemplated by this Agreement to be
performed by it have been duly authorized by all necessary action,
including without limitation, that of its general partner(s), committee(s),
trustee(s), beneficiaries, directors and/or shareholder(s), as the case may
be, as required,
(ii) the consummation of such transactions shall not result in a
breach or violation of, or a default under, its partnership agreement,
trust agreement, charter or by-laws, as the case may be, any agreement by
which such Partner or any of such Partner's properties or any of its
partners, beneficiaries, trustees or shareholders, as the case may be, is
or are bound, or any statute, regulation, order or other law to which such
Partner or any of its partners, trustees, beneficiaries or shareholders, as
the case may be, is or are subject and
(iii) such Partner shall inform the Partnership whether such
Partner is a "foreign person" within the meaning of Section 1445(f) of the
Code.
(c) Each Limited Partner further represents, warrants and agrees
that, it does not and will not, without the prior written consent of the General
Partner, actually own or constructively own (under the attribution rules of Code
Section 318, as modified by Code Section 856(d)(5)) stock of any corporation, or
an interest in the assets and profits of any other entity, from which the
General Partner or the Partnership, directly or indirectly, derives material
rental income from real property that would be excluded from "rents from real
property" pursuant to Code Section 856(d)(2)(B).
(d) Upon the request of the General Partner, each Limited Partner
will disclose to the General Partner the amount of Common Shares or other shares
of capital stock of the General Partner that it actually owns or constructively
owns and shall further disclose to the General Partner any ownership in the
stock, assets or net profits of any corporation or other entity from which the
General Partner or the Partnership, directly or indirectly, derives material
rental income from real property.
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<PAGE>
(e) Each Partner represents and warrants that it is an "accredited
investor" as defined in Rule 501 promulgated under the Securities Act. Each
Partner represents, warrants and agrees that it has acquired and continues to
hold its interest in the Partnership for its own account for investment only and
not for the purpose of, or with a view toward, the resale or distribution of all
or any part of that interest, nor with a view toward selling or otherwise
distributing such interest or any part of that interest at any particular time
or under any predetermined circumstances. Each Partner further represents and
warrants that it is a sophisticated investor, able and accustomed to handling
sophisticated financial matters for itself, particularly real estate
investments, and that it has a sufficiently high net worth that it does not
anticipate a need for the funds it has invested in the Partnership in what it
understands to be a highly speculative and illiquid investment.
(f) The representations and warranties contained in this Section 3.4
shall survive the execution and delivery of this Agreement by each Partner and
the dissolution, liquidation and termination of the Partnership.
(g) Each Partner acknowledges that no representations as to
potential profit, distributions, cash flows, funds from operations or yield, if
any, in respect of the Partnership or the General Partner have been made by any
Partner or any employee or representative or Affiliate of any Partner, and that
projections and any other information, including, without limitation, financial
and descriptive information and documentation, that may have been in any manner
submitted to such Partner shall not constitute any representation or warranty of
any kind or nature, express or implied.
4. CAPITAL CONTRIBUTIONS;
ISSUANCE OF UNITS;
CAPITAL ACCOUNTS
4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS.
(a) INITIAL CAPITAL CONTRIBUTIONS. At the time of the execution of this
Agreement, the Partners shall make or shall have made the capital contributions
set forth in Exhibit A to this Agreement. The Partners shall own Partnership
Units in the amounts set forth in Exhibit A and shall have a Percentage Interest
in the Partnership as set forth in Exhibit A, which Percentage Interest shall be
adjusted in Exhibit A from time to time by the General Partner to the extent
necessary to reflect accurately redemptions, conversions, capital contributions,
the issuance of additional Partnership Units, transfers of Partnership Interests
permitted under Article 11, or similar events having an effect on a Partner's
Percentage Interest. Sixty-six Thousand, Eight Hundred and Eighty-five (66,885)
Partnership Units held by the General Partner (representing one percent (1%) of
all outstanding Partnership Units as of the date of the initial capital
contributions to the Partnership) shall be deemed to be the General Partnership
Interest.
(b) ADDITIONAL CAPITAL CONTRIBUTIONS.
(1) No Partner shall be assessed or, except as provided for in
Sections 4.1(b)(2) below, and except for any such amounts that a Limited Partner
may be obligated to
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repay under Section 10.5 (withholding provision), be required to
contribute additional funds or other property to the Partnership. Any
additional funds or other property required by the Partnership, as determined by
the General Partner in its sole discretion ("Additional Funds"), may, at the
option of the General Partner and without an obligation to do so (except as
provided for in Section 4.1(b)(2)), be contributed by the General Partner as
additional capital contributions. If and as the General Partner or any other
Partner makes additional capital contributions to the Partnership, each such
Partner shall receive additional Partnership Units as provided for in Section
4.2.
(2) The proceeds of any and all funds raised by or through the General
Partner through the issuance of additional shares of the General Partner
(whether Common Shares or Preferred Shares) shall be contributed to the
Partnership as additional capital contributions, and in such event the General
Partner shall be issued additional Partnership Units pursuant to Section 4.2
below. In any such case, if the proceeds so contributed are less than the gross
proceeds of the issuance (i.e., due to any underwriter's discount or other
expenses incurred in connection with the issuance), the General Partner's
capital contribution shall be deemed to equal the amount of the gross proceeds
(i.e., the net proceeds actually contributed, plus any underwriter's discount or
other expenses incurred, and any such discount or expense shall be deemed to
have been incurred on behalf of the Partnership).
(c) RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise expressly
provided in this Agreement, the capital contribution of each Limited Partner
will be returned to that Partner only in the manner and to the extent provided
in Article 5 and Article 13, and no Partner may withdraw from the Partnership or
otherwise have any right to demand or receive the return of its capital
contribution to the Partnership (as such), except as specifically provided in
this Agreement. Under circumstances requiring a return of any capital
contribution, no Partner shall have the right to receive property other than
cash, except as specifically provided in this Agreement. No Partner shall be
entitled to interest on any capital contribution or Capital Account
notwithstanding any disproportion between the Partners in their capital
contributions or Capital Accounts. Except as specifically provided in this
Agreement, the General Partner shall not be liable for the return of any portion
of the capital contribution of any Limited Partner, and the return of such
capital contribution shall be made solely from Partnership assets.
(d) LIABILITY OF LIMITED PARTNERS. No Limited Partner shall have any
further personal liability to contribute money to, or in respect of, the
liabilities or the obligations of the Partnership, nor shall any Limited Partner
be personally liable for any obligations of the Partnership, except as otherwise
provided in this Article 4 or in the Act. No Limited Partner shall be required
to make any contributions to the capital of the Partnership other than its
initial capital contribution.
(e) NO OBLIGATIONS FOR DEFICIT CAPITAL ACCOUNTS. If any Partner has
a deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
those during any year in which a liquidation occurs), such Partner shall have no
obligation at the time of liquidation or otherwise to make any contribution to
the capital of the Partnership with respect to that deficit, and the deficit
shall not be considered a debt owed to the Partnership or to any other Person
for any purpose.
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4.2 ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(a) ISSUANCES IN GENERAL. The General Partner is authorized to cause
the Partnership to issue such additional Partnership Units or other Partnership
Interests for any Partnership purpose at any time or from time to time,
including Units in one or more series of any classes, with such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to other
Partnership Interests, all as shall be determined by the General Partner,
subject to California law, including, without limitation, with respect to (i)
the allocations of items of Partnership income, gain, loss, deduction and credit
to each such class or series of Partnership Interests, (ii) the right of each
such class or series of Partnership Interests to share in Partnership
distributions, and (iii) the rights of each class or series of Partnership
Interests upon dissolution and liquidation of the Partnership, for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole and absolute discretion, all without the approval of
any Limited Partners except to the extent specifically provided in this
Agreement. The General Partner may also amend the Agreement to provide for the
issuance of Partnership Units the Redemption Right of which will relate to
Preferred Shares on such terms as are determined by the General Partner.
(b) ISSUANCE TO THE GENERAL PARTNER. In the case of the issuance of
additional Partnership Units or other Partnership Interests to the General
Partner: (i) the agreement to issue the additional Partnership Interests must
arise in connection with an issuance of or agreement to issue shares of the
General Partner, which shares have designations, preferences and other rights,
all such that the economic interests are substantially similar to the
designations, preferences and other rights of the additional Partnership
Interests that would be issued to the General Partner in accordance with this
Section 4.2(b), and (ii) the General Partner shall agree to make a capital
contribution to the Partnership in an amount equal to the proceeds raised in
connection with the issuance of such shares of the General Partner. For this
purpose, if the General Partner merges with another entity, assets of the other
entity acquired as a result of the merger shall be treated as acquired by the
General Partner in connection with the "issuance" of the shares held by the
other entities' shareholders in the surviving entity.
(c) ISSUANCE OF ADDITIONAL SHARES. The General Partner is explicitly
authorized to issue additional Common Shares or Preferred Shares of the General
Partner, or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase Common Shares and Preferred
Shares ("New Securities") and in connection with the issuance: (i) the General
Partner shall contribute the proceeds from the issuance of such New Securities
and from the exercise of rights contained in such New Securities to the
Partnership or agree as provided in Section 7.6 at the option of the Partnership
to make such a contribution, and (ii) upon the contribution, the Partnership
shall issue to the General Partner, Partnership Interests or rights, options,
warrants or convertible or exchangeable securities of the Partnership having
designations, preferences and other rights, all such that the economic interests
are substantially similar to those of the New Securities. In connection with the
issuance of Partnership Interests that are substantially similar to New
Securities, the General Partner is authorized to modify or amend the
distributions or allocations under this Agreement
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solely to the extent necessary to give effect to the designations, preferences
and other rights pertaining to such Partnership Interests.
(d) FORFEITURE OF SHARES. If the Partnership or the General Partner
acquires Common Shares as a result of the forfeiture of such Common Shares under
a restricted or similar share plan, then the General Partner shall cause the
Partnership to cancel that number of Partnership Units equal to the number of
Common Shares so acquired, and, if the Partnership acquired such Common Shares,
it shall transfer such Common Shares to the General Partner for cancellation.
(e) ISSUANCE PURSUANT TO OPTION PLANS.
(1) Upon the exercise of an option to acquire Common Shares of
the General Partner that is granted by the Partnership or the General Partner,
the optionee shall transfer the exercise price to the Partnership, and the
Partnership shall purchase from the General Partner for fair market value at the
time of exercise the number of Common Shares with respect to which options were
exercised and shall transfer the shares to the optionee. The General Partner
shall immediately transfer the proceeds received for the Common Shares to the
Partnership in exchange for a number of Units equal to the number of Common
Shares sold.
(2) The General Partner shall cause the Partnership to issue
Partnership Units of the Partnership upon the exercise by any optionee of an
option to acquire Partnership Units granted by the Partnership pursuant to the
Option Plans in accordance with the terms of the Option Plans. Partnership Units
so issued shall represent Limited Partnership Interests.
4.3 NO PREEMPTIVE RIGHTS. Except to the extent expressly granted by the
General Partner pursuant to a written agreement, no Person shall have any
preemptive, preferential or other similar right with respect to (a) additional
capital contributions or loans to the Partnership, or (b) issuance or sale of
any Partnership Units.
4.4 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv) and the terms of this Agreement. The
General Partner is authorized to revalue the property of the Partnership to its
fair market value (as determined by the General Partner, in its sole discretion,
and taking into account Section 7701(g) of the Code) in accordance with
Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's property is
revalued by the General Partner, the Capital Accounts of the Partners shall be
adjusted in accordance with Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
4.5 GENERAL PARTNER LOANS OR FUNDING. The General Partner may, or to the
extent the General Partner enters into a "Funding Debt" (i.e., any debt incurred
by or on behalf of the General Partner for the purpose of providing funds to the
Partnership), the General Partner shall, lend Additional Funds to the
Partnership or contribute the funds to the Partnership for a Partnership
Interest paying a preferred return (a "General Partner Funding"). If the General
Partner enters into such a Funding Debt, the General Partner Funding will
consist of the proceeds from such Funding Debt and if the funds are loaned to
the Partnership, the loan will be on the
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same terms and conditions, including interest rate, repayment schedule and costs
and expenses, incurred in connection with such Funding Debt, and in the case of
a contribution to the Partnership, the preferred partnership interest will
substantially reflect the terms of the Funding Debt. Otherwise, any General
Partner Funding made pursuant to this Section 4.5 shall be on terms and
conditions no less favorable to the Partnership than would be available to the
Partnership from any third party. If a Funding Debt or debt issued by the
Partnership is comprised, in whole or in part, of debt convertible into or
exchangeable for Common Shares or other equity interests in the General Partner
and any portion of such debt is converted into or exchanged for Common Shares,
the General Partner shall have the right, but not the obligation, to convert the
equivalent amount of the General Partner Funding into additional Partnership
Interests.
4.6 LOANS BY THIRD PARTIES. The Partnership may incur debt, or enter
into other similar credit, guarantee, financing or refinancing arrangements for
any purpose (including, without limitation, in connection with any further
acquisition of properties) from any Person that is not the General Partner upon
such terms as the General Partner determines appropriate; provided that, the
Partnership shall not incur any debt under which a breach, violation or default
would be deemed to occur by virtue of the transfer of any Limited Partnership
Interest.
5. DISTRIBUTIONS
5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. The General
Partner shall, commencing in 1998, distribute at least quarterly an amount equal
to all Available Cash generated by the Partnership during such quarter or
shorter period to the Partners who are Partners on the Partnership Record Date
with respect to such quarter or shorter period (i) first, with respect to any
class of Partnership Interests issued pursuant to Section 4.2 that is entitled
to a preference over other Partnership Units on the distribution of Available
Cash (and among such classes in order of the preferences designated between
those classes, and pro rata within each such class), and (ii) then, in
accordance with their respective Percentage Interests on such Partnership Record
Date; provided that in no event may a Redeeming Partner receive a distribution
of Available Cash with respect to a Unit if such Partner is entitled to receive
a distribution with respect to a Common Share for which such Unit has been
redeemed or exchanged. It will be the policy of the Partnership, commencing in
1998, to make distributions per Unit that are equal to the per share
distributions made by the General Partner with respect to its Common Shares, and
in any case the per Unit and per share distributions will be equal during the
Partnership Years 1998, 1999, and 2000. The General Partner shall make such
efforts, as it determines in its sole and absolute discretion, to cause the
Partnership to distribute its operating cash flow in a manner that would ensure
that such distributions are treated by the Limited Partners as "operating cash
flow distributions" within the meaning of Regulations Section 1.707-4(b)(2).
5.2 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provisions of any state, local or foreign tax law and Section 10.5 with respect
to any allocation, payment or distribution to the General Partner or any Limited
Partners or Assignees shall be
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treated as amounts distributed to the General Partner or such Limited Partners
or Assignees pursuant to Section 5.1 for all purposes under this Agreement.
5.3 DISTRIBUTIONS UPON LIQUIDATION. Proceeds from any sale or other
disposition of all or substantially all of the assets of the Partnership or a
related series of transactions that, taken together, results in the sale or
other disposition of all or substantially all of the assets of the Partnership
shall be distributed to the Partners in accordance with Section 13.2.
5.4 DISTRIBUTIONS IN KIND. No Partner has any right to demand and
receive property other than cash. The General Partner may determine, in its sole
and absolute discretion, to make a distribution in kind to the Partners of
Partnership assets, and such assets shall be distributed in such a fashion as to
ensure that the fair market value is distributed and allocated in accordance
with Articles 5 and 6.
5.5 REIT DISTRIBUTION REQUIREMENTS. Notwithstanding anything to the
contrary in this Agreement, the General Partner may cause the Partnership to
distribute amounts sufficient to enable the General Partner to pay shareholder
dividends that will allow the General Partner to (i) meet its distribution
requirement for qualification as a REIT as set forth in Section 857(a)(1)of the
Code and (ii) avoid any federal income or excise tax liability imposed by the
Code.
6. ALLOCATIONS
6.1 ALLOCATION OF PROFIT AND LOSS.
(a) GENERAL. Profit and Loss of the Partnership for each fiscal year
of the Partnership shall be allocated among the Partners in accordance with
their respective Percentage Interests. The provisions of this Section 6.1 shall
be amended appropriately in the event that the General Partner causes the
Partnership to issue Units with different preferences or redemption rights.
(b) NONRECOURSE DEDUCTIONS AND MINIMUM GAIN CHARGEBACK.
Notwithstanding any provision to the contrary:
(i) any expense of the Partnership that is a "nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be
allocated in accordance with the Partners' respective Percentage Interests,
(ii) any expense of the Partnership that is a "partner
nonrecourse deduction" within the meaning of Regulations Section 1.704-
2(i)(2) shall be allocated in accordance with Regulations Section 1.704-
2(i)(l),
(iii) if there is a net decrease in "partnership minimum gain"
within the meaning of Regulations Section 1.704-2(g)(1) that would subject
a Partner to a "minimum gain chargeback" within the meaning of Regulations
Section 1.704-2(f) for any Partnership taxable year, items of gain and
income shall be allocated among the Partners in accordance with (to the
minimum extent allowable) Regulations Section 1.704-2(f) and the ordering
rules contained in Regulations Section 1.704-2(j), and
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(iv) if there is a net decrease within the meaning of Regulations
Section 1.704-2(i)(4) in "partner nonrecourse debt minimum gain" within the
meaning of Regulations Section 1.704-2(i)(5) that would subject a Partner
to a minimum gain chargeback for any Partnership taxable year, items of
gain and income shall be allocated among the Partners in accordance with
(to the minimum extent allowable) Regulations Section 1.704-2(i)(4) and the
ordering rules contained in Regulations Section 1.704-2(j).
A Partner's "interest in partnership profits" for purposes of determining its
share of the nonrecourse liabilities of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3) shall be such Partner's Percentage Interest.
(c) QUALIFIED INCOME OFFSET. If a Partner receives in any taxable
year an adjustment, allocation, or distribution described in subparagraphs
(4),(5) or (6) of Regulations Section 1.704(b)(2)(ii)(d) that causes or
increases a negative balance in such Partner's Capital Account that exceeds the
sum of such Partner's share of "partnership minimum gain" and "partner
nonrecourse debt minimum gain," as determined in accordance with Regulations
Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially
for such taxable year (and, if necessary, later taxable years) items of income
and gain in an amount and manner sufficient to eliminate such negative Capital
Account balance as quickly as possible as provided in Regulations Section 1.704-
1(b)(2)(ii)(d).
(d) CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a
Partner to the extent that such allocation would cause (or increase) a deficit
in such Partner's Capital Account (after reduction to reflect the items
described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed
the sum of such Partner's shares of "partnership minimum gain" (Regulations
Section 1.704-2(g)(1)) and "partner nonrecourse debt minimum gain" (Regulations
Section 1.704-2(i)(5)). Any Loss in excess of that limitation shall be
allocated to the General Partner.
(e) ALLOCATIONS UPON CHANGES IN PARTNERSHIP INTERESTS. If a Partner
transfers any part or all of its Partnership Interest or upon changes in the
outstanding Partnership Interests (such as the issuance or redemption of
Partnership Interests), the distributive shares of the various items of Profit
and Loss and other items attributable to those Partnership Interests allocable
among the Partners during such fiscal year of the Partnership shall be allocated
between the transferor and the transferee Partner or between the persons treated
a Partners prior to such event and those treated as Partners after the event as
the General Partner deems appropriate to take into account their varying
interests during that period (which may include interim closings of the books,
prorations of items, using daily, weekly, monthly, or quarterly proration
periods, etc.). The General Partner, in its sole discretion, shall determine
the method or methods to be used to allocate the distributive shares of items
between the Partners.
(f) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any items
of income, gain, expense, or loss referred to in this Agreement shall be
determined by the General Partner in accordance with the Partnership's "book"
income computed under federal income tax accounting principles taking into
account Regulations Section 1.704-1(b)(2)(iv) and the effect of any revaluation
of Partnership property in accordance with Regulations Section 1.704-
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1(b)(2)(iv)(f), except that Profit and Loss shall not include items of income,
gain and expense that are specifically allocated pursuant to Section 6.1(b) or
6.1(c).
(g) TAX ALLOCATIONS. All allocations of income, Profit, gain, Loss,
and expense (and all components of those items) for federal income tax purposes
shall be allocated among the Partners in the same manner as such allocations of
"book" income, gain, loss or deduction are allocated pursuant to this Section
6.1, except as otherwise required by Section 704(c) of the Code and Regulations
Section 1.704-1(b)(4). The General Partner shall have the authority to elect
the method to be used by the Partnership for allocating items of income, gain,
and expense as required by Section 704(c) of the Code and such election shall be
binding on all Partners.
(h) CURATIVE ALLOCATION. The allocations set forth in Section 6.1(b),
(c) and (d) (the "Regulatory Allocations") are intended to comply with certain
regulatory requirements, including the requirements of Regulations Section
1.704-1(b) and 1.704-2. Notwithstanding the provisions of Section 6.1(b),(c)
and (d), the Regulatory Allocations shall be taken into account in allocating
other items of income, gain, loss and deduction among the Partners so that, to
the extent possible, the net amount of such allocations of other items and the
Regulatory Allocations to each Partner shall be equal to the net amount that
would have been allocated to each such Partner if the Regulatory Allocations had
not occurred. In applying this Section 6.1(h), a Partner's share of partnership
minimum gain and partner nonrecourse debt minimum gain (within the meaning of
Regulations Sections 1.704-2(g) and 1.704-2(i), respectively) at any point in
time shall be treated as an amount of income or gain that has already been
allocated to the Partner.
6.2 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that
the allocations of Profit and Loss under the Agreement have substantial economic
effect (or be consistent with the Partners' interests in the Partnership in the
case of the allocation of losses attributable to nonrecourse debt) within the
meaning of Section 704(b) of the Code as interpreted by the related Regulations.
Article 6 and other relevant provisions of this Agreement shall be interpreted
in a manner consistent with that intent.
7. MANAGEMENT AND OPERATIONS OF BUSINESS
7.1 MANAGEMENT.
(a) POWERS OF GENERAL PARTNER. Except as otherwise expressly
provided in this Agreement, all management powers over the business and affairs
of the Partnership are exclusively vested in the General Partner, and no Limited
Partner shall have any right to participate in or exercise control or management
power over the business and affairs of the Partnership. Notwithstanding anything
to the contrary in this Agreement, the General Partner may not be removed by the
Limited Partners. In addition to the powers that are granted to the General
Partner under any other provision of this Agreement, the General Partner shall
have full power and authority to do all things deemed necessary or desirable by
it to conduct the business of the Partnership, to exercise all powers set forth
in Section 3.2 and to effectuate the purposes set forth in Section 3.1,
including, without limitation:
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(1) the making of any expenditures, the lending or borrowing of
money (including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions to its
Partners in such amounts as will permit the General Partner (so long as the
General Partner qualifies as a REIT) to avoid the payment of any federal
income tax (including, for this purpose, any excise tax pursuant to Section
4981 of the Code) and to make distributions to its shareholders sufficient
to permit the General Partner to maintain REIT status), the assumption or
guarantee of, or other contracting for, indebtedness and other liabilities,
the issuance of evidences of indebtedness (including the securing of same
by mortgage, deed of trust or other lien or encumbrance on the
Partnership's assets) and the incurring of any obligations it deems
necessary for the conduct of the activities of the Partnership; provided,
that all such borrowing, incurrence of debt and prepayments shall be
subject to the limitations set forth in Sections 4.5 and 4.6;
(2) the making of tax, regulatory and other filings, or rendering
of periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(3) the acquisition, disposition, sale, conveyance, mortgage,
pledge, encumbrance, hypothecation, contribution or exchange of any assets
of the Partnership or the merger or other combination of the Partnership
with or into another entity on such terms as the General Partner deems
proper; provided, however, that: (i) no sale, exchange, disposition or
other transfer of any property of the Partnership contributed on January 2,
1997 shall occur prior to December 31, 1998 without the prior written
consent of the General Partner; (ii) the sale of all or substantially all
of the assets of the Partnership and a Business Combination (as defined in
Section 8.7(a)) shall require the consent set forth in Section 8.7(b); and
(iii) certain sales of any Designated Property (as defined in Section 8.8)
may require the consent of specified persons as set forth in Section 8.8.
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement and on any terms it sees fit, including, without limitation, the
financing of the conduct of the operations of the General Partner, the
Partnership or any of the Partnership's Subsidiaries, the lending of funds
to other Persons (including the Partnership's Subsidiaries) and the
repayment of obligations of the Partnership and its Subsidiaries and any
other Person in which it has an equity investment and the making of capital
contributions to its Subsidiaries, the holding of any real, personal and
mixed property of the Partnership in the name of the Partnership or in the
name of a nominee or trustee (subject to Section 7.11), the creation, by
grant or otherwise, of easements or servitudes, and the performance of any
and all acts necessary or appropriate to the operation of the Partnership
assets including, without limitation, applications for rezoning, objections
to rezoning, constructing, altering, improving, repairing, renovating,
rehabilitating, razing, demolishing or condemning any improvements or
property of the Partnership;
(5) the negotiation, execution, and performance of any contracts,
conveyances or other instruments (including with Affiliates of the
Partnership to the
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extent provided in Section 7.7) that the General Partner
considers useful or necessary to the conduct of the Partnership's
operations or the implementation of the General Partner's powers under this
Agreement, including, without limitation, the execution and delivery of
leases on behalf of or in the name of the Partnership (including the lease
of Partnership property for any purpose and without limit as to the term of
the lease, whether or not such term (including renewal terms) shall extend
beyond the date of termination of the Partnership and whether or not the
portion so leased is to be occupied by the lessee or, in turn, subleased in
whole or in part to others);
(6) the opening and closing of bank accounts, the investment of
Partnership funds in securities, certificates of deposit and other
instruments, and the distribution of Partnership cash or other Partnership
assets in accordance with this Agreement;
(7) the establishment of one or more divisions of the
Partnership, the selection and dismissal of employees of the Partnership or
the General Partner (including, without limitation, employees having titles
such as "president," "vice president," "secretary" and "treasurer"), and
the engagement and dismissal of agents, outside attorneys, accountants,
engineers, appraisers, consultants, contractors and other professionals on
behalf of the General Partner or the Partnership and the determination of
their compensation and other terms of employment or hiring;
(8) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or appropriate;
(9) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general partnerships,
joint ventures, limited liability companies or other relationships that it
deems desirable (including, without limitation, the acquisition of
interests in, and the contribution of property to, its Subsidiaries and any
other Person in which it has an equity investment from time to time);
(10) the control of any matters affecting the rights and
obligations of the Partnership, including the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation, and
the indemnification of any Person against liabilities and contingencies to
the extent permitted by law;
(11) the undertaking of any action in connection with the
Partnership's direct or indirect investment in its Subsidiaries or any
other Person (including, without limitation, the contribution or loan of
funds by the Partnership to such Persons);
(12) the determination of the fair market value of any Partnership
property distributed in kind using such reasonable method of valuation as
it may adopt;
(13) the issuance of Partnership Units to any Subsidiary that may
be necessary for such Subsidiary to satisfy such Subsidiary's obligations
under the Option Plans, in exchange for the transfer to the Partnership by
such Subsidiary of the price per Partnership Unit required by the Option
Plans to be paid by Subsidiaries;
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(14) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or improvements
owed by the Partnership or any Subsidiary of the Partnership;
(15) the exercise, directly or indirectly, through any attorney-
in-fact acting under a general or limited power of attorney, of any right,
including the right to vote, appurtenant to any asset or investment held by
the Partnership;
(16) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with any
Subsidiary of the Partnership or any other Person in which the Partnership
has a direct or indirect interest, or jointly with any such Subsidiary or
other Person;
(17) the enforcement of any rights against any Partner pursuant to
representations, warranties, covenants and indemnities relating to such
Partner's contribution of property or assets to the Partnership;
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person in which the
Partnership does not have an interest pursuant to contractual or other
arrangements with such Person; and
(19) the making, execution and delivery of any and all deeds,
leases, notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties, indemnities,
waivers, releases or legal instruments or agreements in writing necessary
or appropriate in the judgment of the General Partner for the
accomplishment of any of the powers of the General Partner enumerated in
this Agreement.
(b) NO APPROVAL REQUIRED FOR ABOVE POWERS. Each of the Limited
Partners agrees that the General Partner is authorized to execute, deliver and
perform the above-mentioned agreements and transactions on behalf of the
Partnership without any further act, approval or vote of the Partners,
notwithstanding any other provision of this Agreement (except as otherwise
specifically provided in paragraph (a)(3) of Section 7.1), the Act or any
applicable law, rule or regulation. The execution, delivery or performance by
the General Partner or the Partnership of any agreement authorized or permitted
under this Agreement shall not constitute a breach by the General Partner of any
duty that the General Partner may owe the Partnership or the Limited Partners or
any other Persons under this Agreement or of any duty stated or implied by law
or equity.
(c) INSURANCE. The General Partner may cause the Partnership to
obtain and maintain casualty, liability and other insurance on the properties of
the Partnership and liability insurance for the Indemnities under this Agreement
in such amounts as the General Partner, in its sole and absolute discretion,
deems appropriate and reasonable from time to time.
(d) WORKING CAPITAL RESERVES. The General Partner may cause the
Partnership to establish and maintain working capital reserves in such amounts
as the General Partner, in its sole and absolute discretion, deems appropriate
and reasonable from time to time.
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(e) NO OBLIGATIONS TO CONSIDER TAX CONSEQUENCES TO LIMITED
PARTNERS. In exercising its authority under this Agreement, the General Partner
may, but shall be under no obligation to, take into account the tax consequences
to any Partner (including the General Partner) of any action taken (or not
taken) by any of them. The General Partner and the Partnership shall not have
liability to a Limited Partner for monetary damages or otherwise for losses
sustained, liabilities incurred or benefits not derived by such Limited Partner
in connection with such decisions, provided that the General Partner has acted
in good faith and pursuant to its authority under this Agreement.
7.2 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY. The General Partner may
not, without the written consent of all of the Limited Partners, take any action
in contravention of this Agreement, including, without limitation:
(a) taking any action that would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise provided in this
Agreement; or
(b) possessing Partnership property, or assigning any rights in
specific Partnership property, for other than a Partnership purpose except as
otherwise provided in this Agreement.
In addition, without the consent of any adversely affected Limited Partner, the
General Partner may not perform any act that would subject a Limited Partner to
liability as a general partner in any jurisdiction or any other liability except
as provided in this Agreement or under the Act.
7.3 CERTIFICATE OF LIMITED PARTNERSHIP. To the extent that such action is
determined by the General Partner to be reasonable and necessary or appropriate,
the General Partner shall file amendments to and restatements of the Certificate
and do all the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of California and each other jurisdiction in which the Partnership
may elect to do business or own property. Subject to the terms of Section
8.5(a)(4) (Rights of Limited Partners to certain business records), the General
Partner shall not be required, before or after filing, to deliver or mail a copy
of the Certificate, as it may be amended or restated from time to time, to any
Limited Partner. The General Partner shall use all reasonable efforts to cause
to be filed such other certificates or documents as may be reasonable and
necessary or appropriate for the formation, continuation, qualification and
operation of a limited partnership (or a partnership in which the limited
partners have limited liability) in the State of California and any other
jurisdiction in which the Partnership may elect to do business or own property.
7.4 RESPONSIBILITY FOR EXPENSES.
(a) NO COMPENSATION. Except as provided in this Section 7.4 and
elsewhere in this Agreement (including the provisions of Articles 5 and 6
regarding distributions, payments and allocations to which it may be entitled),
the General Partner shall not be compensated for its services as general partner
of the Partnership.
(b) RESPONSIBILITY FOR OWNERSHIP AND OPERATION EXPENSES. Except as
provided in Section 7.13, the Partnership shall be responsible for and shall pay
all expenses
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relating to the Partnership's ownership of its assets, and the operation of, or
for the benefit of, the Partnership, and the General Partner shall be reimbursed
on a monthly basis, or such other basis as the General Partner may determine in
its sole and absolute discretion, for all expenses it incurs relating to the
Partnership's ownership of its assets and the operation of, or for the benefit
of, the Partnership. If certain expenses are incurred for the benefit of the
Partnership and other entities, those expenses will be allocated to the
Partnership and the other entities in such a manner as the General Partner in
its sole and absolute discretion deems fair and reasonable. Such reimbursements
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.8. All payments and reimbursements under
this Agreement represent expenses of the Partnership incurred on its behalf, and
not expenses of the General Partner, and shall be so characterized for federal
income tax purposes.
(c) RESPONSIBILITY FOR ORGANIZATION OR ISSUANCE EXPENSES. Except as
provided in Section 7.13, the Partnership shall be responsible for and shall pay
(or shall reimburse the General Partner for) all expenses incurred relating to
the organization of the Partnership (including expenses relating to the issuance
of Units), as well as other costs of capital raising or property acquisition
incurred by the Partnership or General Partner with respect to funds or
properties acquired by the Partnership or by the General Partner for prompt
contribution to the Partnership, all of which expenses are considered by the
Partners to constitute expenses of, and for the benefit of, the Partnership.
7.5 PURCHASES OF SHARES BY THE GENERAL PARTNER. If the General Partner
purchases shares in connection with a share repurchase or similar program or for
the purpose of delivering those shares to satisfy an obligation under any
dividend reinvestment or equity purchase program adopted by the General Partner,
any employee equity purchase plan adopted by the General Partner or any similar
obligation or arrangement undertaken by the General Partner in the future, the
purchase price paid by the General Partner for those shares and any other
expenses incurred by the General Partner in connection with that purchase shall
be considered expenses of the Partnership and shall be reimbursable to the
General Partner, subject to the conditions that: (i) if those shares are
subsequently sold by the General Partner, the General Partner shall pay to the
Partnership any proceeds received by the General Partner for those shares
(provided that a transfer of shares for Partnership Units pursuant to Section
8.6 would not be considered a sale for this purpose); and (ii) if the shares are
not retransferred by the General Partner within thirty (30) days after the
purchase of the shares, the General Partner shall cause the Partnership to
cancel a number of Partnership Units held by the General Partner equal to the
number of shares purchased.
7.6 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER. The General Partner shall
not directly or indirectly enter into or conduct any business, other than in
connection with the ownership, acquisition and disposition of Partnership
Interests as a General Partner or Limited Partner and the management of the
business of the Partnership, the General Partner's operation as a public
reporting company with securities registered under the Securities Exchange Act
of 1934, as amended, its operation as a REIT, and such activities as are
incidental to those activities. The General Partner shall not own any assets
other than Partnership Interests, the stock of an entity qualifying as a
"qualified REIT subsidiary"
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under Section 856(i) of the Code, all of the interests in a limited liability
company, debts owed by the Partnership and such bank accounts or similar
instruments as it deems necessary to carry out its responsibilities contemplated
under this Agreement and the Articles of Incorporation. Notwithstanding the
foregoing, the General Partner shall be permitted to own, directly or through
Subsidiaries, interests in Partnership properties that do not exceed 1% of the
economic interest of any property, and if appropriate for regulatory, tax, or
other purposes, the General Partner also may own, directly or through
Subsidiaries, interests in assets that the Partnership otherwise could acquire,
if the General Partner grants to the Partnership the option to acquire the
assets within a period not to exceed three years in exchange for the number of
Partnership Units that would be issued if the Partnership acquired the assets at
the time of acquisition by the General Partner. The General Partner and
Affiliates of the General Partner may acquire Limited Partnership Interests and
shall be entitled to exercise all rights of a Limited Partner relating to such
Limited Partnership Interests. The provisions of this Section 7.6 shall not be
construed to limit the outside activities of Affiliates of the General Partner.
7.7 CONTRACTS WITH AFFILIATES.
(a) LOANS. The Partnership may lend or contribute to its
Subsidiaries or other Persons in which it has an equity investment, and such
Persons may borrow funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General Partner. The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.
(b) TRANSFERS OF ASSETS. The Partnership may transfer assets to
joint ventures, other partnerships, corporations or other business entities in
which it is or by so transferring the assets becomes a participant upon such
terms and subject to such conditions consistent with this Agreement and
applicable law.
(c) CONTRACTS WITH GENERAL PARTNER. Except as expressly permitted by
this Agreement, neither the General Partner nor any of its Affiliates shall
sell, transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are on
terms that are fair and reasonable and no less favorable to the Partnership than
would be obtained from an unaffiliated third party.
(d) EMPLOYEE BENEFIT PLANS. The General Partner, in its sole and
absolute discretion and without the approval of the Limited Partners, may
propose and adopt on behalf of the Partnership employee benefit plans funded by
the Partnership for the benefit of employees of the General Partner, the
Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit of the
Partnership, the General Partner, or any of the Partnership's Subsidiaries,
including any such plan that requires the Partnership, the General Partner or
any of the Partnership's Subsidiaries to issue or transfer Partnership Units to
employees.
(e) CONFLICT AVOIDANCE ARRANGEMENTS. The General Partner is
expressly authorized to enter into, in the name and on behalf of the
Partnership, a right of first opportunity arrangement, non-competition
agreements and other conflict avoidance agreements with various
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Affiliates of the Partnership and the General Partner, on such terms as the
General Partner, in its sole and absolute discretion, believes are advisable.
7.8 INDEMNIFICATION.
(a) GENERAL. Except as provided in Section 7.13, the Partnership
shall indemnify an Indemnitee from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, settlements, and other amounts arising from any and
all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, that relate to the operations of the
Partnership as set forth in this Agreement in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, unless it is
established that: (i) the act or omission of the Indemnitee was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
believe that the act or omission was unlawful. The termination of any proceeding
by judgment, order or settlement does not create a presumption that the
Indemnitee did not meet the requisite standard of conduct set forth in this
Section 7.8(a). The termination of any proceeding by conviction or upon a plea
of nolo contendere or its equivalent, or an entry of an order of probation prior
to judgment, creates a rebuttable presumption that the Indemnitee did not meet
the requirement standard of conduct set forth in this Section 7.8(a). Any
indemnification pursuant to this Section 7.8 shall be made only out of the
assets of the Partnership. Notwithstanding the foregoing provisions, the General
Partner shall be entitled to reimbursement by the Partnership for any amounts
paid by it in satisfaction of indemnification obligations owed by the General
Partner to present or former directors of the General Partner, as provided for
in or pursuant to the Articles of Incorporation and By-Laws of the General
Partner or any similar indemnification agreements between the General Partner
and such persons.
(b) IN ADVANCE OF FINAL DISPOSITION. Except as provided in Section
7.13, reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (a) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 7.8 has been met, and (b) a written undertaking by or
on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct was not met.
(c) NO EFFECT ON OTHER RIGHTS. The indemnification provided by this
Section 7.8 shall be in addition to any other rights to which an Indemnitee or
any other Person may be entitled under any agreement, pursuant to any vote of
the Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided in
a written agreement pursuant to which such Indemnitee is indemnified.
(d) INSURANCE. The Partnership may purchase and maintain insurance,
on behalf of the Indemnities and such other Persons as the General Partner shall
in its sole and absolute discretion determine, against any liability that may be
asserted against or expenses that
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may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement or under
applicable law.
(e) EMPLOYEE BENEFIT PLANS. For purposes of this Section 7.8, the
Partnership shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance by it of its
duties to the Partnership also imposes duties on, or otherwise involves services
by, it to the plan or participants or beneficiaries of the plan; excise taxes
assessed on an Indemnitee with respect to an employee benefit plan pursuant to
applicable law shall constitute fines within the meaning of Section 7.8(a); and
actions taken or omitted by the Indemnitee with respect to an employee benefit
plan in the performance of its duties for a purpose reasonably believed by it to
be in the interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose that is not opposed to the best interests of the
Partnership.
(f) NO PERSONAL LIABILITY FOR LIMITED PARTNERS. In no event may an
Indemnitee subject the Limited Partners to personal liability by reason of the
indemnification provisions set forth in this Agreement.
(g) INTERESTED TRANSACTIONS. An Indemnitee shall not be denied
indemnification in whole or in part under this Section 7.8 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of this Agreement.
(h) BINDING EFFECT. The provisions of this Section 7.8 are for the
benefit of the Indemnities, their heirs, successors, assigns and administrators
and shall not be deemed to create any rights for the benefit of any other
Persons.
(i) EFFECT OF AMENDMENT. Any amendment, modification or repeal of this
Section 7.8 or any provision of this Agreement shall be prospective only and
shall not in any way affect the rights of an Indemnitee under this Section 7.8
as in effect immediately prior to such amendment modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
7.9 LIABILITY OF THE GENERAL PARTNER.
(a) GENERAL. Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership, any Partners or any Assignees for losses sustained, liabilities
incurred or benefits not derived as a result of errors in judgment or of any act
or omissions if the General Partner acted in good faith.
(b) NO OBLIGATION TO CONSIDER INTERESTS OF LIMITED PARTNERS. The Limited
Partners expressly acknowledge that the General Partner is acting on behalf of
the Partnership and the General Partner's shareholders collectively, that the
General Partner is under no obligation to consider the separate interests of the
Limited Partners (including, without limitation, the tax consequences to Limited
Partners or Assignees) in deciding whether to cause the Partnership to take (or
decline to take) any actions that the General Partner has undertaken in
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good faith on behalf of the Partnership, including the disposition of properties
of the Partnership, and that the General Partner shall not be liable for
monetary damages for losses sustained, liabilities incurred, or benefits not
derived by Limited Partners in connection with such decisions provided the
General Partner does not violate the terms of any written agreement between the
Partnership and one or more Limited Partners.
(c) ACTS OF AGENTS. Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it under this Agreement either directly or indirectly or by or through its
agents. The General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by it in good faith.
(d) EFFECT OF AMENDMENT. Any amendment, modification or repeal of
this Section 7.9 or any provision of this Agreement shall be prospective only
and shall not in any way affect the limitations on the General Partner's
liability to the Partnership and the Limited Partners under this Section 7.9 as
in effect immediately prior to such amendment, modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
(e) LIMITATION OF LIABILITY OF SHAREHOLDERS, DIRECTORS AND OFFICERS
OF THE GENERAL PARTNER. Any obligation or liability of the General Partner that
may arise at any time under this Agreement or any obligation or liability that
may be incurred by it pursuant to any other instrument, transaction or
undertaking contemplated by this Agreement shall be satisfied, if at all, out of
the General Partner's assets only. No such obligation or liability shall be
personally binding upon, nor shall resort for the enforcement of any such
obligation or liability be had to, the property of any of its shareholders,
directors, officers, employees or agents, regardless of whether such obligation
or liability is in the nature of contract, tort or otherwise.
7.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
(a) RELIANCE ON DOCUMENTS. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture, or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
(b) RELIANCE ON CONSULTANTS AND ADVISERS. The General Partner may
consult with legal counsel, accountants, appraisers, management consultants,
investment bankers, architects, engineers, environmental consultants, and other
consultants and advisers selected by it, and any act taken or omitted to be
taken in reliance upon the opinion of such Persons as to matters that such
General Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
(c) ACTION THROUGH OFFICERS AND ATTORNEYS. The General Partner shall
have the right, in respect of any of its powers or obligations under this
Agreement, to act through any
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of its duly authorized officers and a duly appointed attorney or attorneys-in-
fact. Each such attorney shall, to the extent provided by the General Partner in
the power of attorney, have full power and authority to do and perform all and
every act and duty that is permitted or required to be done by the General
Partner under this Agreement.
(d) ACTIONS TO MAINTAIN REIT STATUS OR AVOID TAXATION OF GENERAL
PARTNER. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the General Partner to continue
to qualify as a REIT or (ii) to avoid the General Partner incurring any taxes
under Section 857 or Section 4981 of the Code, is expressly authorized under
this Agreement and is deemed approved by all of the Limited Partners.
7.11 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership assets or
any portion of those assets. Title to any or all of the Partnership assets may
be held in the name of the Partnership, the General Partner or one or more
nominees, as the General Partner may determine, including Affiliates of the
General Partner. The General Partner declares and warrants that any Partnership
assets for which legal title is held in the name of the General Partner or any
nominee or Affiliate of the General Partner shall be held by the General Partner
for the use and benefit of the Partnership in accordance with the provisions of
this Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
7.12 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in
this Agreement, any Person dealing with the Partnership shall be entitled to
assume that the General Partner has full power and authority, without consent or
approval of any other Partner or Person, to encumber, sell or otherwise use in
any manner any and all assets of the Partnership and to enter into any contracts
on behalf of the Partnership, and such Person shall be entitled to deal with the
General Partner as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner waives any and all defenses or
other remedies that may be available against such Person to contest, negate or
disaffirm any action of the General Partner in connection with any such dealing.
In no event shall any Person dealing with the General Partner or its
representatives be obligated to ascertain that the terms of this Agreement have
been complied with or to inquire into the necessity or expedience of any act or
action of the General Partner or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying on or claiming under those instruments
that (a) at the time of the execution and delivery of such certificate, document
or instrument, this Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the
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Partnership and (c) certificate, document or instrument was duly executed and
delivered in accordance with the terms and provisions of this Agreement and is
binding upon the Partnership.
7.13 TREATMENT OF AND LIMITATION ON PAYMENTS TO GENERAL PARTNER.
(a) REIMBURSEMENT AND INDEMNIFICATION PAYMENTS. If and to the extent
any payments to the General Partner pursuant to Sections 7.4 or 7.8 constitute
gross income to the General Partner (as opposed to the repayment of advances
made on behalf of the Partnership), those amounts shall constitute guaranteed
payments within the meaning of Section 707(c) of the Code, and shall be so
treated by the Partnership and all Partners, and shall not be treated as
distributions for purposes of computing the Partners' Capital Accounts.
(b) LIMITATION ON PAYMENTS TO GENERAL PARTNER. To the extent that the
amount paid or credited to the General Partner or its officers, directors,
employees or agents pursuant to Section 7.4 or Section 7.8 would constitute
gross income of the General Partner that is not described in Sections 856(c)(2)
or 856(c)(3) of the Code (a "GP Payment") then, notwithstanding any other
provisions of this Agreement, the amount of such GP Payment for any fiscal year
shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of
(1) four and eight tenths percent (4.8%) of the
General Partner's total gross income (not
including any GP Payments or gross income from
prohibited transactions) for the fiscal year over
(2) the amount of gross income (within the
meaning of Section 856(c)(2) of the Code) derived
by the General Partner from sources other than
those described in subsections (A) through (H) of
Section 856(c)(2) of the Code (taking into account
Section 856(c)(5)(G), but not including the amount
of any GP Payments or gross income from prohibited
transactions); or
(ii) an amount equal to the excess, if any, of
(1) twenty-four and eight tenths percent (24.8%)
of the General Partner's total gross income (not
including any GP Payments or gross income from
prohibited transactions) for the fiscal year over
(2) the amount of gross income (within the
meaning of Section 856(c)(3) of the Code) derived
by the General Partner from sources other than
those described in subsections (A) through (I) of
Section 856(c)(3) of the Code (but not including
the amount of any GP Payments or gross income from
prohibited transactions);
Notwithstanding the foregoing, GP Payments in excess of the amounts set forth in
paragraphs (i) and (ii) may be made if and to the extent the General Partner, as
a condition precedent, obtains an opinion of tax counsel that the receipt of
such excess amounts would not adversely affect the General Partner's ability to
qualify as a REIT. To the extent GP Payments may not be made in a year due to
the above limitations, such GP Payments shall carry over and be treated as
arising in
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the following year(s) (subject again to limitation as set forth above in those
years), for a maximum of seven years (treating amounts payable as first being
paid from the earliest year such amounts were carried over, and the next
succeeding years in chronological order). If any GP Payment is carried over for
such seven-year period and not paid, such amount shall no longer be an
obligation of the Partnership. If a GP Payment is inadvertently made in an
amount in excess of the limitations in this Section 7.13(b), such excess
payments shall be treated as a permitted loan from the Partnership to the
General Partner, to be repaid as soon as practicable following discovery of the
overpayment.
8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 LIMITATION OF LIABILITY. The Limited Partners shall have no
liability under this Agreement except as expressly provided in this Agreement,
including Section 10.5 (Partnership withholding obligations), or under the Act.
8.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than
the General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such) shall take part in the operation,
management or control (within the meaning of the Act) of the Partnership's
business, transact any business in the Partnership's name or have the power to
sign documents for or otherwise bind the Partnership. The transaction of any
such business by the General Partner, any of its Affiliates or any officer,
director, employee, partner, agent or trustee of the General Partner, the
Partnership or any of their Affiliates, in their capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS. Subject to any agreements
entered into pursuant to Section 7.7(e) and subject to any other agreements
entered into by a Limited Partner or its Affiliates with the General Partner,
the Partnership or a Subsidiary, the following rights shall govern outside
activities of Limited Partners:
(a) any Limited Partner (other than the General Partner) and any
officer, director, employee, agent, trustee, Affiliate or shareholder of
any Limited Partner shall be entitled to and may have business interests
and engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct or
indirect competition with the Partnership;
(b) neither the Partnership nor any Partners shall have any rights
by virtue of this Agreement in any business ventures of any Limited Partner
or Assignee;
(c) none of the Limited Partners nor any other Person shall have
any rights by virtue of this Agreement or the partnership relationship
established by this Agreement in any business ventures of any other Person,
other than the General Partner, and such Persons shall have no obligation
pursuant to this Agreement to offer any interest in any such business
ventures to the Partnership, any Limited Partner or any such other Person,
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even if such opportunity is of a character that, if presented to the
Partnership, any Limited Partner or such other Person, could be taken by
such Person;
(d) the fact that a Limited Partner may encounter opportunities to
purchase, otherwise acquire, lease, sell or otherwise dispose of real or
personal property and may take advantage of such opportunities or introduce
such opportunities to entities in which it has or has not any interest,
shall not subject such Partner to liability to the Partnership or any of
the other Partners on account of the lost opportunity; and
(e) except as otherwise specifically provided in this Agreement,
nothing contained in this Agreement shall be deemed to prohibit a Limited
Partner or any Affiliate of a Limited Partner from dealing, or otherwise
engaging in business, with Persons transacting business with the
Partnership or from providing services relating to the purchase, sale,
rental, management or operation of real or personal property (including
real estate brokerage services) and receiving compensation for those
activities, from any Persons who have transacted business with the
Partnership or other third parties.
8.4 PRIORITY AMONG LIMITED PARTNERS. No Partner (Limited or General) or
Assignee shall have priority over any other Partner (Limited or General) or
Assignee either as to the return of capital contributions or, except to the
extent provided by Article 6 or as permitted by Section 4.2, or otherwise
expressly provided in this Agreement, as to profits, losses or distributions.
8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP.
(a) COPIES OF BUSINESS RECORDS. In addition to other rights provided
by this Agreement or by the Act, including rights set forth in Article 14, and
except as limited by Section 8.5(c), each Limited Partner shall have the right,
for a purpose reasonably related to such Limited Partner's interest as a limited
partner in the Partnership, upon written demand with a statement of the purpose
of such demand and at such Limited Partner's own expense:
(1) to obtain a copy of the most recent annual and quarterly
reports filed with the Securities and Exchange Commission by the General
Partner pursuant to the Securities Exchange Act of 1934, as amended;
(2) to obtain a copy of the Partnership's federal, state and
local income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and
all amendments, together with executed copies of all powers of attorney
pursuant to which this Agreement, the Certificate and all amendments have
been executed; and
(5) to obtain true and full information regarding the amount of
cash and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to contribute
in the future, and the date on which each became a Partner.
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(b) NOTIFICATION OF CHANGES IN UNIT ADJUSTMENT FACTOR. The Partnership
shall notify each Limited Partner in writing of any change to the number of
Units as a result of a change to the Unit Adjustment Factor within ten (10)
Business Days of the date such change becomes effective.
(c) CONFIDENTIAL INFORMATION. Notwithstanding any other provision of
this Section 8.5, the General Partner may keep confidential from the Limited
Partners, for such period of time as the General Partner determines in its sole
and absolute discretion to be reasonable, any Partnership information that (i)
the General Partner believes to be in the nature of trade secrets or other
information the disclosure of which the General Partner in good faith believes
is not in the best interests of the Partnership or (ii) the Partnership is
required by law or by agreements with unaffiliated third parties to keep
confidential.
8.6 REDEMPTION RIGHT.
(a) GENERAL. Beginning one year after the date on which each Limited
Partner is admitted to the Partnership (except as otherwise contractually agreed
to by the General Partner), each Limited Partner (other than the General
Partner) shall have the right (the "Redemption Right") to cause the Partnership
to purchase on the Specified Redemption Date all or any of such Limited
Partner's Units for cash equal to the Redemption Amount, provided however, that
the General Partner has the authority to establish different payment schedules
to satisfy a Limited Partner's Redemption Right at the time the Units that are
the subject of such Redemption Right are issued. The Redemption Right may be
exercised by a Limited Partner (a "Redeeming Partner") at any time and from time
to time by delivering a Notice of Redemption to the General Partner not less
than ten (10) days prior to such redemption, provided that a Limited Partner may
not exercise the Redemption Right for less than one thousand (1,000) Partnership
Units unless such Redeeming Partner then holds less than one thousand (1,000)
Partnership Units, in which event the Redeeming Partner must exercise the
Redemption Right for all of the Partnership Units held by such Redeeming
Partner. The Assignee of any Limited Partner may exercise the rights of the
Limited Partner pursuant to this Section 8.6, and the Limited Partner shall be
deemed to have assigned those rights to the Assignee and shall be bound by the
exercise of the rights by the Limited Partner's Assignee, and payments shall be
made directly to the Assignee and not to the Limited Partner.
(b) IF DELIVERY OF COMMON SHARES IS PROHIBITED, ETC. Notwithstanding
the provisions of Section 8.6(a) and (d), a Partner shall not be entitled to
exercise the Redemption Right pursuant to Section 8.6(a) if (i) the delivery of
Common Shares to such Partner on the Specified Redemption Date would be
prohibited under the Articles of Incorporation, or (ii) in the opinion of
counsel to the General Partner, there is a significant risk that a delivery of
Common Shares to the Partner would cause the General Partner to no longer
qualify as a REIT, would constitute a violation of applicable securities laws,
or would result in the Partnership no longer being treated as a partnership for
federal income tax purposes. In addition, the consummation of a redemption
shall be subject to the expiration or termination of the applicable waiting
period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
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(c) SECTION 16 CONSIDERATIONS. If a Redemption Right is exercised by
a Redeeming Partner who is a "reporting person" within the meaning of Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the General Partner will promptly notify such Redeeming Partner as to whether
the Redemption Right will be satisfied with the payment of cash or through the
delivery of Common Shares. If the Partnership or the General Partner elects to
satisfy the Redemption Right with the payment of cash, the Redeeming Partner
shall have the right to either withdraw its exercise of the Redemption Right, or
delay the consummation of the redemption to the extent necessary to avoid a
"short-swing" profit under Section 16(b) of the Exchange Act.
(d) GENERAL PARTNER ASSUMPTION OF REDEMPTION RIGHT.
(1) Subject to the other provisions of this Section 8.6 and
Section 11.3 (Limited Partners' rights to transfer), beginning on the date one
year after a Limited Partner's admission to the Partnership (except as otherwise
contractually agreed to by the General Partner), the General Partner may assume
directly and satisfy the obligations of the Partnership as to a Limited
Partner's Redemption Right by paying to a Redeeming Partner either the Shares
Amount, or cash equal to the Redemption Amount as of the Specified Redemption
Date, with the choice of consideration to be determined at the sole option of
the General Partner. If the General Partner shall exercise and perform its right
to satisfy the Redemption Right in this manner, the Partnership shall have no
obligation to pay any amount to the Redeeming Partner with respect to such
Redeeming Partner's exercise of the Redemption Right, and each of the Redeeming
Partner, the Partnership, and the General Partner shall treat the transaction
between the General Partner and the Redeeming Partner as a sale of the Redeeming
Partner's Partnership Units to the General Partner for federal and state income
tax purposes. Each Redeeming Partner agrees to execute such documents as the
General Partner may reasonably require in connection with the payment of the
Redemption Amount. The General Partner shall at all times reserve and keep
available out of its authorized but unissued Common Shares, solely for the
purpose of effecting the exchange of Partnership Units for Common Shares, such
number of Common Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Partnership Units, and the exercise or conversion
of all other rights to acquire Common Shares. No Limited Partner shall, solely
by virtue of being the holder of one or more Partnership Units, be deemed to be
a shareholder of or have any other interest in the General Partner.
(2) Each Redeeming Partner agrees to execute such documents as
the General Partner may reasonably require in connection with, and as a
condition of, the issuance of Common Shares upon exercise of the Redemption
Right, including, without limitation, executing and delivering an investment
representation letter with respect to the matters set forth in Section 3.4(c)
and related matters.
8.7 EXTRAORDINARY TRANSACTIONS.
(a) The General Partner may not engage in any merger, consolidation
or other combination with or into another person or sale of all or substantially
all of its assets, or any reclassification, or any recapitalization (other than
stock splits and stock dividends or other events described in the definition of
"Unit Adjustment Factor") or change of outstanding
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Common Shares (a "Business Combination"), unless (i) the Limited Partners
receive, or have the opportunity to receive, the same consideration per Unit as
holders of Common Shares receive per Common Share in the transaction (without
regard to tax considerations), or (ii) Limited Partners (other than the General
Partner) holding at least 60% of the Units held by Limited Partners (other than
the General Partner) vote to approve the Business Combination.
(b) In addition to the requirements of Section 8.7(a), the General
Partner will not consummate a Business Combination in which the General Partner
conducts a vote of the shareholders of the General Partner unless the matter is
also submitted to a vote of the Partners. For purposes of the Partnership vote,
(i) each holder of Units (including the General Partner, as to its limited and
general partnership interests) shall be entitled to a number of votes equal to
the total votes to which the holder would have been entitled in the vote of the
General Partner's shareholders if the holder's Units had been exchanged for
Common Shares upon the exercise of a Redemption Right, (ii) in the Partnership
vote, the General Partner shall be deemed to vote all Units it holds
(representing both its general and limited partnership interests) in proportion
to the manner in which the General Partner's shareholders voted (disregarding
shareholders who did not vote), and (iii) the Business Combination shall be
deemed approved by the Partnership if the votes so recorded (the deemed vote
with respect to the General Partner's interest and the actual vote of the other
holders of Units) satisfy the standard for a favorable vote of the shareholders
of the General Partner.
(c) Notwithstanding the provisions of Section 8.7(a) and (b), the
General Partner shall be permitted, without compliance with the requirements of
Section 8.7(a) or (b): (i) to transfer all or part of its partnership interest
to an entity wholly owned by the General Partner, or if the General Partner is
wholly owned by another entity (the "Parent"), to transfer all or part of its
General Partner partnership interest to the Parent, (ii) to merge into any
entity wholly-owned by the General Partner or with any parent entity that wholly
owns the General Partner (in either such case no change shall be made to the
Unit Adjustment Factor as a result of that transaction and the surviving entity
shall be treated as was the General Partner), and (iii) to merge into Public
Storage Properties XI, Inc. (in which case the Unit Adjustment Factor shall be
adjusted as provided with respect to a Successor Entity to take into account the
ratio into which shares of the General Partner will be converted into shares of
Public Storage Properties XI, Inc.).
8.8 CONSENT OF CERTAIN LIMITED PARTNERS. Each of the properties listed
on Exhibit D (as well as any subsequently acquired property, the federal income
tax basis of which is determined by reference to the federal income tax basis of
a listed property, such as a property acquired in a "like-kind exchange" for a
listed property) is referred to as a "Designated Property." The Partnership may
not sell or otherwise dispose of any Designated Property during the ten year
period commencing on the date of the contribution to the Partnership of that
Designated Property in a transaction that will cause gain recognition to the
contributing partner, without the prior written consent of Public Storage, Inc.
The limitation on disposition of the preceding sentence shall not apply if, at
the time of the disposition, Public Storage, Inc. and its affiliated
partnerships then own less than 30% of the Units owned as of the date of this
Agreement. At the time of any subsequent contributions of property to the
Partnership, the General Partner may agree with the contributor to treat the
property as a Designated Property that
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may not be sold or disposed of by the Partnership without the contributor's
consent for a period to be agreed upon by the General Partner and the
contributor.
9. BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 RECORDS AND ACCOUNTING. The General Partner shall keep or cause to be
kept at the principal office of the Partnership appropriate books and records
with respect to the Partnership's business, including, without limitation, all
books and records necessary to provide to the Limited Partners any information,
lists and copies of documents required to be provided pursuant to Section 9.3.
Any records maintained by or on behalf of the Partnership in the regular course
of its business may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, micrographics or any other information storage device;
provided that the records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of the Partnership
shall be maintained for financial purposes on an accrual basis in accordance
with generally accepted accounting principles and for tax reporting purposes on
the accrual basis.
9.2 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar
year.
9.3 REPORTS.
(a) ANNUAL REPORTS. As soon as practicable, but in no event later than
120 days after the close of each Partnership Year, the General Partner shall
cause to be mailed to each Limited Partner as of the close of the Partnership
Year, an annual report containing financial statements of the Partnership, or of
the General Partner if such statements are prepared solely on a consolidated
basis with the General Partner, for such Partnership Year, presented in
accordance with generally accepted accounting principles, such statements to be
audited by a nationally recognized firm of independent public accountants
selected by the General Partner.
(b) QUARTERLY REPORTS. If the General Partner distributes quarterly
reports to its shareholders, as soon as practicable, but in no event later than
60 days after the close of each calendar quarter (except the last calendar
quarter of each year), the General Partner shall cause to be mailed to each
Limited Partner as of the last day of the calendar quarter, a report containing
unaudited financial statements of the Partnership, or of the General Partner, if
such statements are prepared solely on a consolidated basis with the General
Partner, and such other information as may be required by applicable law or
regulation, or as the General Partner determines to be appropriate.
10. TAX MATTERS
10.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange for
the preparation and timely filing of all returns of Partnership income, gains,
deductions, losses and other items required of the Partnership for federal and
state income tax purposes and shall use all reasonable efforts to furnish,
within 90 days of the close of each taxable year, the tax information reasonably
required by the General Partner and the Limited Partners for federal and state
income
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tax reporting purposes. The Limited Partners shall promptly provide the General
Partner with such information relating to the Contributed Properties, including
tax basis and other relevant information, as may be reasonably requested by the
General Partner from time to time.
10.2 TAX ELECTIONS. Except as otherwise provided in this Agreement, the
General Partner shall, in its sole and absolute discretion, determine whether to
make any available election pursuant to the Code; including without limitation,
the election under Section 754 of the Code in accordance with applicable
regulations. The General Partner shall have the right to seek to revoke any such
election (including, without limitation, the election under Section 754 of the
Code) upon the General Partner's determination in its sole and absolute
discretion that such revocation is in the best interests of the Partners.
10.3 TAX MATTERS PARTNER.
(a) GENERAL. The General Partner shall be the "tax matters partner"
of the Partnership for federal income tax purposes. Pursuant to Section 6223(c)
of the Code, upon receipt of notice from the IRS of the beginning of an
administrative proceeding with respect to the Partnership, the tax matters
partner shall furnish the IRS with the name, address and profit interest of each
of the Limited Partners; provided, however, that such information is provided to
the Partnership by the Limited Partners. The Limited Partners shall provide such
information to the Partnership as the General Partner shall reasonably request.
(b) POWERS. The tax matters partner is authorized, but not
required:
(1) to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings for the adjustment of
Partnership items required to be taken into account by a Partner for income
tax purposes (such administrative proceedings being referred to as a "tax
audit" and such judicial proceedings being referred to as "judicial
review"), and in the settlement agreement the tax matters partner may
expressly state that such agreement shall bind all Partners, except that
such settlement agreement shall not bind any Partner (a) who (within the
time prescribed pursuant to the Code and Regulations) files a statement
with the IRS providing that the tax matters partner shall not have the
authority to enter into a settlement agreement on behalf of such Partner or
(b) who is a "notice partner" (as defined in Section 6231 of the Code) or a
member of a "notice group" (as defined in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final
administrative adjustment at the Partnership level of any item required to
be taken into account by a partner for tax purposes (a "final adjustment")
is mailed or otherwise given to the tax matters partner, to seek judicial
review of such final adjustment, including the filing of a petition for
readjustment with the Tax Court or the United States Claims Court, or the
filing of a complaint for refund with the District Court of the United
States for the district in which the Partnership's principal place of
business is located;
(3) to intervene in any action brought by any other
Partner for judicial review of a final adjustment;
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(4) to file a request for an administrative adjustment
with the IRS at any time and, if any part of such request is not allowed by
the IRS, to file an appropriate pleading (petition, complaint or other
document) for judicial review with respect to such request;
(5) to enter into an agreement with the IRS to extend
the period for assessing any tax that is attributable to any item required
to be taken into account by a Partner for tax purposes, or an item affected
by such item; and
(6) to take any other action on behalf of the Partners
of the Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law or regulations.
(c) ELECTING LARGE PARTNERSHIP. The General Partner, in
its sole discretion, may cause the Partnership to elect to be an "electing large
partnership" under Section 775 of the Code. In that case, the General Partner
shall be the person authorized to act on behalf of the Partnership in any
federal or related state income tax proceeding for purposes of Section 6255 of
the Code and shall be authorized to undertake any and all actions on behalf of
the Partnership to the maximum extent contemplated under Sections 6240 through
6255 of the Code (including, without limitation, to bind the Partnership and all
Partners with respect to any settlement of any proceeding).
(d) REIMBURSEMENT. The tax matters partner shall receive
no compensation for its services. All third-party costs and expenses incurred by
the tax matters partner in performing its duties as such (including legal and
accounting fees) shall be borne by the Partnership. Nothing in this Agreement
shall be construed to restrict the Partnership from engaging an accounting firm
and a law firm to assist the tax matters partner in discharging its duties under
this Agreement, so long as the compensation paid by the Partnership for such
services is reasonable. The taking of any action and the incurring of any
expense by the General Partner pursuant to this Section 10.3, except to the
extent required by law, is a matter in the sole and absolute discretion of the
General Partner, and the provisions relating to indemnification of the General
Partner set forth in Section 7.8 shall be fully applicable to the General
Partner in its capacity as such.
10.4 ORGANIZATION EXPENSES. The Partnership shall elect to
deduct expenses, if any, incurred by it in organizing the Partnership ratably
over a 60-month period as provided in Section 709 of the Code.
10.5 WITHHOLDING. Each Limited Partner authorizes the
Partnership to withhold from or pay on behalf of or with respect to such Limited
Partner any amount of federal, state, local, or foreign taxes that the General
Partner determines that the Partnership is required to withhold or pay with
respect to any amount distributable or allocable to such Limited Partner
pursuant to this Agreement, including, without limitation, any taxes required to
be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445 or
1446 of the Code. Any amount paid on behalf of or with respect to a Limited
Partner shall constitute a loan by the Partnership to such Limited Partner,
which loan shall be repaid by such Limited Partner within 15 days after notice
from the General Partner that such payment must be made unless (a) the
Partnership withholds
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such payment from a distribution that would otherwise be made to the Limited
Partner or (b) the General Partner determines, in its sole and absolute
discretion, that such payment may be satisfied out of the available funds of the
Partnership that would, but for such payment, be distributed to the Limited
Partner. Any amounts withheld pursuant to the foregoing clauses (a) or (b) shall
be treated as having been distributed to such Limited Partner. Each Limited
Partner unconditionally and irrevocably grants to the Partnership a security
interest in such Limited Partner's Partnership Interest to secure such Limited
Partner's obligation to pay to the Partnership any amounts required to be paid
pursuant to this Section 10.5. If a Limited Partner fails to pay any amounts
owed to the Partnership pursuant to this Section 10.5 when due, the General
Partner may, in its sole and absolute discretion, elect to make the payment to
the Partnership on behalf of such defaulting Limited Partner, and in such event
shall be deemed to have loaned such amount to such defaulting Limited Partner,
and shall succeed to all rights and remedies of the Partnership as against such
defaulting Limited Partner (including, without limitation, the right to receive
distributions otherwise payable by the Partnership to such defaulting Limited
Partner). Any amounts payable by a Limited Partner under this provision shall
bear interest at the base rate on corporate loans at large United States money
center commercial banks, as published from time to time in the Wall Street
Journal, plus four percentage points (but not higher than the maximum lawful
rate) from the date such amount is due (i.e., 15 days after demand) until such
amount is paid in full. Each Limited Partner shall take such actions as the
Partnership or the General Partner shall request in order to perfect or enforce
the security interest created under this provision.
11. TRANSFERS AND WITHDRAWALS
11.1 TRANSFER.
(a) DEFINITION. The term "transfer," when used in this Article 11
with respect to a Partnership Unit, shall be deemed to refer to a transaction by
which the General Partner purports to assign its Partnership Interest to another
Person or by which a Limited Partner purports to assign its Limited Partnership
Interest to another Person, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise. The term "transfer" when used in this Article 11 does not include
any redemption or repurchase of Partnership Units by the Partnership from a
Partner or acquisition of Partnership Units from a Limited Partner by the
General Partner pursuant to Section 8.6 or otherwise. No part of the interest of
a Limited Partner shall be subject to the claims of any creditor, any spouse for
alimony or support, or to legal process, and may not be voluntarily or
involuntarily alienated or encumbered except as may be specifically provided for
in this Agreement.
(b) REQUIREMENTS. No Partnership Interest shall be transferred, in
whole or in part, except in accordance with the terms and conditions set forth
in this Article 11. Any transfer or purported transfer of a Partnership Interest
not made in accordance with this Article 11 shall be null and void.
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11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) GENERAL. The General Partner may not withdraw as a General
Partner or transfer its General Partnership Interest except in connection with a
transaction described in Section 8.7.
(b) TRANSFER TO PARTNERSHIP. The General Partner may transfer Limited
Partnership Interests held by it to the Partnership.
11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.
(a) GENERAL. Except as provided in this Agreement, a Limited Partner
may not transfer its Partnership Interest without the prior written consent of
the General Partner, which consent may be given or withheld by the General
Partner in its sole and absolute discretion. Notwithstanding the foregoing,
subject to the provisions of subsections (d), (e), (f) and (g) of this Section
11.3, and Sections 11.4 and 11.6, a Limited Partner may, without the prior
written consent of the General Partner
(i) transfer all or any portion of its Partnership Interest to
the General Partner,
(ii) transfer all or any portion of its Partnership Interest to
an Affiliate, another original Limited Partner or to an "Immediate Family"
member (i.e., as to any natural Person, such natural Person's spouse,
parents, descendants, nephews, nieces, brothers and sisters),
(iii) if such Limited Partner is a natural person, transfer all
or any portion of his or her Partnership Interest upon his or her death to
such Limited Partner's estate, executor, administrator or personal
representative or to such Limited Partner's beneficiaries pursuant to a
devise or bequest or by the laws of descent and distribution or to a trust
of which such Limited Partner is a settlor or co-settlor with a member of
his or her Immediate Family and the beneficiaries of which include no
Person other than such Limited Partner and/or such Limited Partner's
Immediate Family,
(iv) transfer all or any portion of its Partnership Interest
pursuant to the exercise of the Redemption Right,
(v) pledge all or any portion of its Partnership Interest to a
lending institution, that is not an Affiliate of such Limited Partner, as
collateral or security for a bona fide loan or other extension of credit,
and transfer such pledged Partnership Interest to such lending institution
in connection with the exercise of remedies under such loan or extension or
credit, and
(vi) if such Limited Partner is a corporation, partnership or
other business entity, transfer all or any portion of its Partnership
Interest to one or more entities that are wholly owned and controlled by
such Limited Partner or by distributing Partnership Interests in a
liquidation, winding up or otherwise without consideration to the equity
owners of such corporation, partnership or business entity.
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In order to effect any transfer, the Limited Partner must deliver to the General
Partner a duly executed copy of the instrument making such transfer and such
instrument must evidence the written acceptance by the assignee of, and
compliance with, all of the terms and conditions of this Agreement and represent
that such assignment was made in accordance with all applicable laws and
regulations.
(b) GENERAL PARTNER RIGHT OF FIRST REFUSAL. A Partner shall give to
the General Partner written notice of any proposed transfer that is not
otherwise permitted pursuant to Section 11.3(a) above, which notice shall state
(i) the identity of the proposed transferee, and (ii) the amount and type of
consideration proposed to be received for the transferred Partnership Units. The
General Partner shall have ten (10) days within which to give the transferring
Partner notice of its election to acquire the Partnership Units on the proposed
terms. If the General Partner does not so elect, the transferring Partner may
transfer such Partnership Units to a third party, on economic terms no more
favorable to the transferee than the proposed terms, subject to the other
conditions of this Section 11.3.
(c) ASSUMPTION OF OBLIGATIONS. It is a condition to any transfer
otherwise permitted under this Agreement (excluding Pledges of a Partnership
Interest, but including any transfer of the pledged Partnership Interest,
whether to the secured party or otherwise, pursuant to the secured party's
exercise of its remedies under such Pledge or the related loan or extension of
credit) that the transferee assumes by operation of law or express agreement all
of the obligations of the transferor Limited Partner under this Agreement with
respect to such transferred Partnership Interest and no such transfer (other
than pursuant to a statutory merger or consolidation in which all obligations
and liabilities of the transferor Partner are assumed by a successor corporation
by operation of law) shall relieve the transferor Partner of its obligations
under this Agreement without the approval of the General Partner, in its
reasonable discretion. Notwithstanding the foregoing, any transferee of any
transferred Partnership Interest shall be subject to any and all ownership
limitations contained in the Articles of Incorporation. Any transferee, whether
or not admitted as a Substituted Limited Partner, shall take subject to the
obligations of the transferor under this Agreement. Unless admitted as a
Substitute Limited Partner, no transferee, whether by a voluntary transfer, by
operation of law or otherwise, shall have rights under this Agreement, other
than the rights of an Assignee as provided in Section 11.5.
(d) INCAPACITATED LIMITED PARTNERS. If a Limited Partner is subject
to Incapacity, the executor, administrator, trustee, committee, guardian,
conservator or receiver of such Limited Partner's estate shall have all the
rights of a Limited Partner, but not more rights than those enjoyed by other
Limited Partners for the purpose of settling or managing the estate and such
power as the Incapacitated Limited Partner possessed to transfer all or any part
of his or her interest in the Partnership. The Incapacity of a Limited Partner,
in and of itself, shall not dissolve or terminate the Partnership.
(e) TRANSFERS CONTRARY TO SECURITIES LAWS. The General Partner may
prohibit any transfer otherwise permitted under Section 11.3 by a Limited
Partner of its Partnership Units if, in the opinion of legal counsel to the
Partnership, such transfer would require filing of a
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registration statement under the Securities Act or would otherwise violate any
federal or state securities laws or regulations applicable to the Partnership or
the Partnership Units.
(f) TRANSFERS AFFECTING TAX STATUS. No transfer by a Limited Partner
of its Partnership Units (or any economic or other interest, right or attribute)
may be made to any Person, including a redemption or exchange pursuant to
Section 8.6, if (i) in the opinion of legal counsel for the Partnership, it
would cause a termination of the Partnership for federal or state income tax
purposes that the General Partner believes would have a material adverse effect
or result in the Partnership being treated for federal income tax purposes as an
association taxable as a corporation, or (ii) such transfer is effectuated
through an "established securities market" or a "secondary market (or the
substantial equivalent)" within the meaning of Section 7704 of the Code.
Notwithstanding anything to the contrary in this Agreement, no interests in the
Partnership shall be issued in a transaction that is (or transactions that are)
registered or required to be registered under the Securities Act.
(g) TRANSFERS TO HOLDERS OF NONRECOURSE LIABILITIES. No transfer or
pledge of any Partnership Units may be made to a lender to the Partnership or
any Person who is related (within the meaning of Section 1.752-4(b) of the
Regulations) to any lender to the Partnership whose loan constitutes a
"nonrecourse liability" (within the meaning of Section 1.752-1(a)(2) of the
Regulations) without the consent of the General Partner, in its sole and
absolute discretion, provided that as a condition to any such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Redemption Amount any Partnership
Units that such lender or related person owns or would acquire upon foreclosure
of a security interest simultaneously with the time at which such lender would
be deemed to be a partner in the Partnership for purposes of allocating
liabilities to such lender under Section 752 of the Code.
(h) OTHER RESTRICTIONS. In addition to any other restrictions on
transfer contained in this Agreement, in no event may a transfer or assignment
of a Partnership Interest by any Partner (including a transfer upon exercise of
the Redemption Right) be made without the consent of the General Partner in its
sole and absolute discretion:
(i) to any person or entity who lacks the legal right, power or
capacity to own a Partnership Interest;
(ii) in violation of applicable law;
(iii) of any component portion of a Partnership Interest, such
as the Capital Account, or rights to distributions, separate and apart from
all other components of a Partnership Interest,
(iv) in the event such transfer adversely affects the General
Partner's ability to qualify as a REIT or could subject the General Partner
to any additional taxes under Section 857 or Section 4981 of the Code;
(v) if such transfer would cause the Partnership to become, with
respect to any employee benefit plan subject to Title I of ERISA, a "party-
in-interest" (as
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defined in Section 3(14) of ERISA) or a "disqualified person" (as defined
in Section 4975(c) of the Code);
(vi) if such transfer would, in the opinion of counsel to the
Partnership, cause any portion of the assets of the Partnership to
constitute assets of any employee benefit plan pursuant to Department of
Labor Regulations Section 2510.2-101; or
(vii) if such transfer subjects the Partnership to regulation
under the Investment Partnership Act of 1940, the Investment Advisors Act
of 1940 or the Employee Retirement Income Security Act of 1974, each as
amended.
11.4 SUBSTITUTED LIMITED PARTNERS.
(a) CONSENT OF GENERAL PARTNER REQUIRED. No Limited Partner shall
have the right to substitute a transferee as a Limited Partner in its place
without the prior written consent of the General Partner, which consent may be
given or withheld by the General Partner in its sole and absolute discretion.
The General Partner's failure or refusal to permit a transferee of any such
interests to become a Substituted Limited Partner shall not give rise to any
cause of action against the Partnership or any Partner.
(b) RIGHTS AND DUTIES OF SUBSTITUTED LIMITED PARTNERS. A transferee
who has been admitted as a Substituted Limited Partner in accordance with this
Article 11 shall have all the rights and powers and be subject to all the
restrictions and liabilities of a Limited Partner under this Agreement.
(c) AMENDMENT OF EXHIBIT A. Upon the admission of a Substituted
Limited Partner, the General Partner shall amend Exhibit A to reflect the name,
address, number of Partnership Units, and Percentage Interest of such
Substituted Limited Partner and to eliminate or adjust, if necessary, the name,
address and interest of the predecessor of such Substituted Limited Partner.
11.5 ASSIGNEES. If the General Partner, in its sole and absolute
discretion, does not consent to the admission of any permitted transferee under
Section 11.4 as a Substituted Limited Partner, such transferee shall be
considered an Assignee for purposes of this Agreement. An Assignee shall be
entitled to all the rights of an assignee of a limited partnership interest
under the Act, including the right to receive distributions from the Partnership
and the share of Profit, Loss, and gain attributable to the Partnership Units
assigned to such transferee, but shall not be deemed to be an owner of
Partnership Units for any other purpose under this Agreement, and shall not be
entitled to vote such Partnership Units in any matter presented to the Limited
Partners for a vote (such vote remaining with the transferor Limited Partner).
If any such transferee desires to make a further assignment of any such
Partnership Units, such transferee shall be subject to all the provisions of
this Article 11 to the same extent and in the same manner as any Limited Partner
desiring to make an assignment of Partnership Units.
11.6 GENERAL PROVISIONS.
(a) WITHDRAWAL OF LIMITED PARTNER. No Limited Partner may withdraw
from the Partnership other than as a result of a permitted transfer of all of
such Limited Partner's
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Partnership Units in accordance with this Article 11 or pursuant to a redemption
of all of its Partnership Units upon exercise of the Redemption Right.
(a) TRANSFER OF ALL PARTNERSHIP UNITS BY LIMITED PARTNER. Any
Limited Partner who shall transfer all of its Partnership Units in a transfer
permitted pursuant to this Article 11 or pursuant to the Redemption Right shall
cease to be a Limited Partner, except as otherwise provided in Section 11.5.
(b) TIMING OF TRANSFERS. Transfers pursuant to this Article 11 may
only be made on the first day of a fiscal quarter of the Partnership, unless the
General Partner otherwise agrees.
12. ADMISSION OF PARTNERS
12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor to all of the
General Partner's General Partnership Interest pursuant to Section 8.7 who is
proposed to be admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective upon such transfer, provided that,
in the case of transactions other than those described in Section 8.7(c),
Limited Partners representing a majority of the Percentage Interests (including
Limited Partnership Interests held by the General Partner) vote to admit such
person as successor General Partner, which votes shall be cast by such Limited
Partners in their sole and absolute discretion. Provided such vote of the
Limited Partners is obtained, any such transferee shall carry on the business of
the Partnership without dissolution. In each case, the admission shall be
subject to the successor General Partner executing and delivering to the
Partnership an acceptance of all of the terms and conditions of this Agreement
and such other documents or instruments as may be required to effect the
admission.
12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) GENERAL. A Person who makes a capital contribution to the
Partnership in accordance with this Agreement or who exercises an option to
receive Partnership Units shall be admitted to the Partnership as an Additional
Limited Partner only upon furnishing to the General Partner (a) evidence of
acceptance in form satisfactory to the General Partner of all of the terms and
conditions of this Agreement, including, without limitation, the power of
attorney granted in Article 16 and (b) such other documents or instruments as
may be required in the discretion of the General Partner in order to effect such
Person's admission as an Additional Limited Partner.
(b) CONSENT OF GENERAL PARTNER REQUIRED. Notwithstanding anything
to the contrary in this Section 12.2, no Person shall be admitted as an
Additional Limited Partner without the consent of the General Partner, which
consent may be given or withheld in the General Partner's sole and absolute
discretion. The admission of any Person as an Additional Limited Partner shall
become effective on the date upon which the name of such Person is recorded on
the books and records of the Partnership, following the consent of the General
Partner to such admission.
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12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE. For the admission to the
Partnership of any Partner, the General Partner shall take all steps necessary
and appropriate under the Act to amend the records of the Partnership and, if
necessary, to prepare as soon as practical an amendment of this Agreement
(including an amendment of Exhibit A) and, if required by law, shall prepare and
file an amendment to the Certificate and may for this purpose exercise the power
of attorney granted pursuant to Article 16.
13. DISSOLUTION AND LIQUIDATION
13.1 DISSOLUTION. The Partnership shall not be dissolved by the
admission of Substituted Limited Partners or Additional Limited Partners or by
the admission of a successor General Partner in accordance with the terms of
this Agreement. The Partnership shall dissolve, and its affairs shall be wound
up, upon the first to occur of any of the following ("Events of Dissolution"):
(a) the expiration of the Partnership's term as provided in Section
2.4;
(b) an event of withdrawal of the General Partner, as defined in
the Act, unless, within 90 days after the withdrawal, remaining Partners holding
a majority of the Units agree in writing to continue the business of the
Partnership and to the appointment, effective as of the date of withdrawal, of a
substitute General Partner;
(c) from and after the date of this Agreement through December 31,
2056, an election to dissolve the Partnership made by the General Partner with
the consent of the holders of a majority of the Percentage Interests (including
Limited Partnership Interests held by the General Partner), and on or after
January 1, 2056, an election to dissolve the Partnership made by the General
Partner, in its sole and absolute discretion;
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
(e) the sale of all or substantially all of the assets and
properties of the Partnership;
(f) the merger or other combination of the Partnership with or into
another entity; or
(g) the General Partner --
(1) makes an assignment for the benefit of creditors;
(2) files a voluntary petition in bankruptcy;
(3) is adjudged a bankrupt or insolvent, or has entered against
it an order for relief in any bankruptcy or insolvency proceeding;
(4) files a petition or answer seeking for itself any
reorganization, arrangements, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
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(5) files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against it in any
proceeding of this nature; or
(6) seeks, consents to or acquiesces in the appointment of a
trustee, receiver or liquidator of the General Partner or of all or any
substantial part of its properties.
13.2 WINDING UP.
(a) GENERAL. Upon the occurrence of an Event of Dissolution, the
Partnership shall continue solely for the purposes of winding up its affairs in
an orderly manner, liquidating its assets, and satisfying the claims of its
creditors and Partners. No Partner shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner (or, in the event there
is no remaining General Partner, any Person elected by a majority in interest of
the Limited Partners (the "Liquidator")) shall be responsible for overseeing the
winding up and dissolution of the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value of the
property, and the proceeds shall be applied and distributed in the following
order:
(1) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of or provision for
all of the Partnership's debts and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the
Partnership's debt and liabilities to the other Partners, pro rata in
accordance with amounts owed to each such Partner; and
(4) The balance, if any, to the General Partner and Limited
Partners in accordance with their Capital Accounts, after giving effect to
all contributions, distributions, and allocations for all periods.
The General Partner shall not receive any additional compensation for
any services performed pursuant to this Article 13, other than reimbursement of
its expenses.
(b) WHERE IMMEDIATE SALE OF PARTNERSHIP'S ASSETS IMPRACTICAL.
Notwithstanding the provisions of Section 13.2(a) that require liquidation of
the assets of the Partnership, but subject to the order of priorities set forth
in that provision, if prior to or upon dissolution of the Partnership the
Liquidator determines that an immediate sale of part or all of the Partnership's
assets would be impractical or would cause undue loss to the Partners, the
Liquidator may, in its sole and absolute discretion, defer for a reasonable time
the liquidation of any assets except those necessary to satisfy liabilities of
the Partnership (including to those Partners as creditors) or, with the consent
of the Partners holding a majority of the Partnership Units, distribute to the
Partners, in lieu of cash, as tenants in common and in accordance with the
provisions of Section 13.2(a), undivided interests in such Partnership assets as
the Liquidator deems not suitable for liquidation. Any such distributions in
kind shall be made only if, in the
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good faith judgment of the Liquidator, such distributions in kind are in the
best interest of the Partners, and shall be subject to such conditions relating
to the disposition and management of such properties as the Liquidator deems
reasonable and equitable and to any agreements governing the operation of such
properties at such time. The Liquidator shall determine the fair market value of
any property distributed in kind using such reasonable method of valuation as it
may adopt.
13.3 LIQUIDATION. Subject to Section 13.4, in the event the Partnership
is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g),
distributions shall be made pursuant to this Article 13 to the General Partner
and Limited Partners who have positive Capital Accounts in compliance with
Regulations Section 1.704-1(b)(2)(ii)(b)(2) (including any timing requirements
of those provisions). In the discretion of the General Partner, a pro rata
portion of the distributions that would otherwise be made to the General Partner
and Limited Partners pursuant to this Article 13 may be: (a) distributed to a
liquidating trust established for the benefit of the General Partner and Limited
Partners for the purpose of liquidating Partnership assets, collecting amounts
owed to the Partnership, and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising out of or in
connection with the Partnership (the assets of any such trust shall be
distributed to the General Partner and Limited Partners from time to time, in
the reasonable discretion of the General Partner, in the same proportions as the
amount distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement); or (b) withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized portion of
any installment obligations owed to the Partnership, provided that such withheld
amounts shall be distributed to the General Partner and Limited Partners as soon
as practicable.
13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this Article 13, in the event the Partnership is liquidated within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Event of
Dissolution has occurred, the Partnership's property shall not be liquidated,
the Partnership's liabilities shall not be paid or discharged, and the
Partnership's affairs shall not be wound up.
13.5 RIGHTS OF LIMITED PARTNERS. Except as specifically provided in this
Agreement, each Limited Partner shall look solely to the assets of the
Partnership for the return of its capital contribution and shall have no right
or power to demand or receive property other than cash from the Partnership.
Except as specifically provided in this Agreement, no Limited Partner shall have
priority over any other Limited Partner as to the return of its capital
contributions, distributions, or allocations.
13.6 NOTICE OF DISSOLUTION. If an Event of Dissolution or an event occurs
that would, but for provisions of Section 13.1, result in a dissolution of the
Partnership, the General Partner shall, within 30 days of the event, provide
written notice of the event to each of the Partners and to all other parties
with whom the Partnership regularly conducts business (as determined in the sole
and absolute discretion of the General Partner) and shall publish notice of the
event in a newspaper of general circulation in each place in which the
Partnership regularly conducts business (as determined in the sole and absolute
discretion of the General Partner).
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13.7 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the
completion of the liquidation of the Partnership as provided in Section 13.2,
the Partnership shall be terminated and the Certificate and all qualifications
of the Partnership as a foreign limited partnership in jurisdictions other than
the State of California shall be canceled and such other actions as may be
necessary to terminate the Partnership shall be taken.
13.8 REASONABLE TIME FOR WINDING-UP. A reasonable time shall be allowed
for the orderly winding-up of the business and affairs of the Partnership and
the liquidation of its assets pursuant to Section 13.2, in order to minimize any
losses otherwise attendant upon such winding-up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
14. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
14.1 AMENDMENTS.
(a) GENERAL. Amendments to this Agreement may be proposed by
the General Partner or by any Limited Partners holding 25 percent or more of the
Partnership Units. Following such proposal, the General Partner shall submit any
proposed amendment to the Limited Partners. The General Partner shall seek the
written vote of the Partners on the proposed amendment or shall call a meeting
to vote on the proposal and to transact any other business that it may deem
appropriate. For purposes of obtaining a written vote, the General Partner may
establish a Partnership Record Date and require a response within a reasonable
specified time, but not less than 15 days, and FAILURE TO RESPOND IN SUCH TIME
PERIOD SHALL CONSTITUTE A VOTE THAT IS CONSISTENT WITH THE GENERAL PARTNER'S
RECOMMENDATION WITH RESPECT TO THE PROPOSAL. Except as provided in Section
14.1(b) or 14.1(c), a proposed amendment shall be adopted and be effective as an
amendment to this Agreement if it is approved by the General Partner and it
receives the consent of a majority of the Partnership Units held by the Limited
Partners (including Partnership Units held by the General Partner in its
capacity as a Limited Partner).
(b) GENERAL PARTNER'S POWER TO AMEND. Notwithstanding Section
14.1(a), the General Partner shall have the power, without the consent of the
Limited Partners, to amend this Agreement as may be required to facilitate or
implement any of the following purposes:
(1) to add to the obligations of the General Partner or
surrender any right or power granted to the General Partner or any
Affiliate of the General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination,
or withdrawal of Partners in accordance with this Agreement;
(3) to set forth the rights, powers, duties, and
preferences of the holders of any additional Partnership Interests issued
pursuant to Section 4.2(b);
(4) to reflect a change that does not adversely affect
the Limited Partners in any material respect, or to cure any ambiguity,
correct or supplement any provision in this Agreement not inconsistent with
law or with other provisions, or make
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other changes with respect to matters arising under this Agreement that
will not be inconsistent with law or with the provisions of this Agreement;
(5) in any order, directive, opinion, ruling or regulation of a
federal or state agency or contained in federal or state law; and
(6) to reflect such changes as are reasonably necessary for the
General Partner to maintain its status as a REIT.
The General Partner will notify the Limited Partners when any material
action under this Section 14.1(b) is taken in the next regular communication to
the Limited Partners.
(c) CONSENT OF ADVERSELY AFFECTED PARTNER REQUIRED. Notwithstanding
Section 14.1(a), this Agreement shall not be amended without the consent of each
Partner adversely affected if such amendment would:
(1) convert a Limited Partner's interest in the Partnership into
a general partner's interest,
(2) modify the limited liability of a Limited Partner,
(3) alter rights of the Partner to receive distributions pursuant
to Article 5, or the allocations specified in Article 6 (except as
permitted pursuant to Section 4.2 and Section 14.1(b)(3)),
(4) alter or modify the Redemption Right or the Redemption Amount
as set forth in Section 8.6 and related definitions,
(5) cause the termination of the Partnership prior to the time
set forth in Sections 2.5 or 13.1,
(6) affect the operation of the Unit Adjustment Factor in a
manner adverse to the Limited Partners, or
(7) impose on the Limited Partners any obligation to make
additional capital contributions to the Partnership or (viii) amend this
Section 14.1(c).
Further, no amendment may alter the restrictions of the General Partner's
authority set forth in Section 7.2 without the consent specified in that
Section.
14.2 MEETINGS OF THE PARTNERS.
(a) GENERAL. Meetings of the Partners may be called by the General
Partner and shall be called upon the receipt by the General Partner of a written
request by Limited Partners holding 25 percent or more of the Partnership Units.
The call shall state the nature of the business to be transacted. Notice of any
such meeting shall be given to all Partners not less than seven days nor more
than 30 days prior to the date of such meeting. Partners may vote in person or
by proxy at such meeting. Whenever the vote or consent of Partners is permitted
or required under this Agreement, such vote or consent may be given at a meeting
of Partners or may be given in accordance with the procedure prescribed in
Section 14.1. Except as otherwise
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expressly provided in this Agreement, the consent of holders of a majority of
the Percentage Interests (including Limited Partnership Interests held by the
General Partner) shall control.
(b) ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken at a meeting of the Partners may be taken without a meeting if a
written consent setting forth the action so taken is signed by a majority of the
Percentage Interests of the Partners (or such other percentage as is expressly
required by this Agreement for such action to be taken at a meeting). Such
consent may be in one instrument or in several instruments, and shall have the
same force and effect as a vote of a majority of the Percentage Interests of the
Partners (or such other percentage as is expressly required by this Agreement
for such action to be taken at a meeting). Such consent shall be filed with the
General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
(c) PROXIES. Each Limited Partner may authorize any Person or
Persons to act for him by proxy on all matters in which a Limited Partner is
entitled to participate, including waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Limited Partner or
its attorney-in-fact. No proxy shall be valid after the expiration of 11 months
from the date of the proxy unless otherwise provided in the proxy. Every proxy
shall, unless otherwise specifically provided in the proxy, be revocable at the
pleasure of the Limited Partner executing it.
(d) CONDUCT OF MEETING. Each meeting of Partners shall be conducted
by the General Partner or such other Person as the General Partner may appoint
pursuant to such rules for the conduct of the meeting as the General Partner or
such other Person deems appropriate, including establishment of a Partnership
Record Date for such meeting.
15. GENERAL PROVISIONS
15.1 ADDRESSES AND NOTICE. All notices and demands under this Agreement
shall be in writing, and may be either delivered personally (which shall include
deliveries by courier) by telefax, telex or other wire transmission (with
request for evidence of receipt in a manner appropriate with respect to
communications of that type, provided that a confirmation copy is concurrently
sent by a nationally recognized express courier for overnight delivery) or
mailed, postage prepaid, by certified or registered mail, return receipt
requested, directed to the parties at their respective addresses set forth on
Exhibit A, as it may be amended from time to time, and, if to the Partnership,
such notices and demands sent in the foregoing manner must be delivered at its
principal place of business set forth above. Notices delivered personally or by
telefax, telex or other wire transmission shall be effective on the first
Business Day following the date of delivery or transmission. Notices that are
mailed shall be deemed to have been received three (3) Business Days following
the date so mailed. Any party may designate a different address to which notices
and demands shall subsequently be directed by written notice given in the same
manner and directed to the Partnership at its office.
15.2 TITLES AND CAPTIONS. All article or Section titles or captions in this
Agreement are for convenience only. They shall not be deemed part of this
Agreement and in no way
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define, limit, extend or describe the scope or intent of any provisions of this
Agreement. Except as specifically provided otherwise, references to "Articles"
and "Sections" are to Articles and Sections of this Agreement.
15.3 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
15.4 FURTHER ACTION. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
15.5 BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the parties and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
15.6 WAIVER OF PARTITION. The Partners agree that the Partnership
properties are not and will not be suitable for partition. Accordingly, each of
the Partners irrevocably waives any and all rights (if any) that it may have to
maintain any action for partition of any of the Partnership properties.
15.7 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the matters contained in this
Agreement; it supersedes any prior agreements or understandings among them and
it may not be modified or amended in any manner other than pursuant to Article
14.
15.8 SECURITIES LAW PROVISIONS. The Partnership Units have not been
registered under the federal or state securities laws of any state and,
therefore, may not be resold unless appropriate federal and state securities
laws, as well as the provisions of Article 11, have been complied with.
15.9 REMEDIES NOT EXCLUSIVE. Any remedies contained in this
Agreement for breaches of obligations under this Agreement shall not be deemed
to be exclusive and shall not impair the right of any party to exercise any
other right or remedy, whether for damages, injunction or otherwise.
15.10 TIME. Time is of the essence of this Agreement.
15.11 CREDITORS. None of the provisions of this Agreement shall be
for the benefit of, or shall be enforceable by, any creditor of the Partnership.
15.12 WAIVER. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach of this Agreement shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
15.13 EXECUTION COUNTERPARTS. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all the parties to this Agreement, notwithstanding that all such parties are not
signatories to the original or the same counterpart.
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Each party shall become bound by this Agreement immediately upon affixing its
signature to this Agreement.
15.14 APPLICABLE LAW. This Agreement shall be construed in
accordance with and governed by the laws (other than the law governing the
choice of law) of the State of California, without regard to the principles of
conflicts of law. In the event of a conflict between any provision of this
Agreement and any nonmandatory provision of the Act, the provisions of this
Agreement shall control and take precedence.
15.15 INVALIDITY OF PROVISIONS. If any provision of this Agreement
is or becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained in this
Agreement shall not be affected.
15.16 NO THIRD-PARTY RIGHTS CREATED. The provisions of this
Agreement are solely for the purpose of defining the interests of the Partners,
inter se; and no other person, firm or entity (i.e., a party who is not a
signatory to this Agreement or a permitted successor to such a signatory) shall
have any right, power, title or interest by way of subrogation or otherwise, in
and to the rights, powers, title and provisions of this Agreement.
16. POWER OF ATTORNEY
16.1 POWER OF ATTORNEY.
(a) SCOPE. Each Limited Partner and each Assignee constitutes
and appoints the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each, and each of those acting singly, in each case with
full power of substitution, as its true and lawful agent and attorney-in-fact,
with full power and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices
(i) all certificates, documents and other instruments
(including, without limitation, this Agreement and the Certificate and
all amendments or restatements of the Agreement or the Certificate)
that the General Partner or the Liquidator deems appropriate or
necessary to form, qualify or continue the existence or qualification
of the Partnership as a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of
California and in all other jurisdictions in which the Partnership may
conduct business or own property;
(ii) all instruments that the General Partner deems
appropriate or necessary to reflect any amendment, change,
modification or restatement of this Agreement in accordance with its
terms;
(iii) all conveyances and other instruments or
documents that the General Partner deems appropriate or necessary to
reflect the dissolution and liquidation of the Partnership pursuant to
the terms of this Agreement, including, without limitation, a
certificate of cancellation;
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(iv) all instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to, or
other events described in, Articles 11, 12 or 13 or the capital
contribution of any Partner; and
(v) all certificates, documents and other instruments
relating to the determination of the rights, preferences and
privileges of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots,
consents, approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner, to make,
evidence, give, confirm or ratify any vote, consent, approval, agreement or
other action that is made or given by the Partners under this Agreement or is
consistent with the terms of this Agreement or appropriate or necessary, in the
sole discretion of the General Partner, to effectuate the terms or intent of
this Agreement.
Nothing contained in this Agreement shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article 14
or as may be otherwise expressly provided for in this Agreement.
(b) IRREVOCABILITY. The foregoing power of attorney is declared to
be irrevocable and a power coupled with an interest, in recognition of the fact
that each of the Partners will be relying upon the power of the General Partner
to act as contemplated by this Agreement in any filing or other action by it on
behalf of the Partnership, and it shall survive and not be affected by the
subsequent Incapacity of any Limited Partner or Assignee and the transfer of all
or any portion of such Limited Partner's or Assignee's Partnership Units and
shall extend to such Limited Partner's or Assignee's heirs, successors, assigns
and personal representatives. Each such Limited Partner or Assignee agrees to be
bound by any representation made by the General Partner, acting in good faith
pursuant to such power of attorney; and each such Limited Partner or Assignee
waives any and all defenses that may be available to contest, negate or
disaffirm the action of the General Partner, taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver to
the General Partner or the Liquidator, within 15 days after receipt of the
General Partner's request, such further designation, powers of attorney and
other instruments as the General Partner or the Liquidator, as the case may be,
deems necessary to effectuate this Agreement and the purposes of the
Partnership.
The parties have signed this Agreement as of the date specified in the
introductory paragraph of this Agreement.
GENERAL PARTNER:
AMERICAN OFFICE PARK PROPERTIES, INC.,
a California corporation
By: s/ Ronald L. Havner, Jr.
---------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
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LIMITED PARTNERS:
AMERICAN OFFICE PARK PROPERTIES, INC.,
a California corporation
By: s/ Ronald L. Havner, Jr.
---------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
PUBLIC STORAGE, INC.,
a California corporation
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice President
SEI/PSP II JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP III JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
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PS PARTNERS V, LTD.,
a California Limited Partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP V JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP VI JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
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SEI/PSP VI JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP VII JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
PS PARTNERS VIII, LTD.,
a California Limited Partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP I JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
PS PARTNERS II, LTD.,
a California limited partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
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PS TEXAS HOLDINGS, LTD.,
a Texas limited partnership
By: PS GPT Properties, Inc.,
a California corporation,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
SEI/PSP IV JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
---------------------------------
David P. Singelyn, Vice
President
GALAXY PARTNERSHIP,
a Maryland general partnership
By: s/ Andrew J. Czekaj
---------------------------------
Andrew J. Czekaj, General Partner
GALAXY ASSOCIATES, L.L.C.,
a Virginia limited liability company
By: s/ Andrew J. Czekaj
---------------------------------
Andrew J. Czekaj, Manager
FARATON CORP.,
a British Virgin Islands corporation
By: s/ John Pritchard
---------------------------------
John Pritchard, Authorized Officer
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<PAGE>
EXHIBIT 10.9
MERGER AND CONTRIBUTION AGREEMENT
[Exhibits to this Agreement have been omitted
and will be furnished to the Securities and
Exchange Commission upon request]
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TABLE OF CONTENTS
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ARTICLE I DEFINITIONS................................................ 2
ARTICLE II CONTRIBUTION AND MERGER.................................... 14
2.1 Contribution............................................... 14
2.2 Merger..................................................... 14
2.3 The Closing................................................ 14
2.4 Actions at the Closing..................................... 14
2.5 Additional Action.......................................... 15
2.6 Conversion of Securities................................... 15
2.7 Certificate of Incorporation............................... 15
2.8 Acquisition Corporation By-laws............................ 15
2.9 Directors and Officers..................................... 15
2.10 No Further Rights.......................................... 15
2.11 Closing of Transfer Books.................................. 15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CRF...................... 16
3.1 Organization, Power and Authority, and Qualification....... 16
3.2 Authority Relative to this Agreement and the Transactions.. 16
3.3 Binding Obligation......................................... 16
3.4 No Violation............................................... 16
3.5 Bankruptcy................................................. 17
3.6 Non-Foreign Person......................................... 17
3.7 Leases..................................................... 17
3.8 Acquiport Financial Statements............................. 18
3.9 Compliance With Laws....................................... 18
3.10 Environmental Matters/Soils Conditions..................... 18
3.11 No Litigation.............................................. 18
3.12 Assessments................................................ 18
3.13 Eminent Domain............................................. 19
3.14 Insurance Claims........................................... 19
3.15 Securities Representation.................................. 19
3.16 Tax Matters Representation................................. 19
3.17 Acquiport Three Organization............................... 19
3.18 Absence of Liabilities..................................... 20
3.19 Tax Filing................................................. 20
3.20 Contracts.................................................. 20
3.21 Qualified Institutional Buyer.............................. 20
3.22 Acquiport Shares........................................... 20
3.23 Disclaimer of CRF and Acquiport
Representations and Warranties............................. 20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF
ACQUISITION CORPORATION OP AND AOPP........................ 21
4.1 Organization, Power and Authority, and
Qualification of AOPP...................................... 21
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4.2 Organization, Power and Authority, and
Qualification of Acquisition Corporation,
OP, PSA, PSP11............................................. 22
4.3 Governing Documents........................................ 22
4.4 REIT Status................................................ 23
4.5 Authority Relative to this Agreement and Transactions...... 23
4.6 Binding Obligation......................................... 23
4.7 Issuance of Acquiport AOPP Shares and OP Units............. 24
4.8 No Violation............................................... 24
4.9 Bankruptcy................................................. 25
4.10 Disclosure................................................. 25
4.11 AOPP Entities Financial Statements......................... 25
4.12 Adequate Disclosure........................................ 26
4.13 AOPP/OP/Acquisition Corporation Absence of
Undisclosed Liabilities.................................... 26
4.14 PSP11 Absence of Undisclosed Liabilities................... 26
4.15 PSP11 Public Information................................... 26
4.16 Capitalization............................................. 27
4.17 Compliance with Laws....................................... 27
4.18 Title Matters.............................................. 27
4.19 REIT Properties Compliance Standards....................... 28
4.20 Environmental Matters/Soil Conditions...................... 29
4.21 Leases..................................................... 29
4.22 Contracts.................................................. 29
4.23 No Litigation or Adverse Events............................ 30
4.24 Non-Foreign Person......................................... 30
4.25 No UBTI.................................................... 30
4.26 Employment Agreements...................................... 30
4.27 Assessments................................................ 30
4.28 Eminent Domain............................................. 30
4.29 Insurance Claims........................................... 31
4.30 Disclaimer of AOPP Representations and
Warranties................................................. 31
ARTICLE V RELEASE.................................................... 32
5.1 Release.................................................... 32
ARTICLE VI THE CLOSING................................................ 32
6.1 Deliveries by Acquiport and CRF............................ 32
6.2 Deliveries by Acquisition Corporation and
AOPP....................................................... 34
6.3 Closing Prorations......................................... 35
6.4 Closing Costs.............................................. 37
6.5 Possession................................................. 37
6.6 Notices to Tenants......................................... 37
6.7 Reporting Requirements..................................... 37
ARTICLE VII INDEMNITY.................................................. 38
7.1 AOPP/OP General Indemnity.................................. 38
7.2 CRF General Indemnity...................................... 38
7.3 Securities Indemnification................................. 38
7.4 Limited Securities Indemnification by CRF.................. 39
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7.5 Conduct of Indemnification Proceedings..................... 40
7.6 Contribution............................................... 41
7.7 Liability Threshold........................................ 41
7.8 Maximum Liability.......................................... 42
7.9 Survival................................................... 42
ARTICLE VIII INDUSTRY CENTER............................................ 43
ARTICLE IX GENERAL PROVISIONS......................................... 43
9.1 Survival of Representations and
Warranties................................................. 43
9.2 Specific Performance....................................... 44
9.3 Commissions................................................ 44
9.4 Confidentiality/ No Third Party
Beneficiary................................................ 45
9.5 Joint and Several Obligations.............................. 45
9.6 Notices.................................................... 46
9.7 Execution of Documents by
Acquiport and CRF.......................................... 47
9.8 Successors and Assigns..................................... 47
9.9 Governing Law.............................................. 48
9.10 Enforcement................................................ 48
9.11 Jurisdiction and Venue..................................... 49
9.12 Time of the Essence........................................ 49
9.13 Severability............................................... 49
9.14 Exhibits................................................... 49
9.15 Further Assurances......................................... 49
9.16 Counterparts............................................... 49
9.17 No Waiver.................................................. 50
9.18 Entire Agreement........................................... 50
9.19 Legal Representation and Construction...................... 50
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<PAGE>
MERGER AND CONTRIBUTION AGREEMENT
---------------------------------
THIS MERGER AGREEMENT (this "Agreement") is made and entered into as
of December 23, 1997, by and between Acquiport Two Corporation, a Delaware
corporation ("Acquiport Two"), Acquiport Three Corporation, a Delaware
corporation ("Acquiport Three"), New York State Common Retirement Fund, a public
pension fund created pursuant to Article 9 of the New York Retirement and Social
Security Law ("CRF"), American Office Park Properties, L.P., a California
limited partnership (the "OP"), American Office Park Properties, Inc., a
California corporation ("AOPP"), and AOPP Acquisition Corp. Three, a California
corporation ("Acquisition Corporation").
RECITALS
A. AOPP is a self managed, privately held real estate investment
trust. Approximately 97% of AOPP is owned by Public Storage, Inc., a California
corporation ("PSA"). PSA is a publicly traded real estate investment trust.
Acquisition Corporation is a qualified REIT subsidiary of AOPP, and AOPP owns
all of the issued and outstanding shares of Acquisition Corporation.
B. Acquiport Two owns, among others, three (3) commercial properties
(as more particularly defined in Article I, below, the "Acquiport Two
Properties"). Acquiport Three owns three (3) commercial properties (as more
particularly defined in Article I, below, the "Acquiport Three Properties").
C. This Agreement contemplates (i) a contribution to the OP of the
Acquiport Two Properties plus cash in the amount of One Million Dollars
($1,000,000) (collectively, the "Contribution"), and (ii) a merger of Acquiport
Three into Acquisition Corporation (the "Merger"). Acquiport Two shall receive
1,512,718 "OP Units" (hereafter defined) on account of the Contribution. CRF
has assigned prior to the Merger its right to receive the AOPP shares on account
of the Merger to Acquiport Two. Acquiport Two shall receive 2,970,134 shares of
AOPP common stock on account of the Merger. The Contribution and Merger shall
occur substantially concurrently. The parties contemplate the subsequent
conversion of AOPP to a publicly traded REIT listed on the New York or American
Stock Exchange (the "Listing").
D. AOPP is the sole general partner of the OP. Substantially all of
the assets of AOPP are held by and through the OP, other than the "Baldon
Properties" (hereafter defined), which are held by Baltimore and Charles
Associates, a Maryland general partnership, and Monroe Parkway L.L.C., a
Virginia limited liability company (individually and collectively, "Baldon"),
each of which, directly or indirectly, are wholly owned by AOPP. The OP and
Baldon currently hold a combined total
<PAGE>
of 42 commercial AOPP Properties (as more particularly defined in Article I,
below, the "AOPP Properties").
E. Public Storage Properties XI, Inc. ("PSP11") is a publicly traded
real estate investment trust that is listed on the American Stock Exchange.
Approximately 37% of PSP11 is owned by PSA and "Affiliates" (hereafter defined)
thereof, and the balance of PSP11 is owned by individuals or entities that are
not Affiliates of PSA. PSP11 owns 11 self-storage properties, 2 combination
self-storage/business park properties and 2 business park properties (said 2
business park properties being more particularly defined in Article I, below, as
the "PSP11 Business Park Properties").
F. PSA owns 11 properties totalling approximately 730,000 net
rentable square feet (as more particularly defined in Article I, below, the "PSA
Business Park Properties"). It is contemplated that as promptly as possible
after the "Closing" (hereafter defined), PSP11 will (i) transfer the 11 self
storage and the 2 combination properties to PSA in exchange for the PSA Business
Park Properties and (ii) AOPP will concurrently merge with and into PSP11 (the
"Listing Merger") and the surviving real estate investment trust will be renamed
PS Business Parks, Inc. and will be listed on the New York or American Stock
Exchange. It is contemplated that PS Business Parks, Inc., directly and
indirectly through the OP interests, will own 62 properties, comprised of the 6
Acquiport Properties, 43 AOPP Properties (including the Baldon Properties), 2
PSP11 Business Park Properties and 11 PSA Business Park Properties. The
Contribution, Merger and Listing, and the steps described in this Agreement and
the Closing Documents taken to achieve the same, are sometimes collectively
referred to herein as the "Transactions".
G. Acquiport has agreed to the Transactions on the condition that
the Listing occur on or prior to eighteen (18) months after the Closing. If the
Listing has not been achieved on or before such date (provided such failure is
not due to the failure of Acquiport or CRF to reasonably cooperate in the
Listing), Acquiport Two shall have the option to unwind the Transactions to the
extent and on the terms and conditions set forth in the "Unwind Agreement" (as
hereinafter defined).
AGREEMENT
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NOW, THEREFORE in consideration of the foregoing and the mutual
promises and covenants set forth herein, the parties hereto hereby agree as
follows:
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ARTICLE I
DEFINITIONS
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Certain of the terms used in this Agreement that are not otherwise
defined herein shall have the meanings set forth below.
1.1 "Act" shall mean the Securities Act of 1933, as amended.
1.2 "Acquiport" shall mean Acquiport Two and Acquiport Three,
collectively.
1.3 "Acquiport AOPP Shares" shall mean the 2,970,134 AOPP Shares
received by Acquiport Two as consideration for the Merger.
1.4 "Acquiport OP Units" shall mean 1,512,718 OP Units received by
Acquiport Two as consideration for the Contribution.
1.5 "Acquiport Three" shall mean Acquiport Three Corporation, a
Delaware corporation.
1.6 "Acquiport Two" shall mean Acquiport Two Corporation, a Delaware
corporation.
1.7 "Acquiport Financial Statements" shall mean the financial
statements attached hereto as Exhibit A.
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1.8 "Acquiport Two Properties" or "Acquiport Two Property" and
"Acquiport Three Properties" or "Acquiport Three Properties" shall respectively
mean those certain six commercial properties listed on Exhibit B and which are
---------
identified as Acquiport Two or Acquiport Three, as applicable, including,
without limitation, the Real Property more particularly described in Exhibits C-
----------
1 through C-6, and the Appurtenances and Improvements thereon or associated
- -------------
therewith.
1.9 "Acquiport Properties" shall mean collectively the Acquiport Two
Properties and Acquiport Three Properties.
1.10 "Acquiport Review Material" shall mean the documents and
information listed on Exhibit D or otherwise made available to AOPP Entities
---------
relating to the Acquiport Properties in the possession or control of CRF
Representatives.
1.11 "Acquiport Three Shares" shall mean all of the shares of common
stock of Acquiport Three.
1.12 "Acquiport Three Share Certificate" shall mean certificates
representing the Acquiport Shares, in the form of Exhibit E.
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1.13 "Affiliate" shall mean any person or entity defined as an
"affiliate" in section 405 of Reg C under the SEC rules.
1.14 "Agreement Among Shareholders and Company" shall mean the
agreement attached hereto as Exhibit F.
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1.15 "AOPP" shall mean the reincorporated American Office Park
Properties, Inc., a California corporation.
1.16 "AOPP Board" shall have the meaning contained in the Agreement
Among Shareholders and Company.
1.17 "AOPP Business Plan" shall mean the operating business plan
attached hereto as Exhibit G, which shall be updated annually.
---------
1.18 "AOPP Governance Amendment" shall mean, individually and
collectively, the Amended and Restated Agreement of Limited Partnership of
American Office Park Properties, L.P., and the supplements and amendments to the
AOPP articles of incorporation, bylaws and other governing documents attached
hereto as Exhibit H.
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1.19 "AOPP Entities" or "AOPP Entity" shall mean collectively AOPP,
Acquisition Corporation, PSP11, the OP, and Baldon.
1.20 "AOPP Entities Financial Statements" shall mean balance sheets,
income statements, statements of shareholder equity, and statements of cash
flow, as of September 30, 1997 (which is attached hereto as Exhibit I), and for
---------
each of the years 1994, 1995 and 1996 for each of the AOPP Entities (except
Baldon), which statements have been prepared in accordance with generally
accepted accounting principles. To the extent available, the AOPP Entities
Financial Statements shall be audited by independent certified public
accountants, otherwise the AOPP Financial Entities Statements shall be certified
by the chief financial officer of the applicable AOPP Entities. The foregoing
shall be deemed delivered with respect to the OP provided the requested
information with respect to the OP is included as part of the consolidated
financial statements of AOPP.
1.21 "AOPP Properties" shall mean those certain 43 properties
(including the Baldon Properties) listed on Exhibit J, including, without
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limitation, the Appurtenances and Improvements thereon or associated therewith.
1.22 "AOPP Representatives" shall mean collectively AOPP, PSA, PSP11,
OP, Baldon and their respective agents (including any current on site property
managers), advisors, officers, directors, affiliates, consultants, employees,
attorneys and representatives.
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1.23 "AOPP Review Material" shall mean those documents and
information listed on Exhibit K relating to the REIT Properties in the
---------
possession or control of any AOPP Representatives.
1.24 "AOPP Shares" shall mean shares of AOPP common stock.
1.25 "AOPP Share Certificates" shall mean certificates representing
the Acquiport AOPP Shares, in the form of Exhibit L.
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1.26 "Approved Title Form" shall mean a title insurance commitment or
pro forma title policy issued by the Title Company in the form attached hereto
as Exhibit M.
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1.27 "Appurtenances" shall mean all rights, privileges, interests,
licenses, claims, easements, benefits, covenants, conditions and servitudes of
any type or nature which are appurtenant to or otherwise benefit a parcel of
Land and/or the Improvements located thereon, including without limitation, all
minerals, oil, gas and other hydrocarbon substances on or under the Land, as
well as all development rights, air rights, water, water rights and water stock
relating to a parcel of Land and any other easements, rights of way or
appurtenances and used in connection with the beneficial operation, use and
enjoyment of such Land and/or Improvements or any other appurtenance, together
with all of the owner's rights in and to streets, sidewalks, alleys, gores,
strips, driveways, parking areas and areas adjacent thereto or used in
connection therewith, and all of the owner's rights in any land lying in the bed
of any existing or proposed street adjacent to any Land.
1.28 "Assignment of Intangible Property" shall have the meaning set
forth in Article VI.
1.29 "Assignment of Leases" shall have the meaning set forth in
Article VI.
1.30 "Baldon" shall have the meaning contained in Recital D.
1.31 "Baldon Properties" shall mean those two certain commercial
properties previously owned by Baldon Real Estate, Inc. and which are now part
of the AOPP Properties. The term Baldon Properties shall include, without
limitation, the Appurtenances and Improvements thereon or associated therewith.
1.32 "Bankruptcy Code" shall mean the United States Bankruptcy Code.
1.33 "Chadwick" shall mean Chadwick, Saylor & Co., Inc.
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<PAGE>
1.34 "Chadwick Fee" shall mean all fees, costs and expenses
payable to Chadwick in connection with the Transactions pursuant to a separate
agreement between Chadwick and AOPP.
1.35 "Closing" shall have the meaning contained in Section 2.3,
provided that Closing of the Merger and Contribution shall occur in a single
closing, and Acquiport Two shall have received the OP Units and the AOPP Share
Certificates.
1.36 "Closing Date" shall mean the date hereof.
1.37 "Closing Documents" shall mean those documents to be executed and
delivered at the Closing pursuant to this Agreement.
1.38 "Contracts" shall mean all written or oral service, maintenance,
operating, repair, equipment leasing, supply, purchase, consulting, professional
service, advertising, promotion, public relations and other contracts and
commitments (including any management or leasing agreements) in any way relating
to the Properties or any part thereof.
1.39 "Contribution" shall have the meaning given that term in Recital
C.
1.40 "CRF" shall mean the New York State Common Retirement Fund, a
public pension fund created pursuant to Article 9 of the New York Retirement and
Social Security Law.
1.41 "CRF Representatives" shall mean Acquiport, CRF, Heitman,
Equitable Real Estate Investment Management, Inc., ERE Yarmouth, and their
respective agents (including any current on site property managers), advisors,
officers, directors, affiliates, trustees, beneficiaries, consultants,
employees, attorneys and representatives.
1.42 "Deed(s)" shall mean the Grant Deeds for the Acquiport Two
Properties in the form attached hereto as Exhibit N.
---------
1.43 "Deposits and Reimbursements" shall mean the following with
respect to the Properties: (i) deposits made with or tendered to utility
companies to secure service or to permit the owner to tie in to existing service
grids or to cause a utility company to install connections or extensions
necessary to provide service, and (ii) any refundable fees, payments or
reimbursements which the owner is entitled to receive from any governmental or
quasi-governmental or private body in respect of the ownership and development
of the Acquiport Properties.
1.44 "Effective Date" shall mean December 24, 1997.
1.45 "Effective Time" shall be the time at which both of the following
are completed: (i) a certificate of merger or
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<PAGE>
other appropriate documents necessary to consummate the Merger are filed with
each of the Secretary of State of California and the Secretary of State of
Delaware, and (ii) the Deeds with respect to the Acquiport Two Properties have
been recorded in the Official Records of the county or counties in which the
Acquiport Two Properties are located.
1.46 "Employment Agreement" shall mean the employment agreements
between AOPP and Havner, and AOPP and Howard, in the form of Exhibit O and
---------
Exhibit P, respectively, attached hereto.
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1.47 "Environmental Requirements" shall mean all applicable federal,
state and local statutes, regulations, rules, ordinances, codes, licenses,
permits, orders, approvals, plans, authorizations, concessions, franchises and
similar items, of all governmental agencies, departments, commissions, boards,
bureaus or instrumentalities of the United States, states and political
subdivisions thereof and all applicable judicial and administrative and
regulatory decrees, judgments and orders relating to the protection of human
health (except to the extent compliance with the foregoing relating to human
health is the sole responsibility of a Tenant under a Lease, and excluding ADA
and OSHA, as each is hereafter defined) or the environment, including, without
limitation, all requirements, including but not limited to those pertaining to
reporting, licensing, permitting, investigation and remediation of emissions,
discharges, releases or threatened releases of Hazardous Materials, chemical
substances, pollutants, contaminants or hazardous or toxic substances, materials
or wastes whether solid, liquid or gaseous in nature, into the air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal transport or handling of
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials, or wastes, whether solid, liquid or gaseous in nature.
1.48 "Escrow" shall mean the escrow established at the Title Company
to facilitate the Closing.
1.49 "Escrow Holder" shall mean the Title Company.
1.50 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.51 "Fully Diluted" shall mean, with respect to a shareholder's
ownership interest in the OP, the general partner of the OP, or both, a
fraction, expressed as a percentage if so indicated, the numerator of which is
the number of shares of common stock in the general partner of the OP such
shareholder would hold or over which such shareholder would have voting control
if each OP Unit held by such shareholder (after giving effect to the "Unit
Adjustment Factor" provided for in the Amended and Restated Agreement of Limited
Partnership of the OP) were converted into one share of common stock in such
general
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<PAGE>
partner, and the denominator of which is the total number of shares of common
stock in the general partner of the OP which would be outstanding if (after
giving effect to the "Unit Adjustment Factor" provided for in the Amended and
Restated Agreement of Limited Partnership of the OP) each OP Unit regardless of
ownership were converted into one share of common stock in such general partner.
Notwithstanding the foregoing, in calculating the "Fully Diluted" ownership
interests under paragraph 4(d) of the Agreement Among Shareholders and Company
regarding preemptive rights, the phrase "or over which such shareholder would
have voting control" shall be deleted.
1.52 "Governmental Agency" means (i) any government or municipality or
political subdivision of any government or municipality, (ii) any assessment,
improvement, community facilities or other special taxing district, (iii) any
governmental or quasi-governmental agency, authority, board, bureau, commission,
corporation, department, instrumentality or public body, or (iv) any court,
administrative tribunal, arbitrator, public utility or regulatory body.
1.53 "Havner" shall mean Ronald L. Havner, Jr.
1.54 "Hazardous Materials" shall mean (i) any flammables, explosive or
radioactive materials, contaminants or hazardous or toxic wastes, materials or
substances or related materials whether solid, liquid or gaseous in nature,
including, without limitation, substances defined as "hazardous substances,"
"hazardous materials," "toxic substances" or "solid waste" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C.
-- ----
Section 1801, et seq.; the Toxic Substances Control Act, 15 U.S.C., Section 2601
-- ----
et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section
- -- ---
6901 et seq.; and in the regulations adopted and publications promulgated
-- ----
pursuant to said laws; (ii) those substances listed in the United States
Department of Transportation Table (49 C.F.R. 172.101 and amendments thereto)
or by the Environmental Protection Agency (or any successor agency) as hazardous
substances (40 C.F.R. Part 302 and amendments thereto); (iii) those substances
defined as "hazardous wastes," "hazardous substances" or "toxic substances" in
any similar federal, state or local laws or in the regulations adopted and
publications promulgated pursuant to any of the foregoing laws or which
otherwise are regulated by any governmental authority, agency, department,
commission, board or instrumentality of the United States of America, the state
in which the applicable Property is situated, or any political subdivision
thereof; (iv) any pollutant or contaminant or hazardous, dangerous or toxic
chemicals, materials, or substances within the meaning of any other applicable
federal, state, or local law, regulation, ordinance, or requirement (including
consent decrees and administrative orders) relating to or imposing liability or
standards of conduct concerning any hazardous, toxic, or
-8-
<PAGE>
dangerous waste, substance or material all as amended; (v) petroleum or any by-
products thereof; (vi) any radioactive material, including any source, special
nuclear or by-product material as defined at 42 U.S.C. Sections 2011 et seq., as
-- ----
amended, and in the regulations adopted and publications promulgated pursuant
to said law; (vii) asbestos in any form or condition; and (viii) polychlorinated
biphenyls.
1.55 "Heitman" shall mean Heitman Capital Management Corporation, an
Illinois corporation.
1.56 "Heitman Fee" shall mean all fees, costs and expenses payable to
Heitman in connection with the Transactions pursuant to a separate agreement
between Heitman and CRF.
1.57 "Howard" shall mean Mary Jayne Howard.
1.58 "Improvements" shall mean all improvements, structures or
fixtures (excluding the foregoing that are owned by Tenants under Leases)
constructed upon the Land and/or Appurtenances, including without limitation,
all buildings and structures presently located on the Land and/or Appurtenances,
all apparatus, equipment and appliances presently located on the Land and/or
Appurtenances and used in connection with the operation or occupancy thereof,
such as heating and air conditioning systems and facilities used to provide any
utility services, parking services, refrigeration, ventilation, garbage
disposal, recreation or other services thereto, and all landscaping and
leasehold improvements of Tenants which become the property of the lessor upon
termination of a Lease.
1.59 "Intangible Personal Property" shall mean all right, title,
claim, interest and estate in, to and under any and all (i) intangible personal
property owned by the fee owner of the Real Property which relates to or arises
from the Real Property and/or Tangible Personal Property and any other rights in
or to property, general intangibles and contractual rights which the fee owner
of the Real Property may have which affect or relate to the use, operation,
maintenance, leasing or sale of the Real Property and/or Tangible Personal
Property, including, but not limited to, all Deposits and Reimbursements, all
contract rights, warranties from contractors, architects, engineers and material
and labor suppliers, all claims, choses in action, judgments, remedies, damages
and causes of action, all easements, licenses and rights-of-way, occupancy or
use agreements and all other similar documents affecting or relating to the Real
Property and/or Tangible Personal Property; (ii) any trademark, service mark,
trade name or name customarily used or associated with the Real Property and/or
Tangible Personal Property, and (iii) any and all other warranties, guarantees,
permits, entitlements and other intangible rights related to the Properties;
provided that each of the foregoing relating to Contracts is limited to
Contracts assigned to AOPP at Closing.
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<PAGE>
1.60 "Land" shall mean the parcels of real property comprising the
AOPP Properties and the Acquiport Properties, as applicable.
1.61 "Law(s)" shall mean all applicable building codes, life safety,
laws, rules and regulations including without limitation, those related to
handicapped or disabled (including without limitation the Americans with
Disabilities Act ["ADA"]) and land use and zoning laws, ordinances and
regulations, Environmental Requirements, including, without limitation,
requirements pursuant to the U.S. Occupational Safety and Health Administration
and California Occupational Safety and Health Administration (collectively,
"OSHA") and other applicable local, state and federal laws and regulations.
1.62 "Leases" shall mean all leases, occupancy agreements and other
similar agreements, whether written or oral, together with all modifications,
extensions and renewals thereof, and any guarantees of any of the foregoing with
respect to or demising any part of the Properties, and shall additionally
include any ground lease affecting any Property.
1.63 "Lease List" shall mean the list of Leases affecting the
Acquiport Properties on Exhibit Q-1, dated as of November 25, 1997, and an
-----------
update of such list attached as Exhibit Q-2 identifying Leases affecting the
-----------
Acquiport Properties that are not reflected on Exhibit Q-1.
-----------
1.64 "Licenses and Entitlements" shall mean all licenses, franchises,
certifications, authorizations, approvals, rights, privileges, entitlements and
permits issued or approved by any governmental or quasi-governmental authority
or other person or entity having authority over the Properties, and all
applications, filings and submittals therefor, in each case relating to the
operation, ownership, subdivision, development, use or maintenance of the
Properties or any part thereof, including, without limitation, construction
permits, elevator permits, machinery permits, business licenses, ingress and
egress permits, development agreements, subdivision, parcel and tract maps and
approvals thereof, plans and/or permits required under the applicable zoning
regulations, variances, utility agreements and commitments, improvement
agreements, certificates of occupancy and the like, but excluding therefrom for
all purposes of this Agreement any licenses issued to or solely on behalf of any
Tenant.
1.65 "Listing" shall mean the conversion of AOPP to a publicly traded
real estate investment trust (as defined in Section 856 of the Internal Revenue
Code) and the listing of such publicly traded real estate investment trust on
the New York Stock Exchange or American Stock Exchange substantially
concurrently with such conversion, accomplished by the Listing Merger or by an
initial public offering involving new equity in excess of $25,000,000 or by
other means, subject to any approval
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<PAGE>
rights granted to Acquiport Two in the Agreement Among Shareholders and Company.
1.66 "Listing Deadline" shall mean the date that is eighteen (18)
months after the Closing Date.
1.67 "Listing Merger" shall mean the merger of AOPP with and into
PSP11, with the surviving publicly traded REIT being renamed "PS Business Parks,
Inc." and being listed on the New York Stock Exchange or American Stock
Exchange.
1.68 "Losses and Liabilities" shall have the meaning contained in
Section 7.1.
1.69 "LPs" shall mean the limited partners of the OP other than PSA.
1.70 "Merger" shall mean the merger of Acquiport Three with and into
AOPP, with the surviving entity being known as "AOPP".
1.71 "Milestones" shall mean completion of the following steps taken
by AOPP in connection with achieving the Listing on or prior to the Listing
Deadline: (i) delivery of a draft registration statement to Acquiport Two on or
prior to the date which is 75 days before the Listing Deadline, and (ii)
delivery to Acquiport Two of a copy of the registration statement filed with the
SEC on or prior to 45 days before the Listing Deadline.
1.72 "Non-Competition Agreement" shall mean the agreement in the form
of Exhibit R executed by PSA.
---------
1.73 "Official Records" shall mean the official records of the county
or counties in which the Acquiport Two Properties are located.
1.74 "OP" shall mean American Office Park Properties, L.P., a
California limited partnership, of which AOPP is the sole general partner and
through which AOPP owns all of its properties other than the Baldon Properties.
1.75 "OP Governance Amendment" shall mean, individually and
collectively, the Amended and Restated Agreement of Limited Partnership of
American Office Park Properties, L.P., and the supplements and amendments to the
other governing documents attached hereto as Exhibit S.
---------
1.76 "OP Units" shall mean operating partnership units representing
partnership interests in the OP.
1.77 "Personal Property" shall mean the Tangible Personal Property and
the Intangible Personal Property.
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<PAGE>
1.78 "Property" and "Properties" shall mean any or all of the
Acquiport Properties and/or the REIT Properties, as applicable for the
particular Agreement provision.
1.79 "Proxy Statement" shall mean the "Preliminary Proxy Statement"
and the "Proxy Amendment", as such terms are defined in the Agreement Among
Shareholders and Company.
1.80 "PSA" shall mean Public Storage, Inc., a California corporation.
1.81 "PSA Business Park Properties" shall mean those certain 11
properties totalling approximately 730,000 net rentable square feet, more
particularly described on Exhibit T, including, without limitation, the
---------
Appurtenances and Improvements thereon or associated therewith.
1.82 "PSP11" shall mean Public Storage Properties XI, Inc., a
California corporation.
1.83 "PSP11 Amendments" shall mean the amendments to the PSP11
organizational documents attached hereto as Exhibit U.
---------
1.84 "PSP11 Business Park Properties" shall mean those certain 2
business park properties more particularly described on Exhibit V, including,
---------
without limitation, the Appurtenances and Improvements thereon or associated
therewith.
1.85 "PSP11 Financial Statement" shall mean balance sheets, income
statements, statements of shareholder equity, and statements of cash flow, as of
September 30, 1997; and for each of the years 1994, 1995 and 1996 for PSP11
which annual statements have been prepared in accordance with generally accepted
accounting principles. To the extent available, the PSP11 Financial Statements
shall be audited by independent certified public accountants, otherwise the
PSP11 Financial Statements shall be certified by the chief financial officer of
PSP11. The PSP11 Financial Statement as of September 30, 1997 is attached
hereto as Exhibit W.
---------
1.86 "Real Property" shall mean collectively the Land, Improvements
and Appurtenances.
1.87 "REIT" shall mean a real estate investment trust, as defined in
Section 856 of the Internal Revenue Code.
1.88 "REIT Properties" shall mean collectively, the AOPP Properties,
the PSA Business Park Properties, and the PSP11 Business Park Properties.
1.89 "Rent Roll" and "Rent Rolls" shall mean those certified rent
rolls for the REIT Properties containing the information listed on Exhibit X,
---------
dated no earlier than
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<PAGE>
November 21, 1997, and delivered by AOPP to Acquiport substantially concurrently
herewith.
1.90 "Resulting Entity" shall mean PS Business Parks, Inc., or any
other entity in which PSA and Acquiport own shares as a result of the Listing
being accomplished through means other than the Listing Merger.
1.91 "SEC" shall mean the Securities and Exchange Commission.
1.92 "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.93 "Subsidiaries" shall mean any Affiliate controlled by the named
entity.
1.94 "Surviving Corporation" shall have the meaning contained in
Section 2.2.
1.95 "Tangible Personal Property" shall mean and include, without
limitation, any and all tangible personal property owned by the fee owner of the
Properties, located at, or affixed or attached to, or installed in the Real
Property, or used or to be used in connection with or incorporated into the Real
Property or its ownership, use, management, operation, marketing, leasing,
occupancy, sale or financing, including, but not limited to, fixtures,
furniture, furnishings, machinery, appliances and other apparatus and equipment,
including, without limitation, plumbing equipment, HVAC, electric wiring and
fixtures, gas distribution system, and water and sewage systems, supplies and
other inventories, office equipment, communications equipment, vehicles, storage
tanks, spare and replacement parts, fuel plans, specifications, operational
handbooks, machinery and/or equipment operational instructions and/or
specifications, surveys, drawings, and records, files and papers, including,
without limitation, structural and engineering information.
1.96 "Taxes" means all taxes, assessments, charges, fees and levies
(including interest and penalties), including, without limitation, those for
federal, state or local income, property, unemployment, withholding, sales, use
and other taxes imposed, assessed or collected by any Governmental Agency.
1.97 "Tenant" shall mean each lessee or tenant occupying any portion
of the Properties.
1.98 "Tenant Charges" shall mean Tenant obligations for taxes, common
area expenses, operating expenses or additional charges of any other nature.
1.99 "Title Company" shall mean Chicago Title Insurance Company,
which shall also act as the escrow holder in connection with the Contribution.
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<PAGE>
1.100 "Title Policy" shall mean an ALTA Owner's Policy of Title
Insurance for the Acquiport Two Properties, in the form of the Approved Title
Form, issued to AOPP by the Title Company at Closing.
1.101 "Transactions" shall have the meaning given that term in
Recital E.
1.102 "Unwind Agreement" shall mean the agreement in the form of
Exhibit Y.
- ---------
1.103 "Unwind Date" shall mean the date on which completion of the
"Unwind" of all Acquiport Properties as contemplated by the Unwind Agreement has
occurred.
ARTICLE II
CONTRIBUTION AND MERGER
-----------------------
2.1 Contribution. Upon and subject to the terms and conditions of
------------
this Agreement, Acquiport Two shall contribute the Acquiport Two Properties to
the OP and cash in the amount of One Million Dollars ($1,000,000) (by wire
transfer) at the Effective Time.
2.2 Merger. Upon and subject to the terms and conditions of this
------
Agreement, Acquiport Three shall merge into Acquisition Corporation at the
Effective Time. From and after the Effective Time, the separate corporate
existence of Acquiport Three shall cease and Acquisition Corporation shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The Merger shall have the effects set forth in Section 1107 of
the California General Corporation Laws and Section 259 of the Delaware General
Corporation Laws. CRF hereby assigns to Acquiport Two its right to receive the
Acquiport AOPP Shares on account of the Merger, such assignment to be effective
prior to the Merger such that the Acquiport AOPP Shares are issued to and held
by Acquiport Two only.
2.3 The Closing. The closing of the transactions contemplated by
-----------
this Agreement (the "Closing") shall take place at the offices of Cox, Castle &
Nicholson LLP in Los Angeles, California, commencing at 10:00 a.m. local time on
the Closing Date.
2.4 Actions at the Closing. At the Closing, (a) AOPP and Acquisition
----------------------
Corporation shall deliver to Acquiport Two the various certificates, instruments
and documents referred to in Section 6.2, (b) Acquiport Two, Acquiport Three,
and CRF shall deliver to AOPP the various certificates, instruments and
documents referred to in Section 6.1, and (c) AOPP shall cause to be filed with
the Secretaries of State of the States of California and Delaware, respectively,
the agreement of merger and the certificate of merger as contemplated by the
Merger, and
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<PAGE>
shall cause to be recorded the Deeds to the Acquiport Two Properties in the
Official Records.
2.5 Additional Action. AOPP may, at any time after the Effective
-----------------
Time, take any action, including executing and delivering any document, in the
name and on behalf of either Acquiport or AOPP in order to consummate the Merger
contemplated by this Agreement.
2.6 Conversion of Securities. At the Effective Time, by virtue of
------------------------
the Merger and without any action on the part of any party or the holder of any
of the following securities:
(a) The shares of common stock of Acquiport Three issued and
outstanding immediately prior to the Effective Time shall be converted into and
represent the right to receive 2,970,134 AOPP Shares.
(b) Any shares of common stock held in Acquiport's treasury
immediately prior to the Effective Time shall be cancelled and retired without
payment of any consideration therefor.
2.7 Certificate of Incorporation. The Certificate of Incorporation
----------------------------
of the Surviving Corporation shall be the same as the Certificate of
Incorporation of Acquisition Corporation immediately prior to the Effective
Time.
2.8 Acquisition Corporation By-laws. The By-laws of the Surviving
-------------------------------
Corporation shall be the same as the By-laws of Acquisition Corporation
immediately prior to the Effective Time.
2.9 Directors and Officers. The directors of the Surviving
----------------------
Corporation shall be the directors of Acquisition Corporation immediately prior
to the Effective Time.
2.10 No Further Rights. From and after the Effective Time, no
-----------------
Acquiport Three Shares shall be deemed to be outstanding, and holders of
certificates formerly representing Acquiport Three Shares shall cease to have
any rights with respect thereto except as provided herein or by law.
2.11 Closing of Transfer Books. At the Effective Time, the stock
-------------------------
transfer books of Acquiport Three shall be closed and no transfer of Acquiport
Three Shares shall thereafter be made. If, after the Effective Time,
certificates formerly representing Acquiport Three Shares are presented to
Acquisition Corporation, they shall be cancelled and exchanged for certificates
in AOPP representing Acquiport AOPP Shares as contemplated herein.
-15-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CRF
-------------------------------------
CRF, with respect to Acquiport Two, Acquiport Three and the Acquiport
Properties and as appropriate with respect to itself, makes the following
representations and warranties as of the Closing Date. As used in this
Agreement, CRF's knowledge or words of similar import shall mean the knowledge
of Richard Weber, Gene Fuller, and Howard Edelman who are the individuals who
would be likely to have knowledge of the matters represented and warranted,
after due inquiry.
3.1 Organization, Power and Authority, and Qualification. Acquiport
----------------------------------------------------
Two and Acquiport Three are each corporations duly organized, validly existing
and in good standing under the laws of the State of Delaware, and each has the
requisite power and authority to own, operate and lease all of its assets,
including, without limitation, the Acquiport Properties owned by it, and to
carry on its business as it is now being conducted. CRF is the sole shareholder
of Acquiport. Acquiport Two and Acquiport Three each are, and have been since
inception, single purpose entities that own only their respective Acquiport
Properties; provided that Acquiport Two previously held title to a property
located at 16610 East Gale Avenue, City of Industry, California that has been
sold. CRF has the requisite power and authority to own and sell its Acquiport
shares.
3.2 Authority Relative to this Agreement and the Transactions. All
---------------------------------------------------------
actions, proceedings, consents or approvals necessary to authorize the
execution, delivery and performance of this Agreement, the Closing Documents and
the Transactions by CRF have been taken, and no other proceedings, consents or
approvals are needed by or from CRF to authorize the execution and delivery of
this Agreement or the Closing Documents or to proceed with the consummation of
the Transactions by CRF.
3.3 Binding Obligation. Upon execution of this Agreement and the
------------------
Closing Documents by CRF, Acquiport Two and Acquiport Three, this Agreement and
the Closing Documents shall have been duly and validly executed and delivered by
CRF, Acquiport Two and Acquiport Three, and constitute valid and binding
agreements of CRF and Acquiport, enforceable against Acquiport and CRF in
accordance with their terms. The foregoing representation is subject to the
limitations imposed by the Bankruptcy Code, insolvency laws and other similar
laws, Federal and State, which generally affect the enforceability of creditors'
rights.
3.4 No Violation. The execution and delivery of this Agreement and
------------
the Closing Documents and the consummation of the Transactions will not result
in or constitute any of the following: (i) a default, breach, or violation, or
an event that, with notice or lapse of time or both, would be a default, breach,
or violation, of the organizational documents of
-16-
<PAGE>
Acquiport or any of the following with respect to Acquiport or the Acquiport
Properties: any agreements, Contracts, Leases, License or Entitlement,
promissory notes, conditional sales contracts, commitments, indentures,
mortgages, deeds of trust, or other agreements, instruments or arrangements to
which Acquiport is a party or by which it or the Acquiport Properties are bound
and that relate to the Acquiport Properties; (ii) a violation of or conflict
with any term or provision of any judgment, decree, order, statute, injunction,
rule or regulation of a governmental unit applicable to CRF, Acquiport or the
Acquiport Properties; (iii) the creation or imposition of any lien, charge or
encumbrance on the Acquiport Properties; or (iv) not require approval, waiver or
authorization from a government or regulatory body which has not been obtained.
The execution and delivery of this Agreement and the Closing Documents and the
consummation of the Transactions does not violate Article 9 of the New York
Retirement and Social Security Law.
3.5 Bankruptcy. There are no attachments, executions or assignments
----------
for the benefit of creditors, or voluntary or involuntary proceedings in
bankruptcy or under any other debtor relief laws, contemplated by or pending or
threatened against Acquiport. Without limiting the generality of the foregoing,
none of the following have been done by, against or with respect to Acquiport:
(i) the commencement of a case under Title 11 of the U.S. Code as now
constituted or hereafter amended, or under any other applicable federal or state
bankruptcy law or other similar law; (ii) the appointment of a trustee or
receiver of any property interest; (iii) an assignment for the benefit of
creditors; (iv) an attachment, execution or other judicial seizure of a
substantial property interest; (v) the taking of, failure to take, or submission
to, any action indicating an inability to meet its financial obligations as they
accrue; or (vi) a dissolution or liquidation.
3.6 Non-Foreign Person. Acquiport Two is not a "foreign person" as
------------------
such term is defined in Section 1445(f) of the Internal Revenue Code of 1986, as
amended, and Acquiport Two is not subject to withholding under Section 18662 of
the California Revenue and Taxation Code.
3.7 Leases. The Leases regarding the Acquiport Two Properties and
------
the Acquiport Three Properties listed on the Lease List are all of the Leases
affecting the Acquiport Properties as November 25, 1997, which Lease List shall
be supplemented at Closing to identify the Leases affecting the Acquiport
Properties as of Closing. Acquiport has provided or made available to AOPP
Representatives true, complete and correct copies of (i) the Leases and (ii) all
agreements of each relating to any unpaid or unperformed obligations of each for
tenant improvement and leasing commissions in connection with the Acquiport
Properties that will not be paid in full prior to Closing, to the extent not
included in the Leases. Neither Acquiport Two nor Acquiport Three have received
written notice that there exists any uncured
-17-
<PAGE>
breach or default by Acquiport under any Lease affecting the Acquiport
Properties, and to the knowledge of Acquiport, no pending breach or default
under any Lease by Acquiport exists.
3.8 Acquiport Financial Statements. Acquiport has provided to AOPP
------------------------------
Representatives true, correct and complete copies of Acquiport Financial
Statements. AOPP Entities and PSA acknowledge and agree that the Acquiport
Financial Statements shall not be used or relied upon by AOPP Entities or PSA
for any purposes other than to complete the Proxy Statement and in connection
with Section 3.18, below, and specifically shall not be used or considered in
making any investment decision regarding the Acquiport or the Acquiport
Properties, including, without limitation, the Merger and Contribution
contemplated by this Agreement.
3.9 Compliance With Laws. Acquiport has not received written notice
--------------------
that any Acquiport Property is in violation of any Law which is material to its
ownership and operation of the Acquiport Properties.
3.10 Environmental Matters/Soils Conditions. Except as described in
--------------------------------------
the Acquiport Review Material and environmental reports obtained by AOPP in
connection with its evaluation of the Acquiport Properties which are listed on
Exhibit Z, (i) Acquiport has not engaged in or knowingly permitted any
- ---------
operations or activities involving the handling, manufacture, treatment,
storage, use, generation, release, discharge, refining, dumping or disposal of
any Hazardous Materials on, under, in or about the Acquiport Properties or
transported to or from the Acquiport Properties, in violation of Environmental
Requirements, (ii) to Acquiport's and CRF's knowledge, no Hazardous Materials
are presently constructed, deposited, stored, or otherwise located on, under, in
or about the Acquiport Properties, except in all cases in compliance with
Environmental Requirements.
3.11 No Litigation. Except as disclosed on Exhibit AA, Acquiport has
------------- ----------
not received written notice of any material investigations, actions, suits,
proceedings, claims, writs, orders, injunctions or decrees affecting Acquiport
or any of the Acquiport Properties, and, to the knowledge of CRF, no such
actions are pending, at law or in equity, before or by any federal, state,
municipal or other governmental department, commission, board, agency, or
instrumentality, domestic or foreign, which are not fully covered by insurance,
excluding reasonable and customary deductibles, or which are (i) unsatisfied or
will not be satisfied by Closing, and (ii) the effect of which would have a
material adverse effect Acquiport or on the Acquiport Properties.
3.12 Assessments. Acquiport has not received written notice of any
-----------
pending or proposed special assessments affecting or which may affect the
Acquiport Properties or any part thereof.
-18-
<PAGE>
3.13 Eminent Domain. Acquiport has not received written notice of any
--------------
pending condemnation, eminent domain or similar proceeding involving any of the
Acquiport Properties.
3.14 Insurance Claims. Acquiport has not received written notice of
----------------
any pending insurance claims with respect to damage to any of the Acquiport
Properties, except as disclosed on Exhibit XX. Nothing contained in this
----------
Section 3.14 is intended to be, or shall be construed as, a representation or
warranty of Acquiport regarding any claims other than claims relating to damage
to the Improvements, specifically excluding personal injury claims arising out
of or relating to any Acquiport Property.
3.15 Securities Representation. Acquiport Two is an Accredited
-------------------------
Investor, as defined in Regulation D promulgated under the Securities Act.
Acquiport Two is acquiring the Acquiport AOPP Shares for its own account for
investment, and not with a view to "distribution" within the meaning of the
Securities Act, except to CRF or its Affiliates. Acquiport Two has had the
opportunity to ask questions concerning AOPP and the Acquiport AOPP Shares.
3.16 Tax Matters Representation. Each Acquiport is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. CRF is the sole shareholder of each Acquiport. CRF is a public
pension fund created pursuant to Article 9 of the New York Retirement and Social
Security Law. No beneficiary of CRF has greater than a two percent (2%)
actuarial interest in CRF. CRF has made inquiry of Chase Manhattan Bank, CRF's
master custodian, regarding CRF's direct investments (due to impracticability,
no inquiry was performed as to investments CRF might hold indirectly, such as
through pooled investments or other entities in which CRF may own an interest),
and the investments of Acquiport. The response to that inquiry did not disclose
any direct ownership by CRF of any interest in any tenant of AOPP or of the
Acquiport Properties listed on Exhibit BB (AOPP has indicated that the list
----------
reflects each tenant, including each tenant of the Acquiport Properties, that is
responsible for rental income that is approximately one percent of the total
income of AOPP and the OP prior to the Transaction), or that Acquiport actually
owns an interest in any tenant of AOPP or of the Acquiport Properties, other
than as described on Exhibit BB.
----------
3.17 Acquiport Three Organization. Acquiport Three was organized and
----------------------------
has been operated since inception as an entity under Section 501(c)(25) of the
Code. With respect to Acquiport Three's federal and state income tax returns
for calendar years 1995 and 1996, Acquiport Three has not received written
notice of any inquiry by any applicable taxing authority in connection with any
of Acquiport Three's tax filings that are unresolved and no waivers of statutes
of limitations have been given by or on
-19-
<PAGE>
behalf of Acquiport Three regarding its federal income tax returns.
3.18 Absence of Liabilities. Except for liabilities and obligations
----------------------
(i) set forth in the Acquiport Financial Statement for the period ending
September 30, 1997, (ii) which will be prorated between the parties pursuant to
Article VI, there are no liabilities or obligations (contingent or otherwise),
known or unknown, including liabilities for unpaid taxes or interest or
penalties thereon (excluding real property taxes, regarding which no
representation is being made), of Acquiport Three.
3.19 Tax Filing. Acquiport Three has filed with respect to the
----------
calendar years 1995 and 1996, all federal and state tax returns of Acquiport
Three, and shall file all federal and state tax returns of Acquiport Three with
respect to all periods in the calendar year 1997 prior to the Closing Date.
Acquiport has delivered to AOPP Representatives true and correct copies of their
1996 tax returns.
3.20 Contracts. Exhibit DD lists all of the Contracts affecting the
--------- ----------
Acquiport Properties. Acquiport Three is not bound by any Contract affecting
the Acquiport Three Properties that is not listed on Exhibit DD.
----------
3.21 Qualified Institutional Buyer. At the time CRF was offered the
-----------------------------
Acquiport AOPP Shares, CRF was, and at the date hereof, CRF is, and at the
Closing Date, CRF will be, a "qualified institutional buyer" as defined in Rule
144A under the Securities Act, and has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
AOPP and an investment in the Acquiport AOPP Shares, and is able to bear the
economic risk of such investment. CRF understands and acknowledges that the
Acquiport AOPP Shares are being offered and sold without registration under the
Securities Act in a transaction that is exempt from the registration provisions
of the Securities Act and the availability of such exemption depends in part on,
and that AOPP will rely upon, the accuracy and truthfulness of the foregoing
representations and CRF hereby consents to such reliance.
3.22 Acquiport Shares. The Acquiport Three Shares are validly issued,
----------------
fully paid and non-assessable and shall not be subject to any lien, claim,
encumbrance, preemption right, voting trust or other claim of any third party.
Upon the Merger, AOPP will succeed to all of the assets of Acquiport Three by
operation of law. The authorized capital stock of Acquiport Three consists
solely of 500 shares of common stock. No shares of Acquiport Three are
registered under the Securities Act or any state securities laws and such
Acquiport Shares cannot be resold without registration thereunder or exemption
therefrom.
-20-
<PAGE>
3.23 Disclaimer of CRF and Acquiport Representations and Warranties.
--------------------------------------------------------------
Except as specifically stated in this Agreement, the CRF Representatives make no
representation or warranty of any kind or nature, express or implied, written or
oral, at law or in equity. AOPP Representatives acknowledge that AOPP has been
given a reasonable opportunity to inspect and investigate Acquiport and the
Acquiport Properties, including, without limitation, the Leases, the Contracts
and all other aspects relating thereto, either independently or through agents
and experts of AOPP's Representatives choosing, and, except for CRF's and
Acquiport's representations and warranties contained in this Agreement, AOPP
Representatives are acquiring Acquiport Three and the Acquiport Properties based
exclusively upon AOPP's own investigations and inspections thereof.
Notwithstanding the foregoing, neither the disclaimer contained in this Section
nor any investigation or due diligence conducted by AOPP shall in any manner
limit or diminish any representation or warranty of Acquiport or CRF contained
in this Agreement except AOPP Representatives shall not be entitled to rely on
any representation or warranty to the extent that any AOPP Representatives
obtain actual knowledge prior to Closing (with no duty of inquiry) of any
information that materially contradicts any of the representations or
warranties, or renders any of the representations and warranties materially
untrue or incorrect, and AOPP nevertheless consummates the Merger and
Contribution contemplated by this Agreement. Nothing contained herein shall,
however, impose any obligation on the part of AOPP Representatives to verify the
accuracy of the other's statements, representations and warranties herein.
In addition, Acquiport Three covenants and agrees to use reasonable
efforts prior to the Merger to distribute all of the earnings and profits of
Acquiport Three to CRF.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUISITION CORPORATION OP AND AOPP
---------------------------------------------------------------------
Acquisition Corporation, OP and AOPP make the following
representations and warranties as of the Closing Date. As used in this
Agreement, "Acquisition Corporation's knowledge", "OP's knowledge" or "AOPP's
knowledge" or words of similar import, shall mean the knowledge of Havner,
Howard, John Reyes and David Goldberg, who are the individuals who would be
likely to have knowledge of the matters represented and warranted, after due
inquiry.
4.1 Organization, Power and Authority, and Qualification of AOPP.
-------------------------------------------------------------
AOPP is a corporation qualified as a privately held real estate investment trust
(as defined in Section 856 of the Internal Revenue Code), duly organized,
validly existing, and in good standing under the laws of the State of
California. Prior to the Closing Date, AOPP formed a wholly owned qualified
REIT subsidiary ("New AOPP"), transferred to it AOPP's general
-21-
<PAGE>
partner interest in the OP, so that New AOPP qualifies as a venture capital
operating company as defined in 29 CFR (S)2510.3-101 ("VCOC"), and merged into
New AOPP (the "Reincorporation"). AOPP (i.e., New AOPP) or any Resulting Entity
shall maintain its VCOC qualification until a legal opinion in form and
substance reasonably satisfactory to CRF and Acquiport Two is issued to CRF and
Acquiport Two by Paul, Hastings, et. al., or other counsel to the Resulting
Entity reasonably satisfactory to CRF and Acquiport Two that, without qualifying
as a VCOC, the assets of AOPP or the Resulting Entity would not be deemed to be
"plan assets" (within the meaning of 29 CFR (S) 2510.3-101)(the "Plan Asset
Regulations")) of a "plan" (as defined in 29 USC (S) 1002(3)) which owned, in
the aggregate, CRF's and any of its Affiliates percentage ownership interests in
AOPP or such Resulting Entity, and holds such other rights and privileges as are
then held by CRF or any of its Affiliates with respect to AOPP or the Resulting
Entity (the "VCOC Opinion"). The VCOC Opinion must be issued contemporaneously
with AOPP or any Resulting Entity ceasing to qualify as a VCOC. Approximately
97% of AOPP is owned by PSA. Substantially all of the assets of AOPP are held
by and through the OP, other than the Baldon Properties, which are, directly and
indirectly, wholly owned by AOPP. AOPP has the requisite power and authority to
(i) act as general partner of the OP, (ii) own, operate, and lease all of its
assets, including, without limitation, the REIT Properties owned or to be owned
by it pursuant to the Transactions, (iii) carry on its business as presently
conducted and (iv) consummate the Transactions. The principal place of business
of all AOPP Entities (other than Baldon) and PSA is in California.
4.2 Organization, Power and Authority, and Qualification of
-------------------------------------------------------
Acquisition Corporation, OP, PSA, PSP11. The OP is a limited partnership, duly
- ---------------------------------------
formed and validly existing and in good standing under the laws of the State of
California. The OP is and shall remain qualified as a REOC for so long as
Acquiport Two (or any entity wholly owned by CRF) owns OP Units. PSA is a
corporation, duly formed and validly existing and in good standing under the
laws of the State of California. Acquisition is a corporation, duly formed and
validly existing and in good standing under the laws of the State of California.
PSP11 is a corporation, duly formed and validly existing and in good standing
under the laws of the State of California. Prior to the Reincorporation, AOPP
was the sole shareholder of Acquisition Corporation. Approximately 37% of PSP11
is owned by PSA and its Affiliates, and the balance of PSP11 is owned by
individuals or entities that are not Affiliates of PSA. AOPP is the sole
general partner of the OP. The Acquisition Corporation, OP, PSA, PSP11 and AOPP
each have the requisite power and authority to (i) own operate and lease all of
its assets, including, without limitation, the REIT Properties owned or to be
owned by it as a result of the Transactions, and (ii) carry on its business as
presently conducted, and (iii) subject to the approval of the Listing Merger by
the PSP11 shareholders, to consummate the Transactions.
-22-
<PAGE>
4.3 Governing Documents. Of even date herewith, the AOPP Entities
-------------------
are delivering to Acquiport Two certified copies of the following documents:
PSP11 bylaws, as amended; PSP11 articles of incorporation, as amended; AOPP
bylaws; AOPP articles of incorporation; Agreement of Limited Partnership of the
OP and all organizational documents of AOPP and Acquisition Corporation. Except
as set forth in said certificate or as may be required by this Agreement, the
foregoing governing documents have not been supplemented, amended or revoked.
As of the Closing Date, the AOPP Governance Amendment other than the PSP11
Amendments, and the OP Governance Amendment will have been adopted by all
necessary action and will be in full force and effect. The PSP11 Amendments
will be adopted by the shareholders of PSP11 concurrently with the Listing
Merger.
4.4 REIT Status. Each of AOPP and PSP11 has been operated, in the
-----------
case of AOPP since January 1, 1997, and in the case of PSP11 since formation,
including without limitation with respect to the types of properties owned and
acquired (including, without limitation, the acquisition of the Baldon
Properties), the types of income received and distributed and the number and
circumstances of their shareholders, so as to qualify as a real estate
investment trust under Section 856 of the Internal Revenue Code. PSP11 is
listed on the American Stock Exchange. AOPP does not have any earnings or
profits that are attributable to a C corporation taxable year.
4.5 Authority Relative to this Agreement and Transactions. AOPP has
-----------------------------------------------------
duly and validly obtained all necessary approval of the Transactions, and
represents and warrants that all AOPP Entities (subject to the approval of the
Listing Merger by the shareholders of PSP11) and PSA have obtained all necessary
approvals of the Transactions. The Listing Merger will not be concluded until
after the Closing. All actions necessary to authorize the execution, delivery
and performance of this Agreement and the Closing Documents by all AOPP Entities
(subject to the approval of the Listing Merger by the shareholders of PSP11) and
PSA have been taken, and no other proceedings, consents or approvals are needed
by or from any AOPP Entity (except PSP11) or PSA, to authorize the execution and
delivery of this Agreement or the Closing Documents, or to proceed with the
consummation of the Transactions. The Transactions have been approved by the
board of directors of PSP11 but remain subject to the approval of the PSP11
shareholders. To the extent it may legally and contractually do so, PSA shall
vote its shares in PSP11 in favor of the Transactions.
4.6 Binding Obligation. For each of the AOPP Entities and PSA with
------------------
respect to those documents executed by them, upon execution of this Agreement by
the applicable AOPP Entities, and upon execution of the Closing Documents by the
AOPP Entities and PSA that are parties to such agreements, such agreements shall
have been duly and validly executed and delivered by the AOPP Entities and PSA
thereto and constitute a valid and binding
-23-
<PAGE>
agreement of such AOPP Entities and PSA thereto, enforceable in accordance with
their terms, subject, however, to limitations imposed by the Bankruptcy Code,
insolvency laws and other similar laws, Federal and State, which generally
affect the enforceability of creditors' rights.
4.7 Issuance of Acquiport AOPP Shares and OP Units. The Acquiport
----------------------------------------------
AOPP Shares and Acquiport OP Units issued to Acquiport Two at the Closing will
have been duly authorized for issuance by AOPP and the OP, respectively, and
upon issuance will be validly issued, fully paid and non-assessable and shall
not be subject to any lien, claim, encumbrance, preemption right or other claim
of any third party. Each of the AOPP Share Certificates delivered to Acquiport
Two by AOPP at the Closing will be in good, legal and sufficient form, and upon
such delivery, Acquiport Two will own good and valid title in and to the
Acquiport Two AOPP Shares represented thereby, free and clear of all liens,
claims, charges or encumbrances. Each of Acquiport Two's OP Units will be in
good, legal and sufficient form, and Acquiport Two will own good and valid title
in and to the Acquiport Two OP Units represented thereby, free and clear of all
liens, claims, charges or encumbrances. The authorized capital stock of AOPP
consists solely of (i) 100,000,000 shares of Common Stock ($.10 par value),
3,579,277.83 of which were issued and outstanding as of the Effective Date, and
(ii) 100,000,000 shares of Preferred Stock ($.10 par value), none of which were
issued and outstanding as of the Effective Date, and 8,079,344 outstanding OP
Units as of the Effective Date prior to the issuance of the Acquiport Two OP
Units. As of the Effective Date, only AOPP Common Stock is outstanding; AOPP
has no agreement or arrangement with any party to issue Preferred Stock. No
shares of AOPP stock are registered under the Securities Act or any state
securities laws and such AOPP Shares cannot be resold without registration
thereunder or exemption therefrom. PSA does not hold any shares in PSP11 that
are registered under a resale registration statement. As of the Listing,
provided that the Listing is accomplished by means other than the Listing
Merger, PSA's PSP11 shares will contain the legend described in Section 12(b) of
the Agreement Among Shareholders and Company.
4.8 No Violation. The execution and delivery of this Agreement and
------------
the Closing Documents and the consummation of the Transactions will not result
in or constitute a default, breach, or violation, or an event that, with notice
or lapse of time or both, would be a default, breach, or violation, of (i) the
organizational documents of any AOPP Entities or PSA or status of AOPP as a REIT
or PSP11 as a publicly traded REIT; (ii) any of the following with respect to
the OP, AOPP, PSP11 or the REIT Properties: agreements, Contracts, Leases,
License or Entitlement, promissory notes, conditional sales contracts,
commitments, indentures, mortgages, deeds of trust, or other agreements,
instruments or arrangements to which any AOPP Entity or PSA, with respect to the
PSA Business Park Properties, is a party or by which it or the REIT Properties
are bound; (iii) any
-24-
<PAGE>
term or provision of any judgment, decree, order, statute, injunction, rule or
regulation of a governmental unit applicable to any AOPP Entity, PSA, with
respect to the PSA Business Park Properties, or the REIT Properties; or (iv) any
existing lien, charge or encumbrance, or the creation or imposition of any new
lien, charge or encumbrance on the REIT Properties.
4.9 Bankruptcy. There are no attachments, executions or assignments
----------
for the benefit of creditors, or voluntary or involuntary proceedings in
bankruptcy, or under any other debtor relief laws, contemplated by or pending or
threatened against any AOPP Entities or PSA. Without limiting the generality of
the foregoing, none of the following have been done by, against or with respect
to any AOPP Entities or PSA: (i) the commencement of a case under Title 11 of
the U.S. Code, as now constituted or hereafter amended, or under any other
applicable federal or state bankruptcy law of other similar law; (ii) the
appointment of a trustee or receiver of any property interest; (iii) an
assignment for the benefit of creditors; (iv) an attachment, execution or other
judicial seizure of a substantial property interest; (v) the taking of, failure
to take, or submission to, any action indicating an inability to meet its
financial obligations as they accrue; or (vi) a dissolution or liquidation.
4.10 Disclosure. No representation or warranty of AOPP Entities in
----------
this Agreement, or any information, statement or certificate furnished or to be
furnished by or on behalf of AOPP Entities or PSA pursuant to this Agreement or
the Closing Documents or in connection with the Transactions, contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained therein not misleading. To the knowledge of
AOPP, and OP, there are no documents or information required for a complete
understanding in all material respects of or which are otherwise of significance
in evaluating the AOPP Entities or the REIT Properties which have not been
delivered or made available to CRF Representatives.
4.11 AOPP Entities Financial Statements. The AOPP Entities Financial
----------------------------------
Statements and PSP11 Financial Statements which have been furnished to the CRF
Representatives fairly present the financial condition of such parties as of the
dates of such financial statements and the results of operations for the periods
covered by such financial statements, in accordance with generally accepted
accounting principles consistently applied, and since the respective dates of
such financial statements, there has been no material adverse change in the
financial condition, operations, or properties of the parties described thereon
since the date of such statements. Each of the AOPP Entities and PSA (with
respect to the REIT Properties) has filed all tax returns required to be filed
by it, and has paid all taxes due pursuant to such returns or in respect of any
of its REIT Properties (except for any such Taxes which are being actively
contested in good faith by appropriate proceedings as disclosed on Exhibit EE),
----------
and to the knowledge of AOPP and the
-25-
<PAGE>
OP, no basis exists for additional assessments which have not been adequately
reserved against in the AOPP Entities Financial Statements referred to above.
4.12 Adequate Disclosure. The Board of Directors of PSP11 and all
-------------------
shareholders of PSP11 have been provided, or will be provided with disclosure
materials prepared by AOPP and PSP11, setting forth all relevant, material facts
concerning Acquiport and Acquiport Properties, and the Transactions, and none of
such disclosures misstated any material facts or omitted to state any material
facts necessary to make the statements made, in the light of the circumstances
under which they were made, not misleading; provided, however, no representation
is made by AOPP with respect to statements made in reliance upon and in
conformity with written information concerning Acquiport or the Acquiport
Properties furnished by Acquiport expressly for use in connection with such
documents, or which concerns Acquiport or the Acquiport Properties and has been
approved in writing by Acquiport for use in such documents. The Board of
Directors of PSP11 have given their consents and approvals of the Transactions,
including without limitation, this Agreement and the Closing Documents, on the
basis of such documents.
4.13 AOPP/OP/Acquisition Corporation Absence of Undisclosed
------------------------------------------------------
Liabilities. Except for liabilities and obligations (i) set forth in the AOPP
- -----------
Entities Financial Statement for the period ending September 30, 1997, which is
attached hereto as Exhibit I, (ii) which are disclosed on Exhibit FF (which is
--------- ----------
intended to update the statement in (i), above, to the Effective Date), or (iii)
which will be prorated between the parties pursuant to Article VI, there are no
liabilities or obligations (contingent or otherwise) known or unknown including
liabilities for unpaid taxes or interest or penalties thereon of AOPP Entities.
AOPP Entities owe no indebtedness to any party, other than as reflected in the
footnotes to the AOPP Entities Financial Statements.
4.14 PSP11 Absence of Undisclosed Liabilities. Except for liabilities
----------------------------------------
and obligations (i) set forth in the PSP11 Financial Statement for the period
ending September 30, 1997, which is attached hereto as Exhibit I, (ii) which are
---------
disclosed on Exhibit GG (which is intended to update the statement in (i),
----------
above, to the Effective Date), or (iii) which will be prorated between the
parties pursuant to Article XII, there are no outstanding liabilities or
obligations (contingent or otherwise) of PSP11.
4.15 PSP11 Public Information. All information which has been filed
------------------------
with the SEC regarding AOPP Entities, PSA (to the extent described below) and
the Merger was true, complete and correct in all material respects as of the
date such information was filed, and none of such information misstated any
material facts or omitted to state any material facts necessary to make the
statements made, in the light of the circumstances under
-26-
<PAGE>
which they were made, not misleading, and there has been no material adverse
change to the business or operations of PSP11 since the most recent filing of
Form 10-Q dated November 13, 1997 with the SEC; provided that the foregoing
representation is made with respect to PSA only to the extent that PSA is
discussed or required to be discussed in the information filed with the SEC with
respect to the Merger and the Listing Merger. All filings with the SEC with
respect to the Merger and the Listing Merger complied and will comply as to form
in all material respects with all applicable SEC rules regarding such filings.
Acquiport shall be entitled to rely on the representations, warranties and
covenants contained in the Agreement and Plan of Reorganization, filed as
Exhibit A to the Proxy Statement.
4.16 Capitalization. All of the outstanding shares of capital stock
--------------
of AOPP are validly issued, fully paid and nonassessable and owned of record,
and, to AOPP's knowledge, beneficially owned, solely and directly by the parties
listed on Exhibit HH. To AOPP's knowledge, the shares of capital stock owned by
----------
each entity listed on Exhibit HH are free and clear of all liens, claims,
----------
charges or encumbrances. To AOPP's knowledge, except as set forth on Exhibit
-------
HH, there exists no voting trust or other agreement, arrangement or
- --
understanding restricting or affecting the disposition or voting of any of such
shares owned by AOPP Entities, PSA and their Affiliates, and, to AOPP's
knowledge, with respect to any other shares. AOPP has obtained all consents and
approvals necessary to transfer the Acquiport AOPP Shares to Acquiport Two. OP
has obtained all consents and approvals necessary to transfer the Acquiport OP
Units to Acquiport Two. Except as set forth on Exhibit HH, there are no
----------
options, warrants, conversion privileges or other rights, agreements,
arrangements or commitments giving any person or entity the right to acquire
AOPP Shares or OP Units. All of the outstanding OP Units are validly issued,
and, to the OP's knowledge, beneficially owned, solely and directly by the
parties listed on Exhibit HH.
----------
4.17 Compliance with Laws. Other than as disclosed on Exhibit II the
-------------------- ----------
use and operation of the REIT Properties are in compliance in all material
respects with all Laws which are material to the ownership and operation of the
REIT Properties. Notwithstanding the foregoing, no representation or warranty
is made herein regarding compliance of the REIT Properties with ADA or OSHA,
except that no AOPP Entity or PSA has received written notice that any REIT
Property is not in compliance with ADA or OSHA. All material Licenses and
Entitlements required in connection with the ownership, construction, use, or
occupancy of the REIT Properties have been obtained and are in full force and
effect and in good standing, free from violation. No AOPP Entity has received
written notice that any REIT Property is in violation of any Law which is
material to the ownership and operation of the REIT Properties.
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<PAGE>
4.18 Title Matters. Each of the AOPP Entities has good and
-------------
marketable title in fee simple absolute to each of the REIT Properties owned by
it; except that the REIT Properties commonly known as the B&O Building located
in Baltimore, Maryland, which is ground leased by AOPP Entities, in which case
the applicable AOPP Entity has the right to occupy such property pursuant to a
legally valid and binding ground lease. All REIT Properties are owned or ground
leased free and clear of all liens and encumbrances, other than (i) liens for
taxes not yet due and payable; (ii) installments of special assessments not yet
due and payable; (iii) occupancy leases to tenants as tenants only; (iv)
covenants, conditions, restrictions of record, easements, servitudes and rights
of way of record, rights of the public in any portion of the REIT Properties
which may fall within any dedicated or existing public street, way or alley, and
(v) certain recorded encroachment removal agreements, none of which interfere in
any material respect with the existing or intended ownership, occupancy, use,
operation, maintenance or repair of the REIT Properties and none of which are
violated in any material respect by the existing use, occupancy, or operation of
the Improvements thereof or thereon or materially adversely affect the
marketability of title thereto. Other than the lien of non-delinquent real
property taxes and assessments, there are no monetary liens encumbering any REIT
Properties.
4.19 REIT Properties Compliance Standards. Except as disclosed on
------------------------------------
Exhibit JJ, with respect to each of the REIT Properties, (i) there is direct and
- ----------
unencumbered vehicular and pedestrian access from streets which have been
completed, dedicated and accepted for maintenance and public use by the
appropriate governmental authorities; (ii) each has the right to use parking
facilities that comply with and satisfy in all material respects all
governmental requirements, and that are adequate for the existing use, occupancy
and operation of Tenants; (iii) no easement, license, lease or other agreement
is necessary for access to and from or use of the REIT Properties; (iv) there
are no material encroachments of improvements from adjoining land onto the REIT
Properties or of Improvements on the REIT Properties onto adjoining lands for
which loss occasioned by the forced removal of such Improvements is not insured
by appropriate title insurance; (v) there are no easements or other agreements
that materially adversely interfere with the existing use of the REIT
Properties; (vi) none of the REIT Properties are in an area identified by an
agency or department of the federal government as having special flood zone
(which does not include Flood Zone C) or mudslide hazards, other than the AOPP
Property commonly known as La Prada PS Office Park, 15330 LBJ Freeway, Mesquite,
Texas (the "La Prada Property") and Fairfax/Alban Road, Alban Station Court,
Springfield, Virginia 22150 (the "Alban Property"), each of which are located in
flood zone A-3; (vii) the construction, operation and use of the Improvements on
all REIT Properties complies in all material respects with all restrictive
covenants and other agreements affecting the REIT Properties, including, without
limitation, planning, zoning,
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<PAGE>
building codes and requirements concerning height, bulk and setbacks from
property lines, and availability in number of parking spaces, and such
compliance is not dependent upon any work or improvement that has been deferred
for any reason to a time after the Closing Date; and (viii) the REIT Properties
can each be used for their present uses and all the property and assets required
in order to carry on and conduct the present uses thereon are owned by the AOPP
Entities and PSA, and are not dependent on the use, or related to any property,
other than the REIT Properties. In the event of substantial damage or
destruction of any of the improvements located on any REIT Properties which
constitutes a nonconforming use, reconstruction of such improvements as
currently constructed or used may not be permitted by Governmental Authorities.
4.20 Environmental Matters/Soil Conditions. Except as disclosed in
-------------------------------------
the reports listed on Exhibit Z, complete copies of which have been delivered to
---------
Acquiport Two, (i) no AOPP Entities nor PSA has engaged in or knowingly
permitted any operations or activities in any way involving the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining,
dumping or disposal of any Hazardous Materials on, under, in or about the REIT
Properties, or transported any Hazardous Materials to, from or across the REIT
Properties, except in all cases in compliance with Environmental Requirements;
and (ii) to the knowledge of AOPP and the OP, no Hazardous Materials are
presently constructed, deposited, stored, or otherwise located on, under, in or
about the REIT Properties, except in all cases in compliance with Environmental
Requirements.
4.21 Leases. The Leases described on the Rent Rolls are all of the
------
Leases affecting the REIT Properties as of the date hereof. The Rent Rolls are
true, complete and accurate. Except as set forth in the Rent Rolls, no rent has
been paid under any Lease more than one month in advance. Except for the Leases
described on such Rent Rolls, there are no other leases, licenses or other
agreements affecting the occupancy of any of the REIT Properties. No AOPP
Entity or PSA has received written notice that there exists any uncured breach
or default under any Lease, including, without limitation, any ground lease by
any AOPP Entity or PSA affecting any of the REIT Properties, and to the
knowledge of AOPP Entities, no pending breach or default under any Lease by any
AOPP Entity or PSA exists. Without limiting the generality of the foregoing, no
AOPP Entity has received written notice of any default by the ground lessor
under any ground leases affecting any of the REIT Properties, and all such
ground leases are in full force and effect.
4.22 Contracts. AOPP is not bound by any contract related to REIT
---------
Properties entered into outside the ordinary course of business other than (a)
the Cost Sharing Administrative Service Agreement entered into among various
affiliates of PSA, (b) the Accounts Payable and Payroll Disbursement Agreement
entered into among various Affiliates of PSA, (c) as disclosed in
-29-
<PAGE>
the Proxy Statement, and (d) as disclosed on Exhibit KK. None of AOPP or OP is
----------
bound by any contract outside the ordinary course of business. No AOPP Entity
or PSA has received written notice that there exists any uncured breach or
default under any material Contract by any AOPP Entity or PSA affecting any of
the REIT Properties, and to the knowledge of AOPP Entities and PSA, no pending
breach or default exists. There are no contracts, contingent obligations or
arrangements between OP and AOPP, on the one hand, and PSP11 and PSA, on the
other hand, or any of their respective Affiliates, except as disclosed on
Exhibit KK.
- ----------
4.23 No Litigation or Adverse Events. Except as disclosed on Exhibit
------------------------------- -------
LL, there are no investigations, actions, suits, proceedings or claims pending
- --
against, or, to the knowledge of AOPP Entities, threatened against or affecting,
any AOPP Entities or any of the REIT Properties or PSA with respect to the REIT
Properties, at law or in equity or before or by any federal, state, municipal or
other governmental department, commission, board, agency, or instrumentality,
domestic or foreign. All matters listed on Exhibit LL are fully covered by
----------
insurance, excluding reasonable and customary deductibles. Neither AOPP
Entities nor PSA have received written notice of any, and to AOPP's knowledge,
are not subject to any, order, writ, injunction or decree of any court or
federal, state, municipal or other governmental agency or department,
commission, board, agency or instrumentality which is unsatisfied or will not be
satisfied by Closing.
4.24 Non-Foreign Person. AOPP is not a "foreign person" as such term
------------------
is defined in Section 1445(f) of the Internal Revenue Code of 1986, as amended,
and AOPP is not subject to withholding under Section 26131 of the California
Revenue and Taxation Code.
4.25 No UBTI. A qualified trust (i.e., a trust described in Section
-------
401(a) and exempt from tax under Section 501(a) of the Internal Revenue Code of
1986, as amended) that holds more than ten percent (10%) by value of the
interests in AOPP would not be treated as having taxable income from an
unrelated trade or business pursuant to Section 856(h)(3)(C) of the Internal
Revenue Code of 1986, as amended, with respect to dividends from AOPP, due to
the limited amount of the current gross income (less direct expenses related
thereto) of AOPP from activities that might be considered unrelated trades or
businesses (determined as if AOPP were a qualified trust).
4.26 Employment Agreements. Havner and Howard have each approved
---------------------
their respective Employment Agreements.
4.27 Assessments. Neither AOPP Entities nor PSA have knowledge of any
-----------
pending or proposed special assessments affecting or which may affect the REIT
Properties or any part thereof.
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<PAGE>
4.28 Eminent Domain. Neither AOPP Entities nor PSA have received
--------------
written notice of any pending condemnation, eminent domain or similar
proceedings involving any of the REIT Properties.
4.29 Insurance Claims. AOPP Entities and PSA maintain insurance in
----------------
an amount equal to the full replacement value of the Improvements on the REIT
Properties, excluding reasonable and customary deductibles. AOPP Entities
maintain flood insurance on the La Prada Property and Alban Property. Except as
disclosed on Exhibit MM, neither AOPP Entities, PSA or PSP11 has received a
----------
written notice of any pending insurance claims with respect to damage to any of
the REIT Properties. Nothing contained herein is intended to be, or shall be
construed as, a representation or warranty of AOPP regarding any claims other
than claims relating to damage to the Improvements, specifically excluding
personal injury claims arising out of or relating to any REIT Property.
4.30 Disclaimer of AOPP Representations and Warranties. Except as
-------------------------------------------------
specifically stated in this Agreement, AOPP, and OP make no representation or
warranty of any kind or nature, express or implied, written or oral, at law or
in equity. Notwithstanding anything to the contrary contained in this Section,
the provisions of this Section shall not apply to, or affect, alter or diminish,
in any manner whatsoever, any rights Acquiport Two will enjoy as a shareholder
of AOPP and an OP Unit holder, or in any manner limit or diminish any
representation or warranty of AOPP or the OP contained in this Agreement.
Notwithstanding the foregoing, neither the disclaimer contained in this Section
nor any investigation or due diligence conducted by CRF Representatives shall in
any manner limit or diminish any representation or warranty of AOPP or the OP
contained in this Agreement except CRF shall not be entitled to rely on any
representation or warranty to the extent that any CRF Representatives obtain
actual knowledge prior to Closing (with no duty of inquiry) of any information
that materially contradicts any of the representations or warranties, or renders
any of the representations and warranties materially untrue or incorrect, and
CRF and Acquiport Two nevertheless consummate the Merger and Contribution
contemplated by this Agreement. Nothing contained herein shall, however, impose
any obligation on the part of CRF Representatives to verify the accuracy of the
other's statements, representations and warranties herein.
In addition, on the date of the Listing Merger, AOPP shall deliver or
cause to be delivered to Acquiport Two (i) evidence in form and content
reasonably satisfactory to Acquiport Two reflecting that the Jefferies "fairness
opinion" takes the Merger and Contribution into account, and a letter from Hogan
and Hartson in form and content reasonably satisfactory to Acquiport Two
enabling Acquiport Two and CRF to rely on the opinions Hogan and Hartson has
issued that are referred to in the Proxy Statement and Amended Proxy Statement,
which opinions shall take the Merger and Contribution into account, and (ii) any
legal
-31-
<PAGE>
opinion or accountants' comfort letter regarding the structure of the
Transaction that is issued in connection with the Merger or Contribution,
addressed to, or otherwise in a form that can be relied upon by, Acquiport Two
and CRF. This covenant and agreement shall survive the Merger and Contribution.
ARTICLE V
RELEASE
-------
5.1 Release.
-------
(a) Except with respect to the representations and warranties
contained in Article IV, upon Closing, Acquiport and CRF release all AOPP
Representatives from, and waives all claims, demands, causes of action
(including causes of action in tort), losses, damages, liabilities, costs and
expenses (including reasonable attorneys' fees) of any and every kind or
character, known or unknown, for or attributable to, any latent or patent
----------------
structural, physical or environmental condition at the REIT Properties,
including without limitation, claims or liabilities relating to the presence,
discovery or removal of any Hazardous Materials in, at, about or under the REIT
Properties, or for, connected with or arising out of any and all claims or
causes of action based thereon (a "Loss"); provided, however, that nothing
contained herein shall be deemed to limit or diminish any right Acquiport will
enjoy as a shareholder of AOPP Shares or holder of OP Units.
(b) Except with respect to the representations and warranties
contained in Article III, upon Closing, (i) AOPP Representatives shall assume
from and after the date hereof the risk that adverse matters, including but not
limited to, construction defects and adverse physical and environmental
conditions, may not have been revealed by AOPP's investigations, and (ii) AOPP
releases all CRF Representatives from, and waives all claims, demands, causes of
action (including causes of action in tort), losses, damages, liabilities, costs
and expenses (including reasonable attorneys' fees) of any and every kind or
character, known or unknown, for or attributable to, any latent or patent
----------------
structural, physical or environmental condition at the Acquiport Properties,
including without limitation, claims or liabilities relating to the presence,
discovery or removal of any Hazardous Materials in, at, about or under the
Acquiport Properties, or for, connected with or arising out of any and all
claims or causes of action based thereon, and (iii) any transaction of Acquiport
Three with any Affiliate and any distribution by Acquiport Three prior to the
Closing Date (a "Loss").
ARTICLE VI
THE CLOSING
-----------
6.1 Deliveries by Acquiport and CRF. At Closing, CRF and Acquiport
-------------------------------
shall deliver or cause to be delivered to the Title
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<PAGE>
Company (except where specified to remain at the management office of the
applicable Acquiport Property) or to AOPP, as elected by the parties, duly
executed originals of the following:
(a) The Unwind Agreement;
(b) A duly executed Deed for each of the Acquiport Two Properties
in the form attached hereto as Exhibit N;
---------
(c) A duly executed bill of sale in the form attached hereto as
Exhibit NN, conveying to the OP title to Acquiport Two's Tangible Personal
- ----------
Property in connection with the Acquiport Two Properties;
(d) A duly executed assignment to the OP of the warranties,
guaranties, permits and the Intangible Personal Property in connection with the
Acquiport Two Properties, in the form attached hereto as Exhibit OO (the
----------
"Assignment of Intangible Property");
(e) A duly executed assignment and assumption of Leases affecting
the Acquiport Two Properties to the OP in the form of Exhibit PP (the
----------
"Assignment of Leases");
(f) A duly executed affidavit that Acquiport Two is not a
"foreign person" within the meaning of Section 1445(e)(3) of the Internal
Revenue Code of 1986 (the "Internal Revenue Code") in the form of Exhibit QQ
----------
(the "Non-Foreign Certificate");
(g) A duly executed California Real Estate Withholding Exemption
Certificates (Form 590-RE) in the form of Exhibit RR, (the "Form 590") for each
----------
Acquiport Two Property;
(h) A duly executed legal opinion from counsel to Acquiport
expressing the opinions described in Exhibit SS attached hereto;
----------
(i) Keys to the Acquiport Properties that are not in possession
of Tenants and originals (or copies certified to the knowledge of Acquiport, to
the extent originals are not in the possession of Acquiport) of all Leases,
Tenant files and property records in the possession of Acquiport (each of which
may be left at the applicable Acquiport Property management office);
(j) The corporate record book of Acquiport Three (provided CRF
shall have reasonable access to, and may make such copies of, such information,
at CRF's cost and expense);
(k) Deliveries required as a result of the prorations described
below.
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(l) Such other documents and instruments as are necessary or
appropriate to consummate the Contribution and Merger in accordance with this
Agreement, including, without limitation, an affidavit to the Title Company to
enable the Title Company to issue a non-imputation endorsement to the Title
Policy, provided that the form of such affidavit is acceptable to Acquiport Two
in its reasonable discretion.
6.2 Deliveries by Acquisition Corporation and AOPP. At Closing, the
----------------------------------------------
applicable AOPP Entities shall deliver to Title Company or Acquiport Two, as
elected by the parties, the following:
(a) The AOPP Share Certificates;
(b) Evidence reasonably satisfactory to Acquiport Two that the
Agreement of Limited Partnership lists Acquiport Two as the holder of the
Acquiport OP Units;
(c) The Agreement Among Shareholders, duly executed by all AOPP
Entities and PSA thereto;
(d) Such certificates and resolutions of appropriate governmental
officials and corporate officers as Acquiport Two may reasonably require to
evidence that the AOPP Governance Amendment, and the OP Governance Amendment
have been duly adopted and/or filed and are in full force and effect.
(e) The Unwind Agreement, duly executed by AOPP, and the OP;
(f) The Non-Competition Agreement, duly executed by PSA and AOPP;
(g) A duly executed Assignment of Intangible Property;
(h) A duly executed Assignment of Leases;
(i) Employment Agreements, duly executed by Havner and Howard,
and approved by the AOPP Board;
(j) A duly executed legal opinion from counsel to AOPP and the OP
expressing the opinions described in Exhibit TT attached hereto;
----------
(k) Deliveries required as a result of the prorations described
below;
(l) Certificates of Merger to be filed with the California and
Delaware Secretary of State with respect to the Merger;
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<PAGE>
(m) Documents evidencing the election of John Hull to a three (3)
person Board of Directors of AOPP, effective as of the Closing;
(n) Such other documents and instruments as are necessary or
appropriate to consummate the Contribution and Merger in accordance with this
Agreement, including, without limitation, an affidavit to the Title Company to
enable the Title Company to issue a non-imputation endorsement to the Title
Policy, provided that the form of such affidavit is acceptable to Acquiport in
its reasonable discretion.
6.3 Closing Prorations. The items below applicable to the Acquiport
------------------
Properties are to be apportioned as of 12:01 AM on the December 15, 1997
(regardless of when the prorations are calculated, or when Closing occurs)(the
"Proration Date"); provided only the items described in subsections (b) and (d),
below regarding Security Deposits and "Leasing Costs" (defined in subsection
(d), below) shall be calculated as of the Closing Date, with the balance of the
items below apportioned pursuant to the Post Closing Review.
(a) Security Deposits. Acquiport shall credit to AOPP the sum of all
------------------
security deposits or other deposits paid by Tenants under any Leases at
Acquiport Properties which have not been applied by Acquiport in accordance with
such Leases as of the Proration Date, and any interest earned thereon which by
law or the terms of such Leases are or could become refundable to tenants
(collectively, "Security Deposits").
(b) Rent and Tenant Charges. Rent and Tenant Charges actually
-----------------------
received by Acquiport under the Leases at Acquiport Properties shall be
apportioned as of the Proration Date under the Post Closing Review. In
addition, at the time of the final calculation and collection from Tenants of
Tenant Charges for 1997, whether in the nature of a reconciliation payment or
full payment, in arrears, there shall be a reproration between Acquiport Two and
CRF, on the one hand, and AOPP, on the other hand, as to the Tenant Charges.
Such reproration shall not be made on the basis of a per diem method of
allocation, but shall instead be apportioned between Acquiport Two and CRF, on
the one hand, and AOPP, on the other hand, on the basis of the relative share of
actual expenses in question incurred by Acquiport Two and CRF, on the one hand,
and AOPP, on the other hand, during the lease year in question. Acquiport Two
and CRF and AOPP each covenants to provide the other with any information
necessary to finalize these calculations. Percentage rent shall be prorated by
utilizing the percentage rent payable for the applicable lease year based upon
the actual days of ownership of the applicable property. There shall be no
adjustment for percentage rent payments until after the receipt of any
percentage rent payments made by the respective Tenants. AOPP covenants to bill
Tenants for rent and Tenant Charges due from Tenants and diligently pursue
collections from Tenants and, as
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<PAGE>
collected, to timely deliver to Acquiport reproration amounts due Acquiport.
Similarly, Acquiport Two and CRF agree to pay AOPP any reproration amounts due
AOPP. Any amounts received from Tenants of the Acquiport Properties after
Closing shall be applied on a Tenant by Tenant and property by property basis,
in the following order: (A) first to AOPP or the OP (as applicable) on account
of any amount due on or after the Proration Date; and (B) next, on account of
any amount due Acquiport or CRF, on the one hand, or AOPP or the OP, on the
other hand, for the period up to the Proration Date.
(c) Real Estate Taxes and Special Assessments. All unpaid real estate
-----------------------------------------
taxes, special assessments, bonds and personal property taxes payable for all
calendar years prior to the year in which Closing occurs (together with interest
thereon) shall be paid by Acquiport with respect to the Acquiport Properties.
Unpaid general real estate taxes and assessments in connection with the
Acquiport Properties payable on account of the calendar year in which Closing
occurs, shall be prorated between AOPP and Acquiport Two and CRF as of the
Proration Date under the Post Closing Review. Acquiport Two and CRF, on the one
hand, and AOPP, the OP and the other AOPP Entities, on the other hand, reserve
the right to meet with governmental officials and to contest any reassessments
governing or affecting their properties, and to contest and seek a refund of any
taxes previously paid with respect thereto with respect to periods prior to the
Proration Date. Acquiport Two and CRF shall retain the right to any refunds
obtained with respect to their respective properties relating to the period
prior to the Proration Date, and shall promptly pay to the party entitled
thereto any such refunds received after the Proration Date relating to the
period prior to the Proration Date.
(d) Leasing Costs. Under the Post Closing Review, Acquiport shall pay
-------------
with respect to the Acquiport Properties all leasing commissions and tenant
improvement costs and allowances (including free rent), if any, in connection
with the current term of any Lease executed on or before the Closing except
those Leases approved by AOPP (the "Leasing Costs"). The Leasing Costs that are
to be prorated at the Closing are delineated on Exhibit UU; provided such
----------
exhibit does not limit the provisions of Section (g), below. In addition,
Leases approved by AOPP are identified on Exhibit UU.
----------
(e) Other Apportionments. Amounts payable under the Contracts
--------------------
applicable to the Acquiport Properties, annual or periodic permit and/or
inspection fees (calculated on the basis of the period covered) and liability
for operation and maintenance expenses and other recurring costs of the
Acquiport Properties shall be apportioned as of the Proration Date under the
Post Closing Review. Effective upon the Closing, Acquiport shall cancel all
insurance it maintains on the Acquiport Properties and shall be entitled to
retain any premium refund for
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<PAGE>
such canceled policies. Acquiport shall receive a credit for any Deposits and
Reimbursements.
(f) Preliminary Closing Adjustment. AOPP and Acquiport shall jointly
------------------------------
prepare and approve a preliminary Closing adjustment on the basis of the
Security Deposit and Leasing Costs provisions.
(g) Post-Closing Review. All of the aforesaid prorations shall be
-------------------
calculated as soon after the Closing Date as feasible, but in any event within
ninety (90) days after the Closing Date (the "Post Closing Review"). The
parties agree that, notwithstanding that the calculations or estimates on which
the aforesaid prorations are based are determined during the Post Closing Review
period, all such calculations shall be made as of 12:01 AM on the Proration
Date. The parties shall cooperate in providing the information necessary to
accomplish the Post Closing Review.
6.4 Closing Costs.
-------------
(a) AOPP Closing Costs. AOPP shall pay on or prior to the Closing
------------------
Date (i) the Chadwick Fee; and (ii) all fees, costs and expenses of AOPP
Representatives, including, without limitation, AOPP Representatives' due
diligence fees, costs and expenses and attorney fees and costs. AOPP shall
cause the OP to pay after the Closing Date (iii) for such surveys of the
Acquiport Properties as are required by AOPP Representatives or to enable the
Title Company to issue the Title Policy in accordance with the Approved Title
Form; (iv) such other closing costs as are customarily paid by the buyer of real
property in the county in which each Acquiport Property is located; and any and
all other costs or expenses of the Transactions.
(b) CRF/Acquiport Two Closing Costs. CRF or Acquiport Two, as
-------------------------------
applicable, shall pay on or prior to the Closing Date (i) the Heitman Fee; and
(ii) all fees and costs and expenses of CRF Representatives, including, without
limitation, CRF Representatives' due diligence fees, costs and expenses and
attorney fees and costs, and (iii) such other closing costs as are customarily
paid by the seller of real property in the county in which each Acquiport
Property is located.
6.5 Possession. At Closing, Acquiport shall deliver possession of the
----------
Acquiport Properties to AOPP (subject to the rights of Tenants under the
Leases).
6.6 Notices to Tenants. Acquiport Two shall mail (or cause to be mailed)
------------------
via first-class mail (postage prepaid) or personally deliver to each Tenant of
the Acquiport Properties, immediately after the Closing, a letter in
substantially the form attached hereto as Exhibit VV, executed by AOPP and
----------
Acquiport Two or their authorized agents, advising each Tenant of the applicable
change of ownership and the holding of security
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<PAGE>
deposits, all in conformity with the requirements of California Civil Code
Section 1950.5(g)(1). If the notice to the Tenant is made by personal delivery,
the Tenant shall acknowledge receipt of the notice and sign his or her name on
Acquiport Two's copy of the notice.
6.7 Reporting Requirements. AOPP shall comply with all applicable
----------------------
federal, state and local reporting and withholding requirements relating to the
close of the transactions contemplated herein. Without limiting the generality
of the foregoing, to the extent the transactions contemplated by this Agreement
involve a real estate transaction within the purview of Section 6045 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). The
---------------------
Title Company shall have sole responsibility to comply with the requirements of
Section 6045 of the Internal Revenue Code (and any similar requirements imposed
by state or local law). For purposes hereof, Acquiport's tax identification
numbers are 22-2909230 for Acquiport Two and 95-4189529 for Acquiport Three.
Title Company shall hold the parties hereto and their counsel free and harmless
from and against any and all liability, claims, demands, damages and costs,
including reasonable attorneys' fees and other litigation expenses, arising or
resulting from the failure or refusal of Escrow Holder to comply with such
reporting requirements.
ARTICLE VII
INDEMNITY
---------
7.1 AOPP/OP General Indemnity. AOPP and OP, jointly and severally,
-------------------------
agree to save, hold harmless, indemnify and defend the CRF Representatives, and
their respective successors and assigns, and each person, if any, who controls
Acquiport within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act (individually and collectively, "Acquiport Parties") from
and against any and all obligations, liabilities, claims, liens or encumbrances,
demands, losses, damages, causes of action, judgments, costs and expenses
(including attorneys' fees), whether direct, contingent or consequential, and no
matter how arising, incurred or suffered by any of them ("Losses and
Liabilities"): (i) resulting from any misrepresentation or inaccuracy in or
breach of any representation, warranty or covenant by AOPP Entities, PSA, or any
AOPP Representative in this Agreement or any Closing Documents, (ii) resulting
from (a) the issuance of the Acquiport AOPP Shares or the AOPP Share
Certificates, or the Acquiport OP Units, and (b) the Reincorporation; or (iii)
resulting from any of the litigation listed on Exhibit LL.
----------
7.2 CRF General Indemnity. CRF shall indemnify, save, defend and
---------------------
hold harmless the AOPP Entities and their respective successors and assigns from
and against and all Losses and Liabilities in any way (i) resulting from any
misrepresentation or inaccuracy in or breach of any representation, warranty or
covenant of Acquiport or any CRF
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<PAGE>
Representative in this Agreement or the Closing Documents, (ii) resulting from
the Acquiport Restructuring. No right of set off against any distribution on
account of Acquiport's AOPP Shares or Acquiport's OP Units shall be available;
or (iii) resulting from the litigation listed on Exhibit AA.
----------
7.3 Securities Indemnification. AOPP and OP, jointly and severally,
--------------------------
agree to indemnify, defend and hold harmless Acquiport Parties from and against
any and all Losses and Liabilities arising out of or based upon (i) any breach
or violation, or alleged breach or violation of the Securities Act, Exchange Act
or any other federal or state securities law by AOPP, PSA, OP, PSPll,
Acquisition Corporation or any of their Affiliates in connection with the
Merger, Listing Merger or the Listing, (ii) the actions taken to form the
Resulting Entity in the event the Listing Merger does not occur, (iii) the
distribution or issuance of AOPP Shares to any AOPP Entity or any other party
prior to or in connection with the Merger, Listing Merger and the Listing, (iv)
the issuance of OP Units, the conversion of OP Units to AOPP Shares, the
redemption of OP Units for cash, in each case prior to or in connection with the
Merger, Listing Merger and the Listing, and (v) a breach of this Agreement
and/or any other Transaction document that does not constitute a breach of
representation described in Sections 7.1 and/or 7.2; provided, however, that the
-------- -------
indemnity provided pursuant to this Section 7.3 shall not apply to any Losses
and Liabilities including, without limitation, Losses and Liabilities to
ABKB/LaSalle Securities Limited Partnership, Cohen & Steers Capital Management,
Inc., Morgan Stanley Asset Management, Fidelity Management and Research,
Stanford University, State of Michigan Retirement Systems pursuant to that
certain Term Sheet with AOPP dated December 3, 1997, to the extent arising out
of any untrue statement or omission or alleged untrue statement or omission of a
material fact contained in any registration statement or prospectus relating to
the Merger, Listing Merger or Listing made therein in reliance upon and in
conformity with written information concerning the Acquiport Properties
furnished by CRF expressly for use in connection with such documents, or which
concerns the Acquiport Properties, and which has been approved in writing by CRF
for use in such documents (collectively, an "Approved Statement"), or in
reliance upon and in conformity with the Acquiport Financial Statements;
provided further however, neither this Agreement nor any other Transaction
document, nor anything contained in this Agreement or any other Transaction
document shall constitute or be deemed an Approved Statement unless, and only to
the extent that, such either is separately designated in writing by CRF to be an
Approved Statement or is information concerning Acquiport or the Acquiport
Properties incorporated in a registration statement or prospectus relating to
the Listing verbatim from a Transaction document.
7.4 Limited Securities Indemnification by CRF. CRF agrees to
-----------------------------------------
indemnify, defend and hold harmless AOPP and its successors and assigns, and
each person, if any, who controls
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<PAGE>
AOPP within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any Losses and Liabilities, including, without
limitation, Losses and Liabilities to ABKB/LaSalle Securities Limited
Partnership, Cohen & Steers Capital Management, Inc., Morgan Stanley Asset
Management, Fidelity Management and Research, Stanford University, State of
Michigan Retirement Systems pursuant to that certain Term Sheet with AOPP dated
December 3, 1997, but only to the extent arising out of any untrue statement or
omission or alleged untrue statement or omission of a material fact contained in
any registration statement or prospectus (other than this Agreement or any other
Transaction documents filed as a part of, with or as an exhibit to any such
registration statement or prospectus) relating to the Merger, Listing Merger or
Listing made therein in reliance upon and in conformity with written information
furnished by CRF expressly for use in connection with such documents, or which
has been approved in writing by CRF for use in such documents in connection with
the Merger, Listing Merger or Listing or in reliance upon and in accordance with
the Acquiport Financial Statements; provided further however, neither this
Agreement nor any other Transaction documents, nor anything contained in this
Agreement or Transaction documents shall constitute or be deemed an Approved
Statement unless, and only to the extent that, such is separately designated in
writing by CRF to be an Approved Statement. No right of set off or counter-
claim against any distribution on account of Acquiport's AOPP Shares or
Acquiport's OP Units shall be available.
7.5 Conduct of Indemnification Proceedings. The indemnified party
--------------------------------------
under any indemnity contained in this Agreement shall give reasonably prompt
notice to the indemnifying party of any action or proceeding commenced against
it in respect of which indemnity may be sought hereunder, but failure to so
notify the indemnifying party (a) shall not relieve it from any liability which
it may have under the indemnity agreements provided in this Agreement, unless
and to the extent it did not otherwise learn of such action and the lack of
notice by the indemnified party results in the forfeiture by the indemnifying
party of substantial rights and defenses, and (b) shall not, in any event,
relieve the indemnifying party from any obligations to the indemnified party
other than the indemnification obligations provided under this Agreement. If
the indemnifying party so elects within a reasonable time after receipt of such
notice, the indemnifying party may assume the defense of such action or
proceeding at such indemnifying party's own expense with counsel chosen by the
indemnifying party and approved by the indemnified party, which approval shall
not be unreasonably withheld; provided, however, that the indemnifying party
-------- -------
will not settle any such action or proceeding without the written consent of the
indemnified party unless, as a condition to such settlement, the indemnifying
party secures the unconditional release of the indemnified party; and provided
--------
further, that if the defendants in any such action or proceeding include both
- -------
the indemnified party and the indemnifying party and the indemnified party
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<PAGE>
reasonably determines, upon advice of counsel, that a conflict of interest
exists or that there may be legal defenses available to it or other indemnified
parties that are different from or in addition to those available to the
indemnifying party, then the indemnified party shall be entitled to one separate
counsel, the reasonable fees and expenses of which shall be paid by the
indemnifying party. If the indemnifying party does not assume the defense of
such action or proceeding, after having received the notice referred to in the
first sentence of this Section, the indemnifying party will pay the reasonable
fees and expenses of counsel (which shall be limited to a single law firm) for
the indemnified party. In such event, however, the indemnifying party will not
be liable for any settlement effected without the written consent of the
indemnifying party. If an indemnifying party is entitled to assume, and
assumes, the defense of such action or proceeding in accordance with this
Section, the indemnifying party shall not be liable for any fees and expenses of
counsel for the indemnified party incurred thereafter in connection with such
action or proceeding except as set forth in the second proviso in the second
sentence of this Section.
7.6 Contribution.
------------
(a) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreements provided for in this Agreement
are for any reason held to be unenforceable by the indemnified party in
accordance with its terms, Acquiport and the OP, and, to the extent such
contribution is not satisfied by the OP, then AOPP, shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement, in such proportion as is appropriate
to reflect the relative fault of Acquiport and the AOPP Entities and PSA in
connection with the statements or omissions which resulted in such Losses and
Liabilities. The relative fault of the parties shall be determined by reference
to, among other things, whether the action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by
the indemnifying party or the indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action.
(b) The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section were determined by pro rata allocation or
by any other method of allocation which does not take account of the equitable
considerations referred to in subparagraph (a) above.
(c) Notwithstanding subparagraphs (a) and (b) above, no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section,
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<PAGE>
each person, if any, who controls an indemnified party within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the indemnified party.
7.7 Liability Threshold.
-------------------
(a) Notwithstanding the provisions of Section 7.7(b), below, the
Thresholds shall not apply to or limit the indemnification with respect to (i)
representations and warranties relating to the due organization and ownership of
Acquisition Corporation, AOPP or the OP, the transfer or issuance of all
Acquiport AOPP Shares and Acquiport OP Units, the due organization or ownership
of AOPP Entities, the qualification of AOPP as a VCOC after the Reincorporation,
the qualification of the OP as a REOC, or the qualification of PSP11 as a
publicly traded REIT and a VCOC and AOPP as a private REIT, (ii) representations
and warranties relating to the due organization and ownership of Acquiport, (iv)
representations and warranties regarding, or violations of, securities laws, (v)
prorations, (vi) sections 4.13 and 4.14 regarding the absence of liabilities for
Acquisition Corporation, AOPP, the OP and/or PSP11, (vii) section 3.18 regarding
the absence of liabilities for Acquiport, and (viii) representations and
warranties regarding the Merger, Listing, whether by the Listing Merger, an
initial public offering ("IPO") or otherwise (individually and collectively, the
"Excluded Claims"). Losses and Liabilities arising from Excluded Claims shall
not be included in the calculation of the Thresholds defined in Section 7.7(b),
below.
(b) Neither AOPP nor the OP, on the one hand (the "AOPP Indemnitors"),
nor CRF or Acquiport on the other hand (the "Acquiport Indemnitor"), shall be
required to indemnify any other party under the provisions of Article XIII for
any Losses and Liabilities (other than arising out of Excluded Claims) unless
the aggregate dollar amount of such Losses and Liabilities reasonably estimated
by the claimant and validly claimed against either the AOPP Indemnitors or the
Acquiport Indemnitor (the "Threshold") equals or exceeds the "General Claims
Threshold" for "General Claims", or the "Lease Threshold" for "Lease Claims" (as
such terms are hereafter defined), as applicable. As used herein, "General
Claims" shall mean claims for Losses and Liabilities relating to or arising out
of the breach or default of any representation, warranty or covenant other than
Excluded Claims and Lease Claims. The "General Claims Threshold" shall be Eight
Hundred Forty Thousand Dollars ($840,000). As used herein, "Lease Claims" shall
mean claims for Losses and Liabilities relating to or arising out of the breach
or default of the representations and warranties contained in Section 3.7 and
4.21. The "Lease Claims Threshold" shall be One Hundred Sixty Thousand Dollars
($160,000). If the applicable Threshold is equalled or exceeded by the claiming
party, then the full amount of Losses and Liabilities of the claimant governed
by such Threshold shall be recoverable under the indemnification provisions of
this
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<PAGE>
Agreement. Losses and Liabilities which are covered by title insurance or the
proceeds of condemnation or casualty insurance shall not be included in
computing whether the aggregate claims equal or exceed the applicable Threshold
for the purpose of this provision.
7.8 Maximum Liability. The maximum liability of AOPP and the OP, on
-----------------
the one hand, and CRF and Acquiport, on the other hand, for any Losses and
Liabilities shall equal One Hundred Thirty Five Million Dollars ($135,000,000)
plus all costs of the prevailing party to recover for a Loss or Liability under
this Agreement.
7.9 Survival. Subject to the provisions of Section 9.1, below, and
--------
the provisions of Article VII shall survive the Closing, Merger, Listing Merger,
Listing, Unwind or termination of this Agreement.
ARTICLE VIII
INDUSTRY CENTER
---------------
Acquiport Two owns a property commonly known as "Industry Center"
located at 1245/1265 Johnson Drive, 1310/1320 Johnson Drive, 16666 Johnson
Drive, 1361/1364 Marion Court, 1285 Bixby Drive, 1295/1315 Johnson Drive,
16622/16644 Johnson Drive, 1365 Darius Court, and 1350 Bixby Drive/16651 Johnson
Drive, City of Industry, California (the "Industry Property"). The Industry
Property was originally intended to be included in the portfolio of Acquiport
Properties transferred to AOPP pursuant to the terms hereof in exchange for
382,163 AOPP Shares (the "Industry AOPP Shares"). Prior to the Closing Date,
AOPP determined that there may be certain environmental concerns at the Industry
Property (the "Unresolved Environmental Matters"). The Industry Property was
removed from the portfolio of Acquiport Properties that are the subject of this
Agreement as a result of the Unresolved Environmental Matters. On or prior to a
date which is ten (10) weeks following the Closing Date, Acquiport Two will
diligently and in good faith identify the scope of the Unresolved Environmental
Matters. On or prior to a date which is twelve (12) weeks following the Closing
Date, Acquiport Two shall inform AOPP whether (a) Acquiport Two elects to use
reasonable efforts to resolve the Unresolved Environmental Matters (which shall
include reasonable investigation and monitoring activity and the expenditure of
up to $1,000,000 for remediation), in which case the provisions of this Article
shall apply or (b) Acquiport Two does not commit to use reasonable efforts to
resolve the Unresolved Environmental Matters, in which case the provisions of
this Article shall thereupon be of no further force or effect. In the event
Acquiport Two fails to deliver notice pursuant to the preceding sentence,
Acquiport Two shall be deemed to have elected (b), above. In the event such
Unresolved Environmental Matters are resolved in a manner satisfactory to AOPP
in its sole discretion on or before twelve (12) months after the Closing Date,
AOPP agrees to acquire the Industry Property and Acquiport
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<PAGE>
Two agrees to sell the Industry Property to AOPP. Such acquisition shall be by
either by the merger of Acquiport Two with and into a newly formed subsidiary of
AOPP or the Resulting Entity for the Industry AOPP Shares (or an equivalent
number of shares in any Resulting Entity), or the contribution of Industry
Center to the OP for OP Units equivalent to the AOPP Industry Shares, upon terms
and provisions substantially similar to those contained in this Agreement, as
mutually agreed by Acquiport Two and AOPP. This Article shall survive Closing
for a period of fifteen (15) months after the Closing Date.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Survival of Representations and Warranties. The representations
------------------------------------------
and warranties contained in Sections 3.1 through 3.4, inclusive, 3.8, 3.11, 3.15
through 3.19, inclusive, 3.21, 3.22, 4.1 through 4.8, inclusive, 4.10, 4.11,
4.12 through 4.16, inclusive, 4.25, and 4.30 shall survive the Closing, Merger
and the Listing, or the Unwind, without limitation; the representation and
warranty contained in Section 4.1 regarding the maintenance of the VCOC shall
survive Closing, Merger, Listing Merger and Listing; all other representations
and warranties of AOPP and Acquiport in this Agreement shall survive until the
earlier of (a) a period of two (2) years after the Closing, or (b) the Unwind
Date (whichever of (a) or (b) is applicable is referred to herein as the
"Survival Period"), except in the case of fraud or willful misrepresentation, in
which case such representations and warranties shall survive independent of this
limitation; provided, however, that for matters as to which either party has
given the other written notice within the Survival Period, the representation
and warranties that are related to the matters in such written notice shall
survive until all liabilities arising out of the matters described in such
written notice have been satisfied. Any indemnification reflected in this
Agreement shall not be extinguished by the Closing, Unwind or Listing, but shall
survive indefinitely; provided that, notwithstanding the foregoing, any claim
for indemnification arising out of or relating to a representation or warranty
that does not survive indefinitely as provided above, shall be effective only if
written notice of such claim identifying the applicable representations or
warranties has been delivered prior to the expiration of the Survival Period.
9.2 Specific Performance. The parties hereto acknowledge that the
--------------------
obligations undertaken by them hereunder are unique and that there would be no
adequate remedy at law if any party fails to perform any of its obligations
hereunder, and accordingly agree that each party, in addition to any other
remedy to which it may be entitled at law or in equity, shall be entitled to (a)
compel specific performance of the obligations, covenants and agreements of any
other party under this Agreement in accordance with the terms and conditions of
this Agreement and
-44-
<PAGE>
(b) obtain preliminary injunctive relief to secure specific performance and to
prevent a breach or contemplated breach of this Agreement in any court of the
United States or any State thereof having jurisdiction (each party waives the
requirement of the posting of any bond or security in connection with any
proceedings or any injunction issued in connection with this Section).
9.3 Commissions. CRF and AOPP each represent and warrant to the
-----------
other that (other than CRF's engagement of Heitman as an advisor, whose entire
fee shall be the responsibility of CRF pursuant to a separate agreement, and
AOPP's engagement of Chadwick as an advisor, whose entire fee shall be the
responsibility of AOPP pursuant to a separate agreement) neither has employed
any real estate agent, broker, investment banker, advisor or finder in
connection with the Transactions. CRF shall be responsible for any commission
or fee and all costs and expenses (including, without limitation, reasonable
attorneys' fees) incurred by AOPP in defending against any claim for a
commission or fee by Heitman, and AOPP shall be responsible for any commission
or fee and all costs and expenses (including, without limitation, reasonable
attorneys' fees) incurred by Acquiport in defending against any claim for a
commission or fee by Chadwick. The party through whom any other broker or
finder makes a claim shall hold harmless, indemnify and defend the other party
hereto, its successors and assigns, agents, employees, officers and directors,
and the Properties from and against any and all obligations, liabilities,
claims, demands, liens, encumbrances and losses (including, without limitation,
attorneys' fees), whether direct, contingent or consequential, arising out of,
based on, or incurred as a result of such claim. The provisions of this Section
shall survive the Closing, Merger, Listing Merger and Listing or termination of
this Agreement.
9.4 Confidentiality/ No Third Party Beneficiary. Each of the AOPP
-------------------------------------------
Entities, on the one hand, and Acquiport Two and CRF, on the other hand, and
their respective Representatives agree to maintain as confidential and to not
disclose to any third parties, other than AOPP Entities and AOPP
Representatives, and CRF Representatives, any information in their possession
concerning the CRF Representatives, or the Acquiport Properties and AOPP
Entities, or the REIT Properties, except information which (i) is required to be
disclosed by any of the parties hereto to comply with applicable laws or
governmental regulations (including securities laws and regulations) or a
subpoena or judicial order; (ii) is a matter of public record; (iii) is utilized
by AOPP in a filing with the SEC provided that CRF is identified by name in such
filing only to the extent necessary to comply with SEC requirements; or (iv) is
used for raising funds or acquiring additional properties provided all such
disclosures are first approved by Heitman. Neither party shall release or cause
or permit to be released any press notices or advertising promotion or other
publicity relating to the Transactions without first giving reasonable notice
to, and consulting with, and
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<PAGE>
obtaining the written consent of, the other party. As an accommodation only,
CRF consents to the delivery prior to the Listing Merger of the documents listed
on Exhibit WW to certain equity investors in AOPP (the "Equity Investors"),
----------
provided, however, AOPP shall inform any such Equity Investors that they are not
third party beneficiaries of such documents and they are not entitled to rely
upon, or to any recourse to Acquiport or any CRF Representatives on account of,
any of the provisions or information contained in such documents. Each of the
AOPP Entities, on the one hand, and Acquiport Two and CRF, on the other hand,
and their respective Representatives agree that there are no third party
beneficiaries to this Agreement, the Closing Documents or any Transaction
documents.
9.5 Joint and Several Obligations. Where obligations and/or
-----------------------------
liabilities herein are the joint and several obligations of AOPP and the OP,
without limiting the joint and several nature of such obligations and
liabilities, all such obligations and liabilities shall first be satisfied by
the OP, and then by AOPP.
9.6 Notices. Any notice, consent or approval required or permitted
-------
to be given under this Agreement shall be in writing and shall be deemed to have
been given (i) upon hand delivery to the recipient; (ii) if sent by facsimile
transmission, upon receipt by the sender of confirmation of such transmission,
(iii) one (1) business day after being deposited with Federal Express or another
reliable overnight courier service for next day delivery; or (iv) on the date of
receipt or refusal to accept delivery when deposited in the United States mail,
registered or certified mail, postage prepaid, return receipt required; and
addressed or telecopied as follows:
If to AOPP: American Office Park Properties, Inc.
---------- 701 Western Avenue, Suite 200
Glendale, California 91201
Attn: Mr. Ronald L. Havner, Jr.
Fax No.: (818) 244-9267
Telephone No.: (818) 244-8080
With a copy to: Hale and Dorr LLP
-------------- 1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attn: Steven S. Snider, Esq.
Fax No.: (202) 942-8484
Telephone No.: (202) 942-8494
If to Acquisition
-----------------
Corporation: c/o American Office Park Properties, Inc.
----------- 701 Western Avenue, Suite 200
Glendale, California 91201
Attn: Mr. Ronald Havner, Jr.
Fax No.: (818) 244-9267
Telephone No.: (818) 244-8080
-46-
<PAGE>
With a copy to: Hale and Dorr LLP
-------------- 1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attn: Steven S. Snider, Esq.
Fax No.: (202) 942-8484
Telephone No.: (202) 942-8494
If to CRF or
------------
Acquiport Two: Office of the State Comptroller
------------- 633 Third Avenue, 31st Floor
New York, New York 10017-6754
Attn: Chief Real Estate Investment
Officer-Equity Program
Fax No.: (212) 681-4485
Telephone No.: (212) 681-4489
With a copy to: Office of the State Comptroller
-------------- 633 Third Avenue, 31st Floor
New York, New York 10017-6754
Attn: Marjorie Tsang, Esq.
Fax No.: (212) 681-4485
Telephone No.: (212) 681-4471
With a copy to: Cox, Castle & Nicholson LLP
-------------- 2049 Century Park East, Suite 2800
Los Angeles, California 90067
Attn: Amy H. Wells, Esq.
Fax No.: (310) 277-7889
Telephone No.: (310) 284-2233
And a copy to: Heitman Capital Management
------------- Corporation
180 North LaSalle Street
Suite 3400
Chicago, Illinois 60601-2886
Attn: David B. Perisho
Fax No.: (312) 541-6798
Telephone No.: (312) 541-6748
or such other address or telecopy number as either party may from time to time
specify in writing to the other; provided, however, that the foregoing addresses
and numbers shall remain in effect unless and until notice of any change is
deemed to have been given in the manner required by this Section.
9.7 Execution of Documents by Acquiport and CRF. Acquiport and CRF
-------------------------------------------
have informed AOPP, and AOPP understands and agrees, that for administrative
reasons Acquiport and CRF require up to five (5) business days to execute any
document and an additional one (1) business day to deliver such document to the
Title Company. Therefore, all Closing Documents to be executed by Acquiport
and/or CRF shall be agreed to and prepared in final execution form and received
by Acquiport and/or CRF for execution not less than six (6) business days prior
to the scheduled Closing Date.
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<PAGE>
9.8 Successors and Assigns. Provided such assignment does not
----------------------
violate any applicable securities or REIT laws, and Acquiport Two may assign all
or any portion of its right to receive AOPP Shares and OP Units under this
Agreement and any other Transaction documents, including, without limitation,
their Acquiport AOPP Shares and Acquiport OP Units, to any entity or entities
wholly owned directly or indirectly by CRF, and such entity or entities shall
have all of the rights available to CRF and Acquiport Two as though they were
the original party hereto and to such other Transaction documents.
Notwithstanding any such assignment by CRF and or Acquiport Two, CRF shall
remain liable for all representations, warranties, liabilities and
indemnifications of CRF provided for herein unless the entity assigned CRF's
rights and obligations is legally responsible for all representations,
warranties, liabilities and indemnifications of CRF provided for herein.
Concurrently with the Listing Merger, AOPP may assign its rights and obligations
under this Agreement to PSP11, provided that PSP11 expressly assumes all of the
duties, obligations and liabilities of AOPP, and further provided that PSP11 has
executed and delivered the Unwind Agreement. Notwithstanding any such
assignment by AOPP, AOPP shall remain liable for all representations,
warranties, liabilities and indemnifications of AOPP provided for herein, unless
as a result of the Listing Merger the entity into which AOPP merges is legally
responsible for all representations, warranties, liabilities and
indemnifications of AOPP provided for herein. Except as provided in this
Section, no party hereto shall assign its rights and/or obligations under this
Agreement, in whole or in part, whether by operation of law or otherwise. This
Section shall survive the Merger, Listing Merger and the Listing.
9.9 Governing Law. This Agreement, and all documents and instruments
-------------
executed and delivered in connection herewith shall be governed by and construed
in accordance with the laws of the State of California notwithstanding that
California law, with respect to choice of law, or the Constitution, laws or
treaties of the United States of America, may dictate that this Agreement or
such documents or instruments should be governed by or construed in accordance
with the laws of another jurisdiction.
9.10 Enforcement. If any party hereto institutes any action or
-----------
proceeding to interpret or enforce any provision of this Agreement or for an
alleged breach of any provision of this Agreement, the prevailing party shall be
entitled to recover its actual attorneys' fees and all fees, costs and expenses
incurred in connection with such action or proceeding. Such attorneys' fees,
fees, costs and expenses shall include post judgment attorneys' fees, fees,
costs and expenses incurred on appeal or in collection of any judgment. This
provision is separate and several and shall survive the merger of this provision
into any judgment on this Agreement. No person or entity other than the parties
hereto is or shall be entitled to bring any action to enforce any provision of
this Agreement against any of the parties hereto, and the covenants and
agreements set forth in
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<PAGE>
this Agreement shall be solely for the benefit of, and shall be enforceable only
by, the parties hereto or their respective successors and assigns as permitted
hereunder.
9.11 Jurisdiction and Venue. Any action initiated by any party under
----------------------
this Agreement shall be brought and prosecuted in the United States District
Court for the Central District of California which the parties acknowledge and
agree is a convenient forum in which to litigate such action, and the parties
waive any right to commence or transfer such action in or to any other court.
Should said District Court find that it has no jurisdiction over such action,
then such action shall be brought and prosecuted in the Superior Court of the
County of Los Angeles, State of California. Each party hereto expressly
consents and submits to personal jurisdiction in the federal or state courts, as
the case may be, in the State of California, County of Los Angeles and to
permanent and exclusive venue in Los Angeles County, State of California. In
addition, in any action under this Agreement, each party hereto expressly
consents to service of process by any manner set forth in this Agreement for the
giving of notice.
9.12 Time of the Essence. Time is of the essence of this Agreement.
-------------------
9.13 Severability. If any provision of this Agreement, or the
------------
application thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
9.14 Exhibits. All exhibits attached hereto are incorporated herein
--------
as though fully set forth herein.
9.15 Further Assurances. Each party agrees to cooperate fully with
------------------
the other parties and to prepare, execute, and deliver such further instruments
of conveyance, contribution, assignment, or transfer and shall take or cause to
be taken such other or further action as either party shall reasonably request
at any time or from time to time in order to consummate the terms and provisions
and to carry into effect the intents and purposes of this Agreement.
9.16 Counterparts. To facilitate execution, this Agreement may be
------------
executed in as many counterparts as may be required. It shall not be necessary
that the signatures of, or on behalf of, each party, or that the signatures of
all persons required to bind any party, appear on each counterpart, but it shall
be sufficient that the signature of, or on behalf of, each party, appear on one
or more of the counterparts. All counterparts shall collectively constitute a
single agreement. It shall not be necessary in making proof of this Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereof.
-49-
<PAGE>
9.17 No Waiver. No delay or failure on the part of any party hereto
---------
in exercising any right, power or privilege under this Agreement or under any
other instrument or document given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial
exercise of any such right, power or privilege shall preclude the further
exercise of such right, power or privilege. No waiver shall be valid against
any party hereto unless made in writing and signed by the party against whom
enforcement of such waiver is sought and then only to the extent expressly
specified herein.
9.18 Entire Agreement. The documents, letters and other agreements
----------------
executed and delivered substantially concurrently with the execution and
delivery of this Agreement are intended by the parties as a final expression of
their agreement regarding the Merger and Contribution and are intended to be the
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect thereof. There are no covenants, agreements,
promises, warranties or understandings other than those set forth or referred to
herein, with respect to such subject matter. This Agreement, together with its
exhibits and the other documents and agreements referred to herein, supersede
all prior agreements and understandings between the parties with respect to the
subject matter hereof and thereof. This Agreement shall not be modified or
amended except in a written document signed by the parties hereto. The
obligations of the AOPP Entities and of CRF and Acquiport, respectively, shall
be joint and several.
9.19 Legal Representation and Construction. Each party hereto has
-------------------------------------
been represented by legal counsel in connection with the negotiation and
drafting of this Agreement. The parties acknowledge that each party and its
counsel have reviewed and revised this Agreement, and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed and delivered on its behalf as of the date first
above written.
AMERICAN OFFICE PARK PROPERTIES, INC., a
California corporation
By: /s/ RONALD L. HAVNER, JR.
-------------------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
[SIGNATURES CONTINUED ON NEXT PAGE]
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<PAGE>
[SIGNATURES CONTINUED FROM PRIOR PAGE]
AMERICAN OFFICE PARK PROPERTIES, L.P., a
California limited partnership
By: AMERICAN OFFICE PARK PROPERTIES, INC., a
California corporation, sole general partner
By: /s/ RONALD L. HAVNER, JR.
________________________________
Ronald L. Havner, Jr., President and Chief
Executive Officer
AOPP ACQUISITION CORP. THREE, a California corporation
By: /s/ RONALD L. HAVNER, JR.
-------------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
ACQUIPORT TWO CORPORATION, a Delaware corporation
By: /s/ HOWARD J. EDELMAN
-----------------------------------
Howard J. Edelman, Vice President
-----------------------------------
(Print Name and Title)
ACQUIPORT THREE CORPORATION, a Delaware corporation
By: /s/ HOWARD J. EDELMAN
-----------------------------------
Howard J. Edelman, Vice President
-----------------------------------
(Print Name and Title)
[SIGNATURES CONTINUED ON NEXT PAGE]
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<PAGE>
[SIGNATURES CONTINUED FROM PRIOR PAGE]
THE COMPTROLLER OF THE STATE OF NEW YORK AS TRUSTEE OF
THE COMMON RETIREMENT FUND
By: /s/ JOHN E. HULL
------------------------------------
John E. Hull, Deputy Comptroller,
Investments & Cash Management
Chicago Title Insurance Company agrees to act as Escrow Holder in accordance
with the terms of this Agreement and to comply with all reporting requirements
of Section 6045 of the United States Internal Revenue Code and the regulations
promulgated thereunder and to comply with the terms and provisions of Paragraph
6.7 of this Agreement.
CHICAGO TITLE INSURANCE COMPANY
By: /s/ Joanne Williamson
------------------------------------
Joanne Williamson
------------------------------------
(Print Name and Title)
Underwriting Counsel
-52-
<PAGE>
EXHIBIT LIST
------------
<TABLE>
<CAPTION>
Section(s)
----------
<S> <C> <C> <C>
Exhibit A - Acquiport Financial Statements 1.5
Exhibit B - Description of Acquiport Properties 1.6
Exhibit C-1-
C-6 - Legal Descriptions 1.6
Exhibit D - Acquiport Review Material 1.8
Exhibit E - Acquiport Three Share Certificates 1.10
Exhibit F - Agreement Among Shareholders and Company 1.12
Exhibit G - AOPP Business Plan 1.15
Exhibit H - AOPP Governance Amendment 1.16
Exhibit I - AOPP Entities Financial Statements 1.18
Exhibit J - AOPP Properties 1.19
Exhibit K - AOPP Review Material 1.21
Exhibit L - AOPP Share Certificates 1.23
Exhibit M - Approved Title Form 1.24
Exhibit N - Deed(s) 1.43,9.1(b)
Exhibit O - AOPP/Havner Employment Agreement 1.46
Exhibit P - AOPP/Howard Employment Agreement 1.46
Exhibit Q-1 - Lease List 1.63
Exhibit Q-2 - Updated Lease List 1.63
Exhibit R - Non-Competition Agreement 1.72
Exhibit S - OP Governance Amendment 1.75
Exhibit T - PSA Business Park Properties 1.81
Exhibit U - PSP11 Amendments 1.83
Exhibit V - PSP11 Business Park Properties 1.84
Exhibit W - PSP11 Financial Statements 1.85
Exhibit X - Rent Rolls 1.89
Exhibit Y - Unwind Agreement 1.102
Exhibit Z - Environmental Reports 3.10
Exhibit AA - CRF/Acquiport Litigation 3.11
Exhibit BB - Tax Matters Representation 3.16
Exhibit CC - Intentionally Deleted
Exhibit DD - Service Contracts 3.20
Exhibit EE - Tax Contests 4.11
Exhibit FF - AOPP/OP Financial Update 4.13
Exhibit GG - PSP Financial Update 4.14
Exhibit HH - AOPP Stock/OP Units 4.16
Exhibit II - Compliance with Laws 4.17
Exhibit JJ - Title Matters 4.19
Exhibit KK - AOPP Contracts 4.22
Exhibit LL - AOPP Entities Litigation 4.23
Exhibit MM - Insurance Claims 4.29
Exhibit NN - Bill of Sale 6.1(c)
Exhibit OO - Assignment of Intangible Property 6.1(d)
Exhibit PP - Assignment and Assumption of Lease 6.1(e)
Exhibit QQ - Certificate of Non-Foreign Status 6.1(f)
Exhibit RR - Form 590 6.1(g)
Exhibit SS - Acquiport Legal Opinion 6.1(h)
Exhibit TT - AOPP Legal Opinion 6.1(j)
Exhibit UU - Leasing Costs 6.3(d)
Exhibit VV - Notice to Tenants 6.6
Exhibit WW - Documents Delivered to Equity Investors 9.4
Exhibit XX - Pending Insurance Claims 3.14
</TABLE>
<PAGE>
EXHIBIT 10.10
[Exhibits to this Agreement have been omitted
and will be furnished to the Securities and
Exchange Commission upon request]
AGREEMENT AMONG SHAREHOLDERS AND COMPANY
----------------------------------------
THIS AGREEMENT AMONG SHAREHOLDERS (the "Agreement") is made and entered
into as of this 23rd day of December, 1997, by and among Acquiport Two
Corporation, a Delaware corporation ("Acquiport Two"), American Office Park
Properties, Inc., a California corporation ("AOPP"), American Office Park
Properties, L.P., a California limited partnership ("OP"), and Public Storage,
Inc., a California corporation ("PSA"). Acquiport Two and PSA are hereinafter
referred to individually as a "Stockholder" and collectively as the
"Stockholders."
WITNESSETH:
WHEREAS, New York State Common Retirement Fund, a public pension fund
created pursuant to Article 9 of the New York Retirement and Social Security Law
("CRF"), Acquiport Two, Acquiport Three Corporation, a Delaware corporation
("Acquiport Three", and together with Acquiport Two "Acquiport", both wholly
owned by CRF), AOPP, AOPP Acquisition Corp. Three, a California corporation
("Acquisition Corporation"), and OP have entered into a certain Merger and
Contribution Agreement, dated concurrently herewith (the "Merger and
Contribution Agreement"), whereby, as more particularly described, shares of
AOPP will be issued to Acquiport Two upon the merger of Acquiport Three into
Acquisition Corporation (the "Merger"), and OP will issue OP Units to Acquiport
Two in exchange for the Acquiport Two Properties (the "Contribution") owned by
Acquiport Two; and
WHEREAS, the parties hereto wish to clarify certain issues arising from
such Merger and Contribution Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
and for other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have
-----------
their respective meanings set forth in the Merger and Contribution Agreement,
which meanings are incorporated herein by this reference as though set forth in
full and shall apply notwithstanding that "Closing" (as defined in the Merger
and Contribution Agreement) has occurred.
2. COMPOSITION OF THE BOARD OF DIRECTORS.
-------------------------------------
(a) Subsequent to the Closing and prior to and including the date of the
Listing, in any and all votes for the number or election of directors of
AOPP (whether at a meeting or by written consent in lieu of a meeting),
each Stockholder
<PAGE>
shall, taking into account the manner of voting, whether cumulative or
majority, vote or cause to be voted all Shares (as defined in Section 3
below) owned by it, or over which it has voting control, and otherwise use
its respective best efforts, so as to fix the number of directors of AOPP
at three (3) and to elect (i) two board members designated by PSA and
meeting the approval of Acquiport Two, with such approval not unreasonably
withheld, and (ii) one board member designated by Acquiport Two and meeting
the approval of PSA, with such approval not unreasonably withheld. The
directors initially designated by PSA are Ronald L. Havner, Jr. and Harvey
Lenkin, and the director initially designated by Acquiport Two is John
Hull. For purposes of this Section 2(a), these three initial directors are
hereby approved by Acquiport Two and PSA. So long as this Section 2(a) is
in effect, AOPP shall cause the members of the board of directors of
Acquisition Corporation to be the same as the AOPP board.
(b) Subsequent to the Listing, in any and all votes for the number or
election of directors of AOPP (whether at a meeting or by written consent
in lieu of a meeting), each Stockholder shall, taking into account the
manner of voting, whether cumulative or majority, vote or cause to be voted
all Shares (as defined in Section 3 below) owned by it, or over which it
has voting control, and otherwise use its respective best efforts, so as to
fix the number of directors of AOPP at seven and to elect (i) two board
members designated by PSA, (ii) one board member designated by Acquiport
Two, and (iii) four independent board members mutually approved by
Acquiport Two and PSA, such approval not to be unreasonably withheld or
delayed. For purposes of this Section 2(b), Vern O. Curtis, Arthur
Friedman and Jack Steele are hereby approved by Acquiport Two and PSA.
(c) Notwithstanding Sections 2(a) and 2(b) above, the Stockholders'
obligations to vote their Shares as described in Sections 2(a) and 2(b)
shall cease on the date (the "Termination Date") that is the earlier of,
(i) the Unwind Date; (ii) the date on which Acquiport Two no longer
maintains a Fully Diluted ownership interest in the OP and the general
partner of the OP equal to or greater than 20% (but excluding, for the
purpose of calculating Acquiport Two's Fully Diluted ownership interest,
any Shares that have been issued pursuant to an "Equity for Property
Exchange" or a "Shareholder Approval Issuance" (as defined below) unless
and until Acquiport Two has been provided the opportunity to acquire AOPP
Shares pursuant to a "Cash Offering" (as defined below) on account thereof
pursuant to Section 4(ii) below); and (iii) the date on which PSA no longer
maintains
2
<PAGE>
a Fully Diluted ownership interest in the OP and the general partner of the
OP equal to or greater than 20%, provided, however, that notwithstanding
clause ii or iii of this Section 2(c), the Stockholders' obligations to
vote their Shares as described in Sections 2(a) and 2(b) shall continue
until the 4th anniversary hereof and shall terminate on such date.
(d) Prior to the Termination Date, PSA shall not vote to remove any
director designated by Acquiport Two except for bad faith or willful
misconduct. Prior to the Termination Date, Acquiport Two shall not vote to
remove any director designated by PSA, except for bad faith or willful
misconduct.
(e) If, prior to the Listing, any director elected pursuant to the terms of
this Section 2 shall resign, die, become incapacitated or be removed, PSA
and Acquiport Two agree to vote or cause to be voted all Shares owned by
them, or over which they have voting control, and otherwise use their best
efforts so that a mutually approved independent director, or a designee of
the entity whose designated director has resigned, died, become
incapacitated or been removed, as the case may be, shall be elected to the
board of directors; provided, the requirements otherwise set forth in this
Section 2 shall apply.
(f) Subsequent to the Listing and until the Termination Date, except for
(i) a vacancy in the board member position designated by Acquiport Two,
(ii) a vacancy in a board member position designated by PSA (but only in
the event a successor board member to such PSA board member has not been
approved prior to a vacancy occurring with respect to the other board
member position designated by PSA), and (iii) a vacancy created by the
removal of a director by the vote or written consent of the shareholders or
by court order, vacancies in the Board of Directors of the Company may be
filled by the unanimous vote or written consent of the remaining directors.
In the event a replacement or successor director is not approved pursuant
to the terms of the immediately preceding sentence, such vacancy shall be
filled by the shareholders of the Resulting Entity in the manner set forth
in Sections 2(e), notwithstanding the fact that such vacancy is being
filled subsequent to the Listing and prior to the Termination Date, and
2(g).
(g) Subsequent to the Closing and until the Termination Date, AOPP agrees,
in connection with any election of directors, whether regularly scheduled
or to fill a vacancy, to nominate only the individual or individuals
designated by Acquiport Two and PSA pursuant to this Section 2 and to
3
<PAGE>
include in any relevant notice to shareholders the nomination of such
designees.
(h) If, at any time, prior to the Termination Date, PSA and Acquiport Two
shall have insufficient votes to achieve the results described in Sections
2(a) and 2(b), PSA and Acquiport Two shall confer as to the best manner of
voting so as to fix the number of directors of AOPP and elect board members
in a manner consistent with Sections 2(a) and 2(b). Prior to the
Termination Date, neither PSA nor Acquiport Two shall elect cumulative
voting without the written consent of the other party.
(i) The parties intend the provisions of this Section 2 to constitute a
valid agreement between shareholders authorized by Section 706 of the
California Corporation Code, as such section has been amended pursuant to
California Assembly Bill No. 389 effective January 1, 1998. The parties
agree to re-execute and re-deliver this Agreement after January 1, 1998 to
insure the effectiveness of this Section 2 under such Section 706, as
amended; provided, however, that any failure to do so shall not affect the
effectiveness of this Agreement or any provisions hereof.
3. SHARES. "Shares" shall mean and include any and all shares of common stock
------
and/or shares of capital stock of AOPP, by whatever name called, which carry
voting rights (including voting rights which arise by reason of default) and
shall include (i) any shares now owned or subsequently acquired by a
Stockholder, however acquired, including without limitation stock splits and
stock dividends, and (ii) any shares which would be acquired upon the conversion
of limited partnership interests of the OP to common stock of AOPP.
4. PREEMPTIVE RIGHTS.
-----------------
(a) Prior to the issuance by either AOPP or the OP, as the case may be
(the "Offering Entity"), of any of its securities, including, without
limitation, common, preferred and/or equity stock, limited partnership
interests in the OP, and any and all rights, options, warrants or other
instruments or securities exchangeable for or convertible into such stock
or limited partnership interests, or evidencing any right to subscribe for,
purchase or otherwise acquire such stock or limited partnership interests,
AOPP shall offer to Acquiport Two by written notice (the "Notice of Offer")
the right, for a period of fifteen (15) days, to purchase AOPP Shares in an
amount equal to the amount necessary to maintain Acquiport Two's
proportionate share of the Fully Diluted ownership interest in AOPP.
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<PAGE>
(i) Acquiport Two may accept the offer of AOPP as to the full number
of AOPP Shares offered to it or any lesser number, by written notice thereof
given by it prior to the expiration of the aforesaid fifteen (15) day period, in
which event AOPP shall sell and Acquiport Two shall buy, upon the terms
specified, the number of AOPP Shares agreed to be purchased by Acquiport Two;
provided, Acquiport Two may, but shall not be required to, close on the
- --------
acquisition of such AOPP Shares until the closing on the sale of securities to
individuals or entities which gave rise to the preemptive right; provided
--------
further, however, Acquiport Two shall be permitted to adjust on a pro rata basis
- ------- -------
the number of AOPP Shares agreed to be purchased if the individuals or entities
purchasing the securities which gave rise to the preemptive right reduce the
number of securities to which they subscribed.
(ii) The purchase price per share to Acquiport Two for such AOPP
Shares shall be an amount equal to the gross proceeds per share of the Offering
Entity of securities offered as part of the same offering (converted to an
equivalent per AOPP Share price if such securities are convertible into or
exchangeable for more or less than one AOPP Share), less a discount equal to the
best discount which AOPP and Acquiport Two are able to negotiate, if any, of the
securities to be offered.
(iii) The Offering Entity shall be free, at any time prior to ninety
(90) days after the date of AOPP's Notice of Offer to Acquiport Two, to offer
and sell to any third party or parties the remainder of the securities offered,
including any AOPP Shares offered for purchase to, but not accepted by,
Acquiport Two at the price and on the payment terms specified in the Notice of
Offer to Acquiport Two. However, if such third party sale or sales are not
consummated within such ninety (90) day period, the Offering Entity shall not
sell such securities as have not been purchased within such period without AOPP
again complying with this Section 4.
(iv) So long as the above described preemptive rights are in effect,
AOPP shall maintain a sufficient number of authorized but unissued shares of
common stock so as to be able to satisfy any exercise of such preemptive rights.
(b) The rights granted in this Section 4 shall not apply to securities
issued:
(i) As a stock dividend or upon any subdivision of shares of common,
preferred and/or equity stock, provided that the securities issued pursuant to
such stock dividend or subdivision are limited to additional shares of common,
preferred and/or equity stock of which Acquiport Two receives its pro rata
share;
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<PAGE>
(ii) Pursuant to the conversion of convertible securities issued in
compliance with this Agreement, including, without limitation, the conversion of
limited partnership interests of the OP to common stock of AOPP;
(iii) Pursuant to subscriptions, warrants, options, convertible
securities, or other rights outstanding on the date of this Agreement, which are
listed on Exhibit A hereto;
---------
(iv) Solely in consideration for the acquisition (whether by merger or
otherwise) by the Offering Entity or any of its subsidiaries of all or a portion
of the stock or assets of any other entity;
(v) In connection with any stock option or incentive plan to employees
or service providers of AOPP or the OP; or
(vi) In the event shareholder approval shall be required by any law,
regulation or regulating body (including any stock exchange requirements) with
respect to the issuance of such Shares.
(c) Notwithstanding the foregoing, in the event of issuance by the Offering
Entity of its securities in exchange for all or a portion of the stock or
assets of any other entity, as described in Section 4(b)(iv) (an "Equity
for Property Exchange"), above, or in the event shareholder approval
therefor shall be required, as described in Section 4(b)(vi) (a
"Shareholder Approval Issuance"), above, and, due to Sections 4(b)(iv) or
4(b)(vi), above, Acquiport Two is not entitled to purchase any additional
shares in connection with such Equity for Property Exchange or Shareholder
Approval Issuance, as the case may be, then the preemptive rights contained
in Section 4 shall apply on the date of the first offering by an Offering
Entity of its securities in exchange for cash ("Cash Offering") immediately
following the Equity for Property Exchange or Shareholder Approval
Issuance, as the case may be, and on each Cash Offering thereafter until
Acquiport Two has had an opportunity to purchase a number of AOPP Shares so
that the number of AOPP Shares owned by Acquiport Two equals the "Target
Amount" (as hereinafter defined), AOPP shall offer to Acquiport Two by
written notice the right, for a period of fifteen (15) days, to purchase
the number of AOPP Shares required to maintain its Target Amount. "Target
Amount" shall mean Acquiport Two's proportionate share of the Fully Diluted
ownership interest in AOPP, as of the date immediately prior to the
earliest Equity for Property Exchange or Shareholder Approval Issuance on
account of which Acquiport Two has not yet been provided the full
opportunity to acquire AOPP Shares pursuant to a Cash Offering.
(d) Until the completion of a "Qualifying Transaction" (as hereinafter
defined), neither AOPP nor the OP shall issue any of their respective
securities (except for issuances of
6
<PAGE>
securities as described in Section 4(b), above) at a price per Share below
the "Purchase Price" (as hereinafter defined) (regardless of whether the
consideration for the issuance is cash or assets) without AOPP first
offering to Acquiport Two with 15 days' prior written notice the right to
purchase AOPP Shares on terms and conditions at least as favorable as the
securities are being offered to third parties in an amount sufficient to
maintain Acquiport Two's proportionate share of the Fully Diluted Ownership
interest in AOPP. After completion of a Qualifying Transaction, Acquiport
Two shall have no further rights under this Section 4(d). The Purchase
Price shall be $27.00 per Share (to be adjusted to $22.88/Share subsequent
to the Listing Merger). A "Qualifying Transaction" shall be deemed to have
been completed immediately after closing of (1) a registered public
offering by AOPP of Shares with gross proceeds of at least $150 million (or
a series of such offerings with aggregate gross proceeds of $150 million),
or (2) a merger of AOPP with another entity following which the Resulting
Entity has a total Equity Float of at least $300 million. For purposes of
this provision, "Equity Float" shall mean the market value of the
outstanding publicly-traded shares of AOPP or the Resulting Entity,
excluding shares held by Affiliates, and "Affiliates" shall include all
executive officers, directors, and beneficial owners (within the meaning of
Rule 13d-3 of the Exchange Act) of more than 10% of the outstanding shares
of the publicly-traded stock of the Company.
(e) AOPP shall devote reasonable efforts to allow Acquiport Two to
participate pro-rata in any future underwritten offerings made prior to
December 31, 1998, exclusive of "spot offerings."
(f) Except as otherwise set forth in Sections 4(d) and (e), above, which
shall apply for the respective periods set forth in Sections 4(d) and (e),
the provisions of this Section 4 shall apply so long as the Fully Diluted
ownership interest of Acquiport Two in the OP and the general partner of
the OP, is equal to or greater than 10% (but excluding, for the purpose of
calculating Acquiport Two's Fully Diluted ownership interest, any Shares
which have been issued pursuant to an Equity for Property Exchange or a
Shareholder Approval Issuance unless and until Acquiport Two has been
provided the opportunity to acquire AOPP Shares pursuant to a Cash Offering
on account thereof pursuant to Section 4(c)). Notwithstanding satisfaction
of the 10% threshold in this Section 4(f), the afore-described preemptive
rights shall terminate on and in all events continue until the earlier to
occur of:
(i) the date of Listing;
(ii) the Unwind Date; or
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<PAGE>
(iii) the fourth anniversary hereof; provided, however, in the event
any Equity for Property Exchange or Shareholder Approval Issuance, as the case
may be, has occurred prior to the fourth anniversary hereof and Acquiport Two
has not had the full opportunity to acquire AOPP Shares in a Cash Offering to
achieve the Target Amount on account of such Equity for Property Exchange or
Shareholder Approval Issuance, the aforesaid Section 4(c) shall apply until such
time as Acquiport Two has had an opportunity to purchase a number of AOPP Shares
so that Acquiport Two's proportionate share of ownership of AOPP's issued and
outstanding common stock equals the Target Amount. Sections 4(f)(i) and (ii)
shall apply notwithstanding the achievement of the Target Amount.
5. OPERATION OF PROPERTIES. Until the earlier of the Listing or the Unwind
-----------------------
Date, AOPP and OP shall maintain and operate, and shall cause Acquisition
Corporation to maintain and operate, the Acquiport Properties in a manner
consistent with the AOPP Business Plan. All restrictions in the AOPP Business
Plan applicable to the Acquiport Properties shall also apply to AOPP's ownership
interest in Acquisition Corporation.
6. PROHIBITION ON SALE OR ENCUMBRANCE OF OP UNITS. In addition, subsequent to
----------------------------------------------
the Closing and prior to and including the PSA Registration Date (as hereinafter
defined), PSA, other than through conversion of its OP Units to AOPP Shares,
will not offer, pledge, hypothecate, encumber, sell, transfer, assign, contract
to sell, or otherwise dispose of, directly or indirectly, any OP Units or any
security or other instrument which is convertible into, exercisable for, or
exchangeable for OP Units.
7. TREATMENT OF INCOME. AOPP and the OP shall use their best efforts to
-------------------
undertake activities and earn income so as to avoid having any portion of the
dividends on AOPP shares payable to Acquiport Two treated as taxable income from
an unrelated trade or business pursuant to Section 856(h)(3)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), provided that this obligation
will cease on the earlier of (a) the date after the Closing on which AOPP ceases
to be "predominantly held by qualified trusts" within the meaning of Section
856(h)(3)(D)(ii) of the Code, (b) the date on which Acquiport Two ceases to own
more than 10% by value of the outstanding shares in AOPP, or (c) counsel to AOPP
provides to Acquiport Two an opinion reasonably acceptable to Acquiport Two that
neither Acquiport Two nor any component of CRF is or would be treated as a
qualified trust, within the meaning of Section 856(h)(3)(E) of the Code, holding
more than 10% (by value) of the interests in a pension held REIT, within the
meaning of Section 856(h)(3)(C) of the Code, by virtue of Acquiport Two's direct
and CRF's indirect ownership interests in AOPP, PSBP or any other Resulting
Entity. The determinations in clauses (a) and (b) shall be made by treating all
OP Units owned directly or indirectly by Acquiport Two or CRF as ownership of
the number of shares of common stock in AOPP, PSBP or any other Resulting Entity
that would be issued upon the conversion
8
<PAGE>
of such OP Units to such stock. The determinations in clauses (a) and (b) shall
be made by treating CRF and Acquiport Two as a single qualified trust within the
meaning of Section 856(h)(3)(E) of the Code unless counsel to AOPP provides
Acquiport Two and CRF an opinion reasonably acceptable to Acquiport Two and CRF
that CRF is not a single qualified trust, in which case the determinations in
clauses (a) and (b) shall be made by treating CRF and Acquiport Two as
consisting of two (2) such qualified trusts, each holding such interest as such
counsel's opinion indicates would be the case for purposes of Section
856(h)(3)(D)(ii) of the Code.
8. BOARD APPROVALS.
---------------
(a) Prior to the Listing, unless unanimous consent is required by Section
8(b) of this Agreement or otherwise required by law or the Articles of
Incorporation or By-Laws of AOPP (the "Charter Documents") and in addition
to any other vote or consent required by law or the Charter Documents, the
following actions shall require the approval of at least two of the three
members of the Board of Directors of AOPP;
i. Incurrence of any debt or issuance of any equity securities by
AOPP, the OP and/or any entity controlled by AOPP and/or the OP
(excluding the outstanding options set forth on Exhibit A, attached
---------
hereto);
ii. Actions requiring investment or divestment of assets (material or
real estate) of AOPP, the OP and/or any entity controlled by AOPP
and/or the OP (excluding the Pre-Approved Transactions set forth on
Exhibit B, attached hereto);
---------
iii. Approval and authorization of the annual business plan of AOPP,
the OP and/or any entity controlled by AOPP and/or the OP;
iv. Declaration of any dividend upon the stock of AOPP and/or any
entity controlled by AOPP and/or declaration of any distribution by
the OP, payable in cash, stock or partnership units, or any
distribution to its shareholders or partners, as the case may be,
payable in cash, stock or partnership units;
v. Approval and authorization of any key executive compensation plans
of AOPP, the OP and/or any entity controlled by AOPP and/or the OP;
vi. Any material change in insurance, including without limitation
directors' and officers' liability coverages; and
9
<PAGE>
vii. Issuance of equity securities in excess of a total of $25
million by AOPP and/or any entity controlled by AOPP in connection
with the Listing.
(b) Prior to the Listing, in addition to any other consent or vote required
by law or the Charter Documents, the following actions shall require the
unanimous approval of the members of the Board of Directors of AOPP:
i. Any change in, or waiver or consent requested under, the Employment
Agreement entered into by and between AOPP and Ronald L. Havner, Jr.,
dated of even date herewith, for the longer of (a) the term of such
Agreement, or (b) the actual duration of Ronald L. Havner, Jr.'s
employment;
ii. Any change in, or waiver or consent requested under, the
Employment Agreement entered into by and between AOPP and Mary Jayne
Howard, dated of even date herewith, for the longer of (a) the term of
such Agreement, or (b) the actual duration of Mary Jayne Howard's
employment;
iii. Any incurrence of debt or issuance of equity securities by AOPP,
the OP and/or any entity controlled by AOPP and/or the OP in excess of
a total of $25 million outstanding at any one time which have not
previously been unanimously approved by the Board of Directors
(provided, the Pre-Approved Transactions set forth on Exhibit B,
---------
attached hereto, have already been approved by the Board of Directors
and shall not require any further approval of the Board of Directors
(the "Pre-Approved Transactions"); provided, however, unanimity of the
Board of Directors of AOPP shall not be required with respect to the
issuance of equity securities by AOPP and/or any entity controlled by
AOPP in connection with the Listing;
iv. Investment and divestment decisions by AOPP, the OP and/or any
entity controlled by AOPP and/or the OP in excess of a total of $25
million which have not previously been unanimously approved by the
board (provided, the Pre-Approved Transactions set forth on Exhibit B,
attached hereto, have already been approved by the Board of Directors
and shall not require any further approval of the Board of Directors
(the "Pre-Approved Transactions");
v. The waiver or modification of any condition to "Closing" (as
defined in that certain Agreement and Plan of Reorganization dated
August 18, 1997, by and among PSP11, AOPP and PSA (the "Agreement and
Plan of Reorganization")) set forth in the Agreement of Reorganization
which would have a material adverse effect on CRF, Acquiport Two,
10
<PAGE>
AOPP, the OP or Resulting Entity other than any change required or
contemplated by the Merger and Contribution Agreement or any document
executed, by CRF or Acquiport Two pursuant thereto or in connection
therewith; and
vi. The revocation of any dividend authorized by the Board of
Directors of AOPP on or about the date hereof.
(c) Any material reasonably necessary for prudent consideration by the
Board of Directors of AOPP, PSBP or any other Resulting Entity, for a vote
or consent must be provided to each board member at least five business
days prior to the Board of Directors' meeting at which such issue or
proposal will be considered.
(d) So long as this Section 8 is in effect, AOPP shall cause Acquisition
Corporation to comply with this Section 8 as if it referred to Acquisition
Corporation in the place of AOPP.
9. SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations
----------------------
hereunder may not be assigned by any of the parties hereto, provided, however,
that (a) Acquiport Two may assign its rights and obligations under this
Agreement to CRF or to any other corporation or corporations wholly owned,
directly or indirectly, by CRF and to which all of the Acquiport Two AOPP Shares
have been transferred, and (b) AOPP may assign its rights to PSP11 or any
Resulting Entity. This Agreement shall be binding on any successor corporation
to any of the parties hereto.
10. MODIFICATION OF ORGANIZATION DOCUMENTS. Contemporaneously with the
--------------------------------------
execution of this Agreement, AOPP has caused to be modified the provisions
contained in the organization documents of AOPP and/or the OP as set forth in
the amendments to such organization documents attached hereto as Exhibit C.
---------
AOPP shall cause the organizational documents of Acquisition Corporation shall
be substantially the same as those of AOPP. Contemporaneously with the Listing
Merger, AOPP shall cause to be modified the provisions contained in the
organizational documents of PSP11 attached hereto as Exhibit D.
---------
11. PROXY STATEMENT; SEC FILINGS.
----------------------------
(a) PSA and AOPP shall file, or cause to be filed, an amendment or
supplement to PSP11's preliminary proxy statement to reflect the
Transactions (the "Proxy Amendment") prior to or concurrently with or
promptly after the Closing. AOPP will not consummate the Listing unless
the Acquiport Properties are included, or this Agreement has been
terminated pursuant to the terms of this Agreement.
11
<PAGE>
(b) The Proxy Amendment shall not be filed, and the Proxy Statement shall
not be considered to be in final form, unless and until all of the
following conditions have been satisfied; provided, however, that, except
for any addition, deletion or revision to any written information
concerning Acquiport or the Acquiport Properties furnished by Acquiport
expressly for use in connection with any Securities Act, Exchange Act or
any other federal or state securities law filing in connection with the
Listing) expressly requested by Acquiport in writing, by implementing the
following conditions, neither CRF nor Acquiport shall be deemed to have
made any representation or warranty of any kind or nature whatsoever with
respect to any matter set forth, contained or addressed in the Proxy
Statement or related materials, including but not limited to the accuracy,
adequacy or completeness thereof:
(i) A complete and accurate copy of the draft Proxy Statement and all
related material, and each revised draft supplement or amendment to any Proxy
Statement or related materials (all individually and collectively referred to
herein as "Filing Material") shall be provided to each person or entity
designated herein to receive the original or copies of notices directed to
Acquiport Two (each a "Notice Party") sufficiently in advance, and for the
maximum number of days possible for review, of that Filing Material being filed
with the SEC or any other federal or state agency having jurisdiction over
securities offerings (a "Filing") so as to allow the Notice Parties a reasonable
opportunity to review and comment on such Filing Material prior to filing.
(ii) Promptly upon receipt of any comments or requested revisions to
any Filing Material from the SEC or any other federal or state agency
(collectively "Agency Comments"), PSA and AOPP shall provide or cause to be
provided a complete and accurate copy of the Agency Comments to each Notice
Party.
(iii) Promptly upon making any addition, deletion or revision to
any Filing Material not previously provided to all Notice Parties, including but
not limited to any addition, deletion or revision in response to Agency
Comments, AOPP and PSA shall provide or cause to be provided to the Notice Party
a complete and accurate revised draft of the Filing Material, with the changes
highlighted therein, sufficiently in advance, and for the maximum number of days
possible for review, of Filing any such addition, deletion or revision so as to
allow the Notice Parties a reasonable opportunity to review and comment thereon
prior to Filing.
(iv) In connection with the Listing, AOPP shall use diligent efforts
to assure that none of the disclosures in the Filing Material misstated any
material facts or omitted to state any material facts necessary to make the
statements made, in the light of the circumstances under which they were made,
not misleading; provided, however, the foregoing covenant shall not
12
<PAGE>
apply to statements made in reliance upon and in conformity with written
information concerning Acquiport or the Acquiport Properties furnished by
Acquiport expressly for use in connection with such documents, or which concerns
Acquiport or the Acquiport Properties and has been approved in writing by
Acquiport for use in such documents.
(c) All registration statements, prospectuses, proxy statements and other
filings (the "Other Filings") with the SEC by AOPP, PSBP or any other
Resulting Entity, and all related materials, and each supplement or
amendment to any thereof to achieve the Listing shall be subject to the
requirements of Section 11(b)(i) through (iv) as if the Other Filings were
the Proxy Statement and the Filing Material, and PSBP or any other
Resulting Entity was AOPP, referred to in Section 11(b)(i) through (iv).
(d) Neither Acquiport nor CRF shall have the right or the obligation to
approve the Filing Materials provided pursuant to this Section 11 and
neither Acquiport nor CRF shall have any approval rights with respect to
the issuance of equity securities by AOPP and/or any entity controlled by
AOPP in connection with the Listing.
(e) Except as otherwise provided in the Registration Rights Agreement or
the Merger Agreement between AOPP and PSP11, AOPP shall pay all expenses
incurred in connection with the Proxy Amendment, Proxy Statement, Filing,
filing Material and any Other Filings and the performance by it of any and
all of its other obligations under this Section 11, including (a) all stock
exchange, SEC and state securities registration, listing and filing fees,
(b) all expenses incurred in connection with the preparation, printing and
distributing of the Proxy Amendment, Proxy Statement, Filing Material and
any Other Filing, (c) accounting fees, costs of appraisals, and the costs
of environmental and other reports, (d) fees and disbursements of counsel
for AOPP, and (e) except as set forth in the following sentence,
underwriting discounts, brokerage and selling commissions and transfer
taxes. Except as otherwise provided in the Registration Rights Agreement
or the Merger Agreement between AOPP and PSP11, Acquiport Two shall be
responsible for the payment of any underwriting discounts, brokerage and
selling commissions and transfer taxes relating to the sale or disposition,
if any, of securities held by Acquiport Two, and the fees and disbursements
of Acquiport Two's counsel. Notwithstanding the foregoing, in the event
any attempt to file any Other Filing with the SEC fails solely due to the
fault or error of Acquiport Two, Acquiport Two will reimburse AOPP for
AOPP's reasonable costs and expenses incurred in attempting to accomplish
such registration.
13
<PAGE>
12. COVENANTS AND AGREEMENTS REGARDING AOPP SHARES
----------------------------------------------
(a) If either Acquiport Two or PSA should decide to dispose of any shares
in AOPP, PSBP or other Resulting Entity each understands and agrees that,
except in the event of a Listing Merger and other than with respect to
shares of PSP11 owned as of this date directly or indirectly by PSA or its
affiliates (which are already registered under the Securities Act), it may
do so only pursuant to an effective registration statement under the
Securities Act, and the rules and regulations promulgated thereunder or
pursuant to any exemption from registration under the Securities Act. In
connection with any offer, resale, pledge or other transfer (individually
and collectively, a "Transfer") of any shares in AOPP, PSBP or other
Resulting Entity other than pursuant to an effective registration statement
or the Listing Merger, AOPP or Acquiport Two, as applicable, may require
that the transferor of the shares in AOPP, PSBP or other Resulting Entity
provide to AOPP or Acquiport Two, as applicable, an opinion of counsel
which opinion shall be reasonably satisfactory in form and substance to the
other, to the effect that such Transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and any state or foreign securities
laws. Acquiport Two and PSA each agree to the imprinting, so long as
required (but not on shares issued pursuant to the Listing Merger), of
substantially the following legends on certificates representing the shares
in AOPP, PSBP or other Resulting Entity held by Acquiport Two and PSA;
(b) THE SHARES OF COMMON STOCK (THE "SHARES") EVIDENCED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER AGREES THAT IT
WILL NOT OFFER, RESELL, PLEDGE OR OTHERWISE TRANSFER (INDIVIDUALLY OR
COLLECTIVELY, A "TRANSFER") THE SHARES EVIDENCED HEREBY, EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT,
OR (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
SUCH AS THE EXEMPTION SET FORTH IN RULE 144 UNDER THE SECURITIES ACT (IF
APPLICABLE). IF THE PROPOSED TRANSFER IS TO BE MADE OTHER THAN PURSUANT TO
CLAUSE (A) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
CORPORATION AND THE TRANSFER AGENT SUCH CERTIFICATIONS, LEGAL OPINIONS OR
OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY
STATE OR FOREIGN SECURITIES LAW.
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13. LISTING MERGER CONTINGENCY.
--------------------------
(a) In the event the Listing Merger cannot or does not occur, PSA agrees to
contribute the eleven (11) PSA Business Park Properties to the OP in
exchange for an additional 1,835,000 OP Units.
(b) In the event the Listing Merger cannot or does not occur, AOPP agrees
to (i) deliver a draft Listing registration statement to Acquiport Two on
or prior to the date which is 75 days before the Listing Deadline, and (ii)
deliver to Acquiport Two a copy of the Listing registration statement filed
with the SEC on or prior to 45 days before the Listing Deadline.
14. REINCORPORATION. AOPP will consummate the Reincorporation prior to
---------------
the Closing. From and after the Closing until the earlier of (i) the Unwind
Date, and (ii) delivery of the Status Opinion, AOPP will operate as a VCOC and
the OP will operate as a REOC.
15. RESTRICTIONS ON PSA'S SHARES. From the date hereof through the PSA
----------------------------
Registration Date (as hereinafter defined), and excepting any registration
pursuant to the Listing Merger, AOPP, PSBP or any other Resulting Entity will
not cause or allow to become effective any registration statement, prospectus or
related materials filed with the SEC pursuant to which AOPP, PSBP or any other
Resulting Entity Shares owned by PSA are or are purported to be registered under
the Securities Act for offer, sale, resale or otherwise. All AOPP, PSBP or
other Resulting Entity Shares owned by PSA, other than Shares issued pursuant to
the Listing Merger and shares of PSP11 owned as of this date directly or
indirectly by PSA or its affiliates (which are already registered under the
Securities Act), shall have endorsed thereon the legend in Section 12(b). In
addition, PSA hereby represents and warrants that none of the PSP11 securities
which PSA currently owns, or any additional shares of PSP11 which PSA shall
acquire in the Listing Merger, are covered by an effective resale registration
statement. PSA Registration Date shall mean the date which is the same number
of days after the third anniversary of the listing that the Acquiport Two
Registration Date (as hereinafter defined) is after the first anniversary of the
Listing. Acquiport Two Registration Date shall mean the date on which the
registration of all Acquiport Two shares in AOPP, PSBP or any other Resulting
Entity under the Securities Act for offer, sale and resale becomes effective.
16. ASSUMPTION OF AOPP OBLIGATIONS. As part of the Listing, AOPP shall cause
------------------------------
PSBP or any other Resulting Entity to assume AOPP's obligations under, and agree
in writing to be bound by, the Merger and Contribution Agreement (to the extent
of the provisions which survive Listing), Right of First Refusal and
Participation Agreement, Non-Compete Agreement, this Agreement Among
Shareholders and Company, Employment Agreements for Ronald
15
<PAGE>
L. Havner, Jr. and Mary Jayne Howard and all other agreements entered into by
AOPP pursuant to or in connection with the Merger and Contribution Agreement.
If the Listing is by Listing Merger with PSP11, then as part of the Listing
Merger, AOPP shall also cause PSP11 to sign and deliver the Registration Rights
Agreement. If the Listing is by any means other than the Listing Merger, AOPP
shall cause any other Resulting Entity to sign and deliver the Registration
Rights Agreement.
17. LIABILITY. Any liability of AOPP and/or the OP hereunder shall be
---------
satisfied first by the OP (if the OP is jointly and severally liable), and to
the extent not satisfied by the OP, then by AOPP.
18. INTERIM FINANCIAL STATEMENTS. After Closing and prior to the Listing
----------------------------
Merger, AOPP and the OP shall periodically provide Acquiport Two with copies of
interim financial statements of AOPP.
19. EXCHANGE RIGHTS. Anything contained in the Amended and Restated Agreement
---------------
of Limited Partnership of the OP (the "OP Agreement") to the contrary
notwithstanding, Acquiport Two shall have the right, but not the obligation, in
its sole and absolute discretion, at any time and from time to time, by
delivering written notice to AOPP of such exchange ("Exchange Notice"), to
exchange with AOPP any and all of Acquiport Two's Limited Partnership Units ("OP
Units") in the OP for shares of common stock in AOPP. In that event, AOPP shall
promptly deliver to Acquiport Two the number of shares of common stock in AOPP
equal to the number of OP units specified by Acquiport Two in the Exchange
Notice, taking into account any adjustment in the number of OP Units on account
of the "Unit Adjustment Factor" as defined in the OP Agreement. The common
stock in AOPP so delivered shall be duly authorized, validly issued, fully paid
and nonassessable, and free of any pledge, lien, encumbrance or restriction
created or imposed by AOPP or the OP. The date of Acquiport Two's Exchange
Notice (the "Exchange Date") shall be deemed the effective date of the exchange,
notwithstanding any delay in the issuance of stock certificates to Acquiport Two
or the entry of Acquiport Two's stock ownership in AOPP's books and records.
Any AOPP dividend of AOPP payable to Acquiport Two on account of any such
exchanged common stock in AOPP shall be determined as if Acquiport Two had held
such common stock and not OP Units in the OP during Acquiport Two's period of
ownership of the exchanged OP Units.
20. UNDERWRITERS. Acquiport Two shall have the right to approve (such approval
------------
not to unreasonably be withheld or delayed) underwriters, counsel and
accountants engaged in connection with any Listing. The underwriters, counsel
and accountants named on Exhibit E attached hereto are hereby approved by
---------
Acquiport Two for any Listing.
16
<PAGE>
21. COSTS OF PURSUING LISTING. Except as otherwise provided in the
-------------------------
Registration Rights Agreement and Merger Agreement between AOPP and PSP11, all
fees, costs and expenses of pursuing the Listing, whether or not accomplished
and, if accomplished, whether accomplished through the Listing Merger or
otherwise, payable by AOPP or the OP shall be paid by the OP. Such fees, costs
and expenses shall include, without limitation, the fees, costs and expenses of
the parties' third party advisors and consultants and their respective legal
counsel.
22. STOCK DIVIDEND. Subsequent to the Closing and until the OP acquires all of
--------------
the properties owned directly or indirectly by AOPP, commencing on January 1,
1998, any and all dividends paid by AOPP on its common stock (on a per share
basis) shall be equal to or greater than the distributions made by the OP (on a
per OP Unit basis), taking into account any adjustment in the number of OP Units
on account of the Unit Adjustment Factor.
23. GENERAL.
-------
(a) Equitable Remedies. Each party hereto agrees that the others will be
------------------
irreparably injured by any breach or default of the terms of this
Agreement, and that the damages caused by any such breach or default could
not be remedied by monetary damages. Therefore, without limitation of any
other rights or remedies that any party may have at law or equity, each
party shall be entitled to specifically enforce the provisions of this
Agreement by injunction, specific performance, or other equitable remedies.
(b) Severability. The provisions of this Agreement are severable, so
------------
that the invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other term or
provision of this Agreement, which shall remain in full force and effect.
(c) Governing Law. This Agreement, and all documents and instruments
-------------
executed and delivered in connection herewith shall be governed by and
construed in accordance with the laws of the State of California
notwithstanding that California law, with respect to choice of law, or the
Constitution, laws or treaties of the United States of America, may dictate
that this Agreement or such documents or instruments should be governed by
or construed in accordance with the laws of another jurisdiction.
(d) Enforcement. If any party hereto institutes any action or proceeding
-----------
to interpret or enforce any provision of this Agreement or for an alleged
breach of any provision of this Agreement, the prevailing party shall be
entitled to recover its actual attorneys' fees and all fees, costs and
expenses incurred in connection with such action or proceeding. Such
attorneys' fees, fees, costs and expenses shall include post judgment
attorneys' fees, fees, costs and expenses incurred
17
<PAGE>
on appeal or in collection of any judgment. This provision is separate and
several and shall survive the merger of this provision into any judgment on
this Agreement. No person or entity other than the parties hereto is or
shall be entitled to bring any action to enforce any provision of this
Agreement against any of the parties hereto, and the covenants and
agreements set forth in this Agreement shall be solely for the benefit of,
and shall be enforceable only by, the parties hereto or their respective
successors and assigns as permitted hereunder.
(e) Jurisdiction and Venue. Any action initiated by any party under this
----------------------
Agreement shall be brought and prosecuted in the United States District
Court for the Central District of California which the parties acknowledge
and agree is a convenient forum in which to litigate such action, and the
parties waive any right to commence or transfer such action in or to any
other court. Should said District Court find that it has no jurisdiction
over such action, then such action shall be brought and prosecuted in the
Superior Court of the County of Los Angeles, State of California. Each
party hereto expressly consents and submits to personal jurisdiction in the
federal or state courts, as the case may be, in the State of California,
County of Los Angeles and to permanent and exclusive venue in Los Angeles
County, State of California. In addition, in any action under this
Agreement, each party hereto expressly consents to service of process by
any manner set forth in this Agreement for the giving of notice.
(f) Time of the Essence. Time is of the essence of this Agreement.
-------------------
(g) Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to prepare, execute, and deliver such further instruments
of conveyance, Closing, assignment, or transfer and shall take or cause to
be taken such other or further action as either party shall reasonably
request at any time or from time to time in order to consummate the terms
and provisions and to carry into effect the intents and purposes of this
Agreement.
(h) No Waiver. No delay or failure on the part of any party hereto in
---------
exercising any right, power or privilege under this Agreement or under any
other instrument or document given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be construed
as a waiver of any default or any acquiescence therein. No single or
partial exercise of any such right, power or privilege shall preclude the
further exercise of such right, power or privilege. No wavier shall be
valid against any party hereto unless made in writing and signed by the
party against whom enforcement of such waiver is
18
<PAGE>
sought and then only to the extent expressly specified herein.
(i) Legal Representation and Construction. Each party hereto has been
-------------------------------------
represented by legal counsel in connection with the negotiation and
drafting of this Agreement. The parties acknowledge that each party and
its counsel have reviewed and revised this Agreement, and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of
this Agreement.
(j) Complete Agreement; Amendments. The documents, letters and other
------------------------------
agreements executed and delivered substantially concurrently with the
execution and delivery of this Agreement are intended by the parties as a
final expression of their agreement regarding the subject matter hereof and
are the complete and exclusive statement of the agreement and understanding
of the parties hereto in respect thereof. This Agreement shall not be
modified or amended except in a written document signed by the parties
hereto. The obligations of the AOPP Entities shall be joint and several.
No amendment, modification or termination of any provision of the Agreement
shall be valid unless in writing and signed by the parties hereto and
delivered pursuant to Subsection (k) herein.
(k) Notices. All notices, requests, consents and other communications
-------
under this Agreement shall be in writing and shall be delivered by hand or
mailed by first class certified or registered mail, return receipt
requested, postage prepaid:
If to AOPP or the OP:
--------------------
American Office Park Properties, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Attn: Mr. Ronald L. Havner, Jr.
Fax No.: (818) 244-9267
Telephone No.: (818) 244-8080
With a copy to:
--------------
Hale and Dorr LLP
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attn: Steven S. Snider, Esq.
Fax No.: (202)942-8484
Telephone No.: (202)942-8494
19
<PAGE>
If to Acquiport Two:
-------------------
Office of the State Comptroller
633 Third Avenue, 31st Floor
New York, New York 10017-6754
Attn: Marjorie Tsang, Esq.
Fax No.: (212) 681-4485
Telephone No.: (212) 681-4471
With a copy to:
--------------
Cox, Castle & Nicholson LLP
2049 Century Park East, Suite 2800
Los Angeles, California 90067
Attn: Amy H. Wells, Esq.
Fax No.: (310) 277-7889
Telephone No.: (310) 284-2233
And a copy to:
-------------
Heitman Capital Management Corporation
180 North LaSalle Street
Suite 3400
Chicago, Illinois 60601-2886
Attn: Mr. David Perisho
Fax No.: (312) 541-6798
Telephone No.: (312) 541-6748
If to PSA:
---------
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Attn: David Goldberg, Esq.
General Counsel
Fax No.: (818) 548-9288
Telephone No.: (818) 244-8080 Ext. 529
(l) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall constitute one Agreement binding on all
the parties hereto.
(m) Captions Captions or sections have been added only for convenience and
--------
shall not be deemed to be a part of this Agreement.
20
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first written above.
THE COMPTROLLER OF THE STATE OF
NEW YORK AS TRUSTEE OF THE COMMON
RETIREMENT FUND
By: /s/ John E. Hull
______________________________
John E. Hull
Deputy Comptroller Investments
& Cash Management
AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ Ronald L. Havner, Jr.
______________________________
Ronald L. Havner, Jr.
President and Chief Executive
Officer
AMERICAN OFFICE PARK PROPERTIES, L.P.
By: American Office Park Properties, Inc.,
general partner
By: /s/ Ronald L. Havner, Jr.
_________________________
Ronald L. Havner, Jr.
President and Chief
Executive Officer
PUBLIC STORAGE, INC.
By: /s/ David Goldberg
_____________________________
Name: David Goldberg
Title: Senior Vice President
21
<PAGE>
Exhibit 10.11
[Letterhead of Heitman Capital Management Corporation]
January 21, 1998
VIA FACSIMILE & FEDERAL EXPRESS
American Office Park Properties, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Attention: Mr. Ronald L. Havner, Jr.
Re: Public Company Board of Directors
Dear Ron:
In connection with the recently completed transactions among the undersigned,
each of the undersigned have entered into that certain Agreement Among
Shareholders and Company dated as of December 23, 1997 (the "Agreement Among
Shareholders"). Capitalized terms not otherwise defined herein have the meaning
contained in the Agreement Among Shareholders. Pursuant to the Agreement Among
Shareholders, Acquiport Two has the right to designate one nominee for the board
of directors (the "Board") of AOPP, PS Business Parks or any other Resulting
Entity, who need not be independent of Acquiport Two (the "Acquiport Board
Representative"). If and only if the Listing occurs, then, effective upon the
Listing, Acquiport Two hereby relinquishes its right to nominate the Acquiport
Board Representative, and instead the undersigned hereby agree that following
the Listing the nominees for the Board shall be comprised of two Board nominees
designated by Public Storage, Inc. ("PSA"), and five independent nominees
mutually approved by Acquiport Two and PSA, such approval not to be unreasonably
withheld or delayed. To give effect to the foregoing, the parties hereby agree
that Acquiport Two's right to designate a nominee contained in item (ii) of
paragraph 2(b) of the Agreement Among Shareholders is deleted, the provision is
re-numbered such that "(iii)" is changed to "(ii)" and the number of independent
board members therein specified is changed from "four" to "five". Except as
provided in this letter, the Agreement Among Shareholders and Company remain in
effect.
As provided in that certain letter agreement dated December 23, 1997 between
Heitman and AOPP (the "Board Letter Agreement"), AOPP acknowledges and confirms
its understanding that the Advisor is assisting and advising CRF and Acquiport
Two in connection with the Acquiport Investment. After the Listing, Acquiport
Two and the Advisor will be provided with such information and material as is
provided to other investors, potential investors, financial analysts,
underwriters and other investment professionals. The foregoing provisions shall
be binding upon PSBP or any other Resulting Entity with the same effect as
though such entity were a party hereto.
<PAGE>
Mr. Ronald L. Havner, Jr.
January 21, 1998
Page 2
Heitman Capital Management Corporation
This letter agreement shall be of no force or effect unless and until executed
and delivered by all parties hereto.
Very Truly Yours,
ACQUIPORT TWO CORPORATION,
a Delaware corporation
By: /s/ DAVID B. PERISHO
----------------------------
David B. Perisho
Managing Director
AGREED AND ACCEPTED:
- --------------------
AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ RONALD L. HAVNER, JR.
------------------------------------------
Ronald L. Havner, Jr., President and
Chief Executive Officer
AMERICAN OFFICE PARK PROPERTIES, L.P.
By: American Office Park Properties, Inc.,
general partner
By: /s/ RONALD L. HAVNER, JR.
------------------------------------
Ronald L. Havner, Jr., President and
Chief Executive Officer
PUBLIC STORAGE, INC.
By: /s/ DAVID GOLDBERG
------------------------------------------
David Goldberg, Senior Vice President
<PAGE>
EXHIBIT 10.12
[Exhibits to this Agreement have been omitted
and will be furnished to the Securities and
Exchange Commission upon request]
NON-COMPETITION AGREEMENT
-------------------------
This NON-COMPETITION AGREEMENT (this "Agreement") is made and entered
into effective as of the 23rd day of December, 1997, by and between Public
Storage, Inc., a California corporation ("PSA"), American Office Park
Properties, Inc., a California corporation ("AOPP"), American Office Park
Properties, L.P., a California limited partnership (the "OP"), and Acquiport Two
Corporation, a Delaware corporation ("Acquiport").
RECITALS
A. This Agreement is entered into pursuant to that certain Merger and
Contribution Agreement dated December 23, 1997, among AOPP, the OP, Acquiport
and others (the "Contribution Agreement"). Terms used and not otherwise defined
herein shall have the meanings given thereto in the Contribution Agreement,
which definitions are incorporated herein by this reference as though set forth
in full and shall apply notwithstanding that "Closing" (as defined in the
Contribution Agreement) has occurred.
B. Pursuant to the Contribution Agreement, Acquiport Two contributed the
Acquiport Two Properties and cash to the OP and Acquiport Three Corporation, a
Delaware corporation affiliated with Acquiport, merged with and into a wholly
owned subsidiary of AOPP in exchange for which stock in AOPP and OP Units in the
OP were issued to Acquiport Two, all as more particularly described in the
Contribution Agreement. AOPP is the sole general partner of the OP and a
limited partner in the OP. PSA is a major shareholder in AOPP and a limited
partner in the OP.
C. The parties intend that a Listing will be accomplished with respect
to AOPP. It is currently contemplated that the Listing will be accomplished by
the Merger of AOPP and PSP11, with the surviving real estate investment trust
being renamed "PS Business Parks, Inc." "PSBP" shall mean the corporate entity
that is the successor by merger to AOPP and PSP11. It is also currently
contemplated that, in connection with the Merger, the name of the OP will be
changed to "PS Business Parks, L.P."
D. In the event the Merger cannot or does not occur, the parties hereto
have agreed to certain alternative steps to achieve the Listing, as more fully
set forth in the Agreement Among Shareholders and Company. "Resulting Entity"
shall mean
<PAGE>
PSBP, or any other entity, including without limitation AOPP, in which PSA and
Acquiport own shares as a result of the Listing being accomplished through means
other than the Merger.
E. It is contemplated that AOPP, the OP, PSBP and/or the Resulting
Entity will be in the business of acquiring, owning, operating, leasing,
managing, repairing, developing, investing in and divesting of "Business Park"
(as hereinafter defined) properties, and engaging in all activities incidental
to such primary activities, including, without limitation, the location,
identification, development and negotiation of new "Business Park" opportunities
throughout the entire United States and its territories (the "Competing
Business").
F. In order to induce Acquiport to enter into the Contribution Agreement
and consummate the Transactions, and in consideration therefor, PSA has agreed
to refrain from competing with AOPP, the OP, PSBP and any Resulting Entity on
and subject to the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. In this Agreement, the following terms shall have the
-----------
following meanings:
1.1 "Business Park" shall mean a commercial real property in which
the majority of the occupied rentable square footage (a) is occupied by tenants
under leases covering less than 10,000 square feet, and (b) is used for light
manufacturing, warehouse, showroom, R&D, retail or office uses (other than self
storage, strip malls or warehouses used for portable self storage in connection
with PSA's "pick-up and delivery" business).
1.2 "Common Equity Market Capitalization" shall mean the closing
price, for the common stock of AOPP, PSBP or other Resulting Entity on the New
York or American Stock Exchange, as applicable, multiplied by the sum of (a) the
number of issued and outstanding shares of common stock of AOPP, PSBP or other
Resulting Entity on the date of determination, and (b) the number of additional
shares of common stock of AOPP, PSBP or other Resulting Entity which would be
issued if all OP Units were converted to common stock
-2-
<PAGE>
of AOPP, PSBP or other Resulting Entity on the date of determination.
1.3 "Competing Business" shall have the meaning set forth in Recital
E, above.
1.4 "Competing Entity" shall mean any person or entity, other than
AOPP, the OP, PSBP or any other Resulting Entity, which is engaged in the
Competing Business anywhere in the United States or any of its territories.
Notwithstanding the foregoing, the term "Competing Entity" shall not include (a)
any entity listed on Exhibit A attached hereto (a "Scheduled Entity") but only
so long as such Scheduled Entity does not (i) acquire, own, operate, lease,
manage, repair, develop or invest in, directly or indirectly, any Business Park
property other than the Business Park properties listed on Exhibit A attached
hereto (a "Scheduled Property"), or (ii) increase the number of rentable square
feet devoted to uses which are included in the definition of Business Park in
any property, including without limitation any Scheduled Property, owned,
operated, leased or managed by such Scheduled Entity; (b) any company the shares
in which are publicly traded and in which PSA, in the aggregate, both directly
and indirectly, owns no more than five percent (5%) of any class of issued and
outstanding shares of stock; (c) any Non-Business Park Entity; or (d) any
property which has been rejected by a majority of the "independent directors""
(as defined in Section 5.2 below) (a "Rejected Property").
1.5 "Non-Business Park Entity" shall mean any entity (a) which does
not own, operate, lease, manage, repair or invest in, directly or indirectly,
any property in which fifty percent (50%) or more of the rentable square footage
therein is devoted to uses which are included in the definition of Business
Park, or (b) with twenty percent (20%) or less of its properties' rentable
square footage devoted to uses which are included in the definition of Business
Park.
1.6 "Scheduled Entity/Property" shall mean any project or entity
listed or described in Schedule A, attached hereto.
2. Non-Competition. PSA hereby covenants and agrees that it shall not
---------------
directly or indirectly, as an owner, employee, officer, director, shareholder,
partner, member, manager, investor, consultant, agent, advisor or any other
capacity whatsoever, (a) engage in the Competing Business; or (b) own any
interest in any Competing Entity; provided, however, that this Section 2 shall
not preclude investment in
-3-
<PAGE>
or ownership of a Scheduled Entity or Scheduled Property so long as such
Scheduled Entity or Scheduled Property continues to qualify for exclusion from
the definition of Competing Entity.
3. Non-Disclosure.
--------------
3.1 PSA agrees, and agrees to use reasonable efforts to cause its
officers and executive directors, not to divulge, communicate, use to the
detriment of AOPP, the OP, PSBP or any Resulting Entity, or for the benefit of
any Competing Entity, Scheduled Entity, Scheduled Property or Non-Business Park
Entity, any of AOPP's, the OP's, PSBP's or any Resulting Entity's confidential
information, data or trade secrets, including, without limitation, financial or
technical data, personnel information or property information. PSA acknowledges
and agrees, on behalf of itself and its officers and executive directors, that
any such information or data that it or any of its officers or executive
directors may hereafter acquire was or will be received as a fiduciary of AOPP,
the OP, PSBP and any Resulting Entity and that PSA shall keep, and agrees to use
reasonable efforts to cause its officers and executive directors to keep, all
such information and data confidential. PSA shall keep, and agrees to use
reasonable efforts to cause its officers and executive directors to keep, its
knowledge and information of and related to any Competing Business opportunities
confidential and agrees, and agrees to use reasonable efforts to cause its
officers and executive directors, not to divulge, communicate, use to the
detriment of AOPP, the OP, PSBP or any other Resulting Entity, or for the
benefit of any Competing Entity, Scheduled Entity, Scheduled Property or Non-
Business Park Entity, any such knowledge or information. The foregoing
restrictions shall not apply to any property after it has become a Rejected
Property.
3.2 PSA agrees to direct and use reasonable efforts to cause its non-
executive directors and its agents, shareholders, employees and affiliates to
(a) not divulge, communicate, use to the detriment of AOPP, the OP, PSBP or any
Resulting Entity, or for the benefit of any Competing Entity, Scheduled Entity,
Scheduled Property or Non-Business Park Entity, any of AOPP's, the OP's, PSBP's
or any Resulting Entity's confidential information, data or trade secrets,
including, without limitation, financial or technical data, personnel
information or property information; (b) keep all such information and data
confidential; (c) keep their knowledge and information of and related to any
Competing Business opportunities confidential; and (d) not divulge,
-4-
<PAGE>
communicate, use to the detriment of AOPP, the OP, PSBP or any other Resulting
Entity, or for the benefit of any Competing Entity, Scheduled Entity, Scheduled
Property or Non-Business Park Entity, any such knowledge or information. The
foregoing restrictions shall not apply to any property after it has become a
Rejected Property.
4. Term of Agreement. This Agreement shall commence on the Closing.
-----------------
This Agreement shall terminate on the first to occur of: (a) the Unwind Date;
(b) three (3) years from the date a Listing is accomplished; (c) Acquiport's
Fully Diluted ownership interest in AOPP, PSBP or other Resulting Entity and the
OP falls below 7.5% (excluding, for this purpose, any "Shares" which have been
issued pursuant to an "Equity for Property Exchange" or a "Shareholder Approval
Issuance" unless and until Acquiport has been provided the opportunity to
acquire AOPP Shares pursuant to a "Cash Offering" on account thereof pursuant to
Section 4(c) of the Agreement Among Shareholders and Company, as such terms used
in this parenthetical are defined in the Agreement Among Shareholders and
Company); (d) PSA's Fully Diluted ownership interest in AOPP, PSPB or other
Resulting Entity and the OP falls below 7.5%; or (f) the Common Equity Market
Capitalization of AOPP, PSBP or other Resulting Entity and the OP exceeds $1
billion.
5. Consent by Board.
----------------
5.1 Prior to Listing. Prior to a Listing being accomplished, none of
----------------
the provisions or restrictions contained in this Agreement may be waived or
modified by any party hereto without the written consent of Acquiport, which
consent may be given or withheld in Acquiport's sole and absolute discretion.
5.2 Following Listing. After a Listing has been accomplished, the
-----------------
independent directors of AOPP, PSBP or other Resulting Entity (with any director
affiliated with Acquiport or who Acquiport has the right to require PSA to vote
for pursuant to the Agreement Among Shareholders and Company being deemed an
independent director for this purpose if the authorized number of directors of
AOPP, PSBP or other Resulting Entity ever exceeds seven (7)) shall have the
right, by majority vote of such independent directors only, in their sole and
absolute discretion, to (a) waive or modify the provisions and restrictions
contained in this Agreement, or (b) refuse to waive or modify the provisions and
restrictions contained in this Agreement. The vote of the independent directors
shall be on a transaction-by-transaction basis.
-5-
<PAGE>
6. Equitable Remedies. PSA agrees that the other parties hereto will be
------------------
irreparably injured by any breach or default of the terms of this Agreement, and
that the damages caused by any such breach or default cannot be adequately
remedied by monetary damages. Therefore, without limitation of any other rights
or remedies that any party may have at law or equity, AOPP, the OP, PSBP, any
Resulting Entity and Acquiport shall each be entitled to specifically enforce
the provisions of this Agreement by injunction, specific performance or other
equitable remedies.
7. General.
-------
7.1 Notices. Any notice, consent or approval required or permitted
-------
to be given under this Agreement shall be in writing and shall be deemed to have
been given (a) upon hand delivery to the recipient; (b) by facsimile
transmission, upon receipt by the sender of confirmation of such transmission,
(c) one (1) business day after being deposited with Federal Express or another
reliable overnight courier service for next day delivery; or (d) if deposited in
the United States mail, registered or certified mail, postage prepaid, return
receipt required, on the date of receipt or refusal to accept delivery; and
addressed or telecopied as follows:
If to AOPP or the OP: American Office Park Properties, Inc.
- -------------------- 701 Western Avenue, Suite 200
Glendale, California 91201
Attn: Mr. Ronald L. Havner, Jr.
Fax No.: (818) 244-9267
Telephone No.: (818) 244-8080
With a copy to:
--------------
Hale and Dorr LLP
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attn: Steven S. Snider, Esq.
Fax No.: (202) 942-8484
Telephone No.: (202) 942-8400
If to Acquiport: Office of the State Comptroller
- --------------- 633 Third Avenue, 31st Floor
New York, New York 10017-6754
Attn: Chief Real Estate Investment
Officer - Equity Program
Fax No.: (212) 681-4485
Telephone No.: (212) 681-4489
-6-
<PAGE>
With a copy to:
--------------
Office of the State Comptroller
633 Third Avenue, 31st Floor
New York, New York 10017-6754
Attn: Marjorie Tsang, Esq.
Fax No.: (212) 681-4485
Telephone No.: (212) 681-4471
and a copy to:
-------------
Cox, Castle & Nicholson LLP
2049 Century Park East, Suite 2800
Los Angeles, California 90067
Attn: Amy H. Wells, Esq.
Fax No.: (310) 277-7889
Telephone No.: (310) 284-2233
And a copy to:
-------------
Heitman Capital Management Corporation
180 North LaSalle Street
Suite 3400
Chicago, Illinois 60601-2886
Attn: John W. Noell, Esq.
Fax No.: (312) 541-6738
Telephone No.: (312) 541-6766
If to PSA: Public Storage, Inc.
- --------- 701 Western Avenue, Suite 200
Glendale, California 91201
Attn: David Goldberg, Esq.
Fax No.: (818) 244-9267
Telephone No.: (818) 244-8080
With a copy to:
--------------
Hale and Dorr LLP
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attn: Steven S. Snider, Esq.
Fax No.: (202) 942-8484
Telephone No.: (202) 942-8400
or such other address or telephone number as any party may from time to time
specify in writing to the others; provided, however, that the foregoing
addresses and numbers shall remain
-7-
<PAGE>
in effect unless and until notice of and change is deemed to have been given in
the manner required by this Section.
7.2 Execution of Documents by Acquiport. Acquiport has informed the
-----------------------------------
other parties hereto, and the other parties hereto understand and agree, that
for administrative reasons Acquiport requires up to five (5) business days to
execute any document and an additional one (1) business day to deliver such
document. Therefore, all documents to be executed by Acquiport shall be agreed
to and prepared in final execution form and received by Acquiport for execution
not less than six (6) business days prior to the scheduled delivery date.
7.3 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their successors and assigns.
7.4 Amendments. This Agreement may be amended or modified only by a
----------
written instrument executed and delivered by the parties hereto.
7.5 Governing Law. Notwithstanding that California law, with respect to
-------------
choice of law, or the Constitution, laws or treaties of the United States of
America, may dictate that this Agreement should be governed by or construed in
accordance with the laws of another jurisdiction, this Agreement, and all
documents and instruments executed and delivered in connection herewith, shall
be governed by and construed in accordance with the laws of the State of
California.
7.6 Enforcement. If any party hereto institutes any action or
-----------
proceeding to interpret or enforce any provision of this Agreement or for an
alleged breach of any provision of this Agreement, the prevailing party shall be
entitled to recover its reasonable attorneys' fees and all fees, costs and
expenses incurred in connection with such action or proceeding. Such reasonable
attorneys' fees, fees, costs and expenses shall include post judgment reasonable
attorneys' fees, fees, costs and expenses incurred on appeal or in collection of
any judgment. This provision is separate and several and shall survive the
merger of this provision into any judgment on this Agreement. No person or
entity other than the parties hereto is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants and agreements set forth in this Agreement shall be solely for
the benefit of, and shall be enforceable only by, the parties hereto or their
respective successors and assigns as permitted hereunder.
-8-
<PAGE>
7.7 Jurisdiction and Venue. Any action initiated by any party under
----------------------
this Agreement shall be brought and prosecuted in the United States District
Court for the Central District of California which the parties acknowledge and
agree is a convenient forum in which to litigate such action, and the parties
waive any right to commence or transfer such action in or to any other court.
Should said District Court find that it has no jurisdiction over such action,
then such action shall be brought and prosecuted in the Superior Court of the
County of Los Angeles, State of California. Each party hereto expressly
consents and submits to personal jurisdiction in the federal or state courts, as
the case may be, in the State of California, County of Los Angeles and to
permanent and exclusive venue in Los Angeles County, State of California. In
addition, in any action under this Agreement, each party hereto expressly
consents to service of process by any manner set forth in this Agreement for the
giving of notice.
7.8 Time of the Essence. Time is of the essence of this Agreement.
-------------------
7.9 Severability. If any provision of this Agreement, or the application
------------
thereof to any person, place, or circumstance, shall be held by a court of
competent jurisdiction to be invalid, unenforceable or void, the remainder of
this Agreement and such provisions as applied to other persons, places and
circumstances shall remain in full force and effect.
7.10 Exhibits. All exhibits attached hereto are incorporated herein as
--------
though fully set forth herein.
7.11 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to prepare, execute, and deliver such further instruments of
conveyance, contribution, assignment, or transfer and shall take or cause to be
taken such other or further action as either party shall reasonably request at
any time or from time to time in order to consummate the terms and provisions
and to carry into effect the intents and purposes of this Agreement.
7.12 Counterparts. To facilitate execution, this Agreement may be
------------
executed in as many counterparts as may be required. It shall not be necessary
that the signatures of, or on behalf of, each party, or that the signatures of
all persons required to bind any party, appear on each counterpart, but it shall
be sufficient that the signature of, or on behalf of, each party, appear on one
or more of the counterparts. All counterparts shall collectively constitute
-9-
<PAGE>
a single agreement. It shall not be necessary in making proof of this Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereof.
7.13 No Waiver. No delay or failure on the part of any party hereto in
---------
exercising any right, power or privilege under this Agreement or under any other
instrument or document given in connection with or pursuant to this Agreement
shall impair any such right, power or privilege or be construed as a waiver of
any default or any acquiescence therein. No single or partial exercise of any
such right, power or privilege shall preclude the further exercise of such
right, power or privilege. No waiver shall be valid against any party hereto
unless made in writing and signed by the party against whom enforcement of such
waiver is sought and then only to the extent expressly specified herein.
7.14 Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement regarding the subject matter hereof. There
are no covenants, agreements, promises, warranties or understandings other than
those set forth or referred to herein, with respect to such subject matter.
This Agreement, together with its exhibits and the other documents and
agreements referred to herein, supersede all prior agreements and understandings
between the parties with respect to the subject matter hereof and thereof. This
Agreement shall not be modified or amended except in a written document signed
by the parties hereto.
7.15 Legal Representation and Construction. Each party hereto has been
-------------------------------------
represented by legal counsel in connection with the negotiation and drafting of
this Agreement. The parties acknowledge that each party and its counsel have
reviewed and revised this Agreement, and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement.
-10-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be duly executed and delivered on its behalf as of the date first above
written.
ACQUIPORT TWO CORPORATION, a Delaware corporation
By: /s/ Howard J. Edelman
______________________________
Howard J. Edelman Vice President
______________________________
(Print Name and Title)
ACQUIPORT THREE CORPORATION, a Delaware corporation
By: /s/ Howard J. Edelman
______________________________
Howard J. Edelman Vice President
______________________________
(Print Name and Title)
[Signatures Continued On Next Page]
-11-
<PAGE>
[Signatures Continued From Previous Page]
AMERICAN OFFICE PARK PROPERTIES, INC., a California
corporation
By: /s/ Ronald L. Havner, Jr.
___________________________________
Ronald L. Havner, Jr., President
and Chief Executive Officer
AMERICAN OFFICE PARK PROPERTIES, L.P., a California
limited partnership
By: AMERICAN OFFICE PARK PROPERTIES, INC., a California
corporation, sole general partner
By: /s/ Ronald L. Havner, Jr.
______________________________
Ronald L. Havner, Jr.,
President and Chief
Executive Officer
PUBLIC STORAGE, INC., a California corporation
By: /s/ David Goldberg
________________________________
David Goldberg, Sr. V.P.
________________________________
(Print Name and Title)
-12-
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
AMERICAN OFFICE PARK PROPERTIES, INC., a California corporation
(hereinafter referred to as "EMPLOYER") and RONALD L. HAVNER, JR., a resident of
the State of California (hereinafter referred to as "EMPLOYEE"), in
consideration of the mutual promises hereinafter set forth, agree as follows:
ARTICLE 1.
EMPLOYMENT OF EMPLOYEE
1.1 Specified Period: Employer hereby employs Employee and Employee
----------------
hereby accepts employment with Employer for a period of two (2) years pursuant
to this Agreement beginning the date of the closing of the contribution of
properties by Acquiport Two Corporation and Acquiport Three Corporation to
Employer pursuant to that certain Contribution Agreement by and between them,
such period being referred to as the "EMPLOYMENT TERM."
ARTICLE 2.
EMPLOYEE'S DUTIES AND OBLIGATIONS
2.1 General Duties: Employee shall serve as the Chairman of the
--------------
Board, Chief Executive Officer and President of Employer subject to the
direction and control of the Employer's Board of Directors. Employee shall be
based at the Employer's headquarters,
1
<PAGE>
currently 701 Western Avenue, Suite 200, Glendale, California 91201, as such may
be changed from time to time.
2.2 Devotion to Employer's Business:
-------------------------------
2.2.1 Employee shall devote, during the term of this Agreement,
all or substantially all of his professional time, ability and attention to the
business of Employer as is necessary to perform his duties and responsibilities
inherent in his position in a prudent, reasonable and businesslike manner.
2.2.2 This Agreement, during its term, shall not be interpreted
to prohibit Employee from making passive personal investments, provided that
such investments do not materially interfere with the Employee's duties and
services required by this Agreement, including, but not limited to, the
competitive provisions of Section 2.3 hereof.
-----------
2.3 Competitive Activities:
----------------------
2.3.1 Without the consent in writing of Employer, Employee
shall not, during the term of his employment by Employer pursuant to this
Agreement ("Employment"), engage in or carry on a "Competing Business" (as
defined in Recital E of the Non-Competition Agreement signed of even date
herewith between Public Storage, Inc. ("Public Storage"), Employer, American
Office Park Properties, L.P., and New York State Common Retirement Fund (the
"Non-Competition Agreement")), or in any way have a relationship with, directly
or indirectly, either for himself or as a partner, member, stockholder, owner,
investor, officer, director, manager, employee, agent, associate, consultant,
advisor or in any other capacity, any "Competing Entity" (as defined in the Non-
Competition Agreement) or, without Employer's prior written approval, which
shall not be unreasonably withheld or delayed, make
2
<PAGE>
passive investments in such a Competing Entity (e.g., a limited partnership
interest or non-managing membership interest); provided, however, this Section
2.3.1 shall not apply to Employee in relation to Public Storage, Inc. or
affiliates thereof.
2.3.2 If a court or other authority having jurisdiction thereof
determines that the foregoing competitive restriction is too broad or otherwise
unreasonable under applicable law, including with respect to time or space, the
court is hereby requested, directed and authorized by the parties hereto to
revise the foregoing restriction to include the maximum restriction allowed
under the applicable law. The Employee expressly agrees that his breach of the
provisions of Section 2.3 would result in irreparable injuries to Employer, that
-----------
the remedy at law for any such breach will be inadequate and that upon breach of
this Section 2.3 Employer, in addition to all other available remedies, shall be
-----------
entitled as a matter of right to injunctive relief in any court of competent
jurisdiction.
2.3.3 Nothing herein shall prevent or prohibit the Employee, (a)
during his Employment, from owning less than five percent (5%) of the
outstanding debt or equity securities of (i) any corporation whose securities
are listed on any national securities exchange or on the Nasdaq Stock Market or
(ii) any mutual fund or co-mingled investment entity registered under the
Investment Company Act, or (b) during his Employment, serving on the board of
directors of corporations, in each case, as reasonably approved in writing by
the Employer and so long as such directorships do not adversely affect the
performance of the Employee's duties hereunder, as determined by the Employer,
or do not violate the covenants of Subsection 2.3.1.
----------------
3
<PAGE>
ARTICLE 3.
OBLIGATIONS OF EMPLOYER
3.1 General Provision: Employer shall provide Employee with the
-----------------
salary, incentives and benefits specified in this Agreement.
3.2 Office and Staff: Employer shall provide Employee with a private
----------------
office, secretarial support, office equipment, supplies and other facilities and
services reasonably suitable to Employee's position and adequate for the
performance of his duties.
3.3 Indemnification:
---------------
3.3.1 To the fullest extent permitted by law, Employee shall be
indemnified and held harmless by Employer from and against any and all losses,
claims, damages, liabilities (joint and several), expenses (including reasonable
legal fees and expenses), costs, charges, judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings in which Employee may be involved, or threatened to be involved, as
a party or otherwise by reason of Employee's status as an employee, officer or
consultant of Employer if (a) Employee acted in good faith and in a manner he in
good faith believed to be in, or not opposed to, the best interests of Employer,
and, with respect to any criminal proceedings, had no reasonable cause to
believe his conduct was unlawful, and (b) Employee's conduct did not constitute
gross negligence or willful or wanton misconduct. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that Employee acted in a manner contrary to that specified in clause
------
3.3.1(a) or clause 3.31(b) above.
- -------- --------------
4
<PAGE>
3.3.2 To the fullest extent permitted by law, reasonable
expenses (including legal fees and expenses) incurred by Employee in defending
any claim, demand, action, suit or proceeding shall be advanced by Employer
prior to the final disposition of such claim, demand, action, suit or
proceeding upon receipt by Employer of a written undertaking by or on behalf of
Employee to repay such amount if it shall be determined that Employee is not
entitled to be indemnified as authorized in this Section.
3.3.3 The indemnification provided by this Section shall be
in addition to any other rights which Employee may be entitled under any
agreement, as a matter of law or otherwise, both as to action in Employee's
capacity as an employee or consultant of Employer and to action in any other
capacity.
ARTICLE 4.
COMPENSATION TO EMPLOYEE
4.1 Base Salary: As base compensation for the services to be
-----------
performed hereunder, Employee shall receive a base annual salary of One Hundred
and Eighty Five Thousand Dollars ($185,000) commencing as of the date Employee's
employment begins as specified in Section 1.1 of this Agreement. Such base
-----------
salary shall be paid pursuant to the general payroll practices of Employer and
shall be subject to increase from time to time, in the sole and absolute
discretion of Employer.
4.2 Annual Bonus:
------------
5
<PAGE>
4.2.1 For each year, or part thereof, of his Employment Employee
will be considered for receipt of an annual bonus. The payment and amount of
the bonus shall be determined solely by Employer, in its sole and absolute
discretion.
4.2.2 If this Agreement is terminated by Employer for cause,
Employee shall not be entitled to an annual bonus for the fiscal year in which
that termination occurs.
4.2.3 Tax Withholding: Employer shall have the right to deduct or
---------------
withhold from the compensation due to Employee hereunder any and all sums
required for federal, state, local and foreign income tax, Social Security
taxes, unemployment insurance taxes, state compensation fund charges, and all
other federal, state, local and foreign taxes, assessments and charges, as the
case may be, now applicable or that may be enacted and become applicable in the
future.
ARTICLE 5.
EMPLOYEE BENEFITS
5.1 Vacation, Illness, Life Insurance and Other Benefits: Employer
----------------------------------------------------
shall provide Employee with vacation and illness time off, life insurance,
medical insurance covering Employee and his immediate family, use of an
automobile commensurate with Employee's position and current corporate vehicle
and such other fringe benefits as are customarily made available to employees of
like status employed by Employer, but in no event will such benefits be less
favorable to Employee that the benefits provided to employees of like
compensation levels at affiliates of Employer.
6
<PAGE>
ARTICLE 6.
BUSINESS EXPENSES
6.1 Business Expenses:
-----------------
6.1.1 Employer shall reimburse Employee for all expenses and
disbursements reasonably incurred by Employee in the performance of Employee's
duties for Employer during the Employment Term.
6.1.2 Each such expenditure shall be reimbursable only if
Employee furnishes to Employer reasonable and adequate written records and other
documentary evidence in accordance with Employer's policies established from
time to time and as requested by federal and state law, and regulations issued
by the appropriate taxing authorities, for the substantiation of each such
expenditure as an income tax deduction.
ARTICLE 7.
TERMINATION OF EMPLOYMENT
7.1 Termination for Cause:
---------------------
7.1.1 Employer reserves the right to terminate this Agreement
if: (i) Employee is convicted or pleads nolo contendere to a felony or a crime
involving moral turpitude; (ii) Employee willfully and intentionally, not due to
disability or illness, habitually fails to perform Employee's duties as
specified in this Agreement or willfully and intentionally violates any other
express covenant herein and fails to cure said failure within 15 days after
specific notice from Employer; or (iii) Employee is found by final judgement of
an arbitrator or court of competent jurisdiction to have committed fraud or
theft against the Employer.
7
<PAGE>
7.1.2 Subject to the notice and cure period set forth in Section
-------
7.1.1 above, Employer may at its option terminate this Agreement for the reasons
- -----
stated in this Section by giving written notice of termination to Employee
without prejudice to any other remedy to which Employer may be entitled either
at law, in equity or under this Agreement.
7.1.3 Termination under this Section 7.1 shall be considered "for
-----------
cause" for the purposes of this Agreement.
7.1.4 In the event the Employee's employment is terminated for
cause pursuant to Section 7.1.1, the Employer shall pay to the Employee the
-------------
compensation, benefits and reimbursement of reasonable expenses otherwise
payable to him as otherwise would have been payable pursuant to this Agreement
through the last day of his actual employment by the Employer. The Employer
shall have no further obligations to the Employee, and the Employee shall have
no further rights, including, without limitation, rights to any compensation,
whatsoever under this Agreement.
7.2 Effect of Merger, Transfer of Assets or Dissolution:
----------------------------------------------------
7.2.1 This Agreement shall terminate by any voluntary or
involuntary dissolution of Employer resulting from either a merger or
consolidation in which Employer is not the consolidated or surviving
corporation, or a transfer of all or substantially all of the assets of
Employer; provided, however, that this Section shall not apply in the case of:
(i) any such merger or consolidation approved in writing by Employee and in
which the surviving or consolidated entity assumes the obligations of Employer
under this Agreement; or (ii) a merger into and with Public Storage Properties
XI, Inc. and an assumption of this Agreement by Public Storage Properties XI,
Inc.
8
<PAGE>
7.2.2 Termination under this Section shall not be considered "for
cause" for the purposes of this Agreement. In the event that the Employee is
terminated pursuant to this Section, Employee shall be entitled to the same
severance as if terminated without cause and, in addition, all options on stock
of the Employer granted to Employee in respect of his employment which have not
vested and become exercisable shall become exercisable at the time of closing of
the transaction which terminates this Agreement pursuant to Section 7.2.1 above.
7.3 Termination by Employer Without Cause:
-------------------------------------
7.3.1 Notwithstanding any provision of this Agreement to the
contrary, if Employer terminates this Agreement without cause during its term
(i) Employer shall immediately pay Employee's annual salary, bonus and fringe
benefits and reimburse Employee for expenses in each case as set forth herein,
earned or reimbursable and unpaid through the effective date of termination, and
(ii), on the effective date of such termination, Employer shall also pay
Employee, in a lump sum, (a) the present value of the Employee's annual salary
(based on the base salary being earned at the time of the notice of termination)
for the remainder of the Employment Term as would otherwise be payable (based on
a discount rate of 5%) plus (b) the Employee's last annual bonus, pro rated for
the partial fiscal year already passed at the date of termination, so that if
60% of the fiscal year has passed, 60% of the prior years bonus shall be paid,
but in no event will the bonus payment payable under this subsection (ii) (b) be
less than Employee's annual base salary at the time. In addition, if Employer
terminates this Agreement without cause during its term all options on stock of
the Employer granted to Employee in respect of his employment which have not
vested and
9
<PAGE>
become exercisable shall become exercisable on the date of termination and shall
be exercisable for a period of three months thereafter.
7.4 Termination by Employee With Cause: Employee may terminate his
----------------------------------
obligations under this Agreement with cause after fifteen (15) days' written
notice to Employer fully and accurately describing the cause for termination and
Employer fails to cure the breach within such fifteen (15) day period. With
"cause" shall mean a material and continuing breach by Employer in failing to
pay to Employee amounts to which Employee is entitled under this Agreement. In
the event Employee terminates this Agreement pursuant to this Section 7.4, (i)
-----------
Employer shall immediately pay Employee's annual salary, bonus and fringe
benefits and reimburse Employee for expenses in each case as set forth herein,
earned or reimbursable and unpaid through the effective date of termination, and
(ii), on the effective date of such termination, Employer shall also pay
Employee, in a lump sum, (a) the present value of the Employee's annual salary
(based on the base salary being earned at the time of the notice of termination)
for the remainder of the Employment Term as would otherwise be payable (based on
a discount rate of 5%) plus (b) the Employees last annual bonus, pro rated for
the partial fiscal year already past at the date of termination, so that if 60%
of the fiscal year has past, 60% of the prior years bonus shall be paid, but in
no event will the bonus payment payable under this subsection (ii) (b) be less
than Employees annual base salary at the time. In addition, if Employee
terminates this Agreement with cause during its term all options on stock of the
Employer granted to Employee in respect of his employment which have not vested
and become exercisable shall become exercisable on the date of termination and
shall be exercisable for a period of three months thereafter.
10
<PAGE>
ARTICLE 8.
GENERAL PROVISIONS
8.1 Notices: Any notices to be given hereunder by either party to
-------
the other may be effected either by personal delivery in writing or by
registered or certified mail, postage prepaid with return receipt requested, by
nationally recognized overnight courier or by confirmed facsimile at the
following addresses or facsimile numbers:
If to Employee: Mr. Ronald L. Havner, Jr.
1698 Lorrain Road
San Marino, California 91108
With a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Los Angeles, CA 90067
Attn: Steven J. Insel
Facsimile: (310) 203-0567
If to Employer: American Office Park Properties, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Facsimile: (818) 244-9267
Attn: Office of General Counsel
Notices delivered personally shall be deemed communicated upon actual
receipt; mailed notices shall be deemed communicated upon receipt of the
mailing; notices sent by overnight courier shall be deemed communicated and
received as of one (1) business day after delivery to the overnight courier; and
notices sent by facsimile shall be deemed communicated and received as of the
time the sender receives written confirmation of the sending of the facsimile.
11
<PAGE>
8.2 Attorneys' Fees and Costs: If any action in law or equity is
--------------------------
necessary to enforce or interpret the terms of this Agreement, the non-
prevailing party shall pay the reasonable attorneys' fees and costs of the
prevailing party, unless otherwise provided by law or this Agreement. A party
shall not be considered a prevailing party unless he or it prevails in
substantially all of his or its position under dispute.
8.3 Partial Invalidity: If any provision of this Agreement is held
------------------
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated.
8.4 Applicable Law: This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of California as now enacted
and as may hereafter be modified and/or amended.
8.5 Construction of Terms: The terms and provisions of this
---------------------
Agreement, which are freely negotiated as between the parties, shall not be
construed either in favor of or against either party in the event of any
ambiguity or uncertainty.
8.6 Employee's consultation with Independent Attorney: Employee
-------------------------------------------------
expressly acknowledges that Employee has been requested to consult with
independent legal counsel of Employee's choosing to review and have explained to
Employee the legal significance and legal effect of the terms and conditions of
this Agreement prior to Employee's execution of this Agreement. In this regard,
Employee expressly acknowledges that the terms of this Agreement were not forced
upon Employee by Employer, and that the terms of this Agreement were negotiable
and were not "cast in stone," and that Employer has not imposed
12
<PAGE>
any time deadlines upon Employee with regard to the execution of this Agreement.
Employer agrees to reimburse Employee for legal expenses hereunder up to a
maximum of $5,000.
8.7 Entire Agreement: This Agreement supersedes any and all other
----------------
agreements, either oral or in writing, between the parties with respect to the
employment of Employee by Employer, and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid or binding.
8.8 Modifications: Any modification of this Agreement will be
-------------
effective only if it is in writing and signed by the party to be charged.
8.9 Waiver: A waiver of any of the terms and conditions hereof shall
------
not be construed as a general waiver of the same or any other term or condition
hereof or any subsequent breach thereof.
8.10 Dispute Resolution. Any controversy or claim arising out of, or
------------------
relating to, this Agreement or Employee's employment with Employer shall be
settled by arbitration in Los Angeles, California in accordance with the rules
of the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Employer and Employee agree to the personal
jurisdiction of any court of competent subject matter jurisdiction in the County
of Los Angeles for the enforcement of any order or judgement related hereto. The
decision of the
13
<PAGE>
arbitrator shall be final and binding upon both parties. The prevailing party in
any arbitration shall be entitled to its costs and expenses (including
reasonable attorneys' fees) incurred in connection with the arbitration from the
other party. No punitive or exemplary damages may be awarded by the arbitrator.
The foregoing provisions of this Section shall not be interpreted to restrict
either party's right to pursue equitable relief from a court of competent
jurisdiction.
8.11 Waiver of Jury Trial: BY AGREEING TO ARBITRATE, ALL PARTIES, AS
--------------------
A PRACTICAL MATTER, HAVE WAIVED THE RIGHT TO JURY TRIAL. The parties hereby
waive trial by jury in any action, proceeding or counterclaim brought by any of
them against any other party on any matters whatsoever arising out of or in any
way connected with this Agreement, provided that all actions brought under this
Agreement shall be brought in the State of California.
8.12 Restriction of Sale of Stock: Without the consent in writing of
----------------------------
Employer, Employee shall not, during his Employment, sell stock of the Employer
which is owned by Employee (being 39,500 shares) as of the date of this
Agreement, but Employee may sell shares if he subsequently acquires shares and,
after said sale, retains at least 39,500 shares, adjusted for stock dividends,
stocks splits and similar events. For purposes of this Section 8.12 "sell"
shall also include gift, assignment, transfer, hypothecation, grant, conveyance
or any disposition or encumbrance, in whole or part, or of any rights related to
stock (including, but not limited to, voting or dividend rights).
14
<PAGE>
WHEREFORE, the parties hereby execute this Agreement this 23rd day
of December, 1997.
EMPLOYER:
AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ David Goldberg
_____________________________
Name: David Goldberg
Title: Authorized Agent
EMPLOYEE:
/s/ Ronald L. Havner, Jr.
___________________________________
RONALD L. HAVNER, JR.
15
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
AMERICAN OFFICE PARK PROPERTIES, INC., a California corporation
(hereinafter referred to as "EMPLOYER") and Mary Jayne Howard, a resident of the
State of California (hereinafter referred to as "EMPLOYEE"), in consideration of
the mutual promises hereinafter set forth, agree as follows:
ARTICLE 1.
EMPLOYMENT OF EMPLOYEE
1.1 Specified Period: Employer hereby employs Employee and Employee
----------------
hereby accepts employment with Employer for a period of one (1) year beginning
the date last stated below, such period being referred to as the "EMPLOYMENT
TERM."
ARTICLE 2.
EMPLOYEE'S DUTIES AND OBLIGATIONS
2.1 General Duties: Employee shall serve as Executive Vice President
--------------
of Employer subject to the direction and control of the Employer's Chief
Executive Officer and Board of Directors. Employee shall be based at the
Employer's headquarters, currently 701 Western Avenue, Suite 200, Glendale,
California 91201, as such may be changed from time to time.
1
<PAGE>
2.2 Devotion to Employer's Business:
-------------------------------
2.2.1 Employee shall devote, during the term of this Agreement,
all or substantially all of her professional time, ability and attention to the
business of Employer as is necessary to perform her duties and responsibilities
inherent in her position in a prudent, reasonable and businesslike manner.
2.2.2 This Agreement, during its term, shall not be interpreted
to prohibit Employee from making passive personal investments, provided that
such investments do not materially interfere with the Employee's duties and
services required by this Agreement, including, but not limited to, the
competitive provisions of Section 2.3 hereof.
-----------
2.3 Competitive Activities:
----------------------
2.3.1 Without the consent in writing of Employer, Employee shall
not, during the term of her employment by Employer pursuant to this Agreement
("Employment"), engage in or carry on a "Competing Business" (as defined in
Recital E of the Non-Competition Agreement signed of even date herewith between
Public Storage, Inc. ("Public Storage"), Employer, American Office Park
Properties, L.P., and New York State Common Retirement Fund (the "Non-
Competition Agreement")), or in any way have a relationship with, directly or
indirectly, either for himself or as a partner, member, stockholder, owner,
investor, officer, director, manager, employee, agent, associate, consultant,
advisor or in any other capacity, any "Competing Entity" (as defined in the Non-
Competition Agreement) or, without Employer's prior written approval, which
shall not be unreasonably withheld or delayed, make passive investments in such
a Competing Entity (e.g., a limited partnership interest or non-
2
<PAGE>
managing membership interest); provided, however, this Section 2.3.1 shall not
apply to Employee in relation to Public Storage, Inc. or affiliates thereof.
2.3.2 If a court or other authority having jurisdiction thereof
determines that the foregoing competitive restriction is too broad or otherwise
unreasonable under applicable law, including with respect to time or space, the
court is hereby requested, directed and authorized by the parties hereto to
revise the foregoing restriction to include the maximum restriction allowed
under the applicable law. The Employee expressly agrees that her breach of the
provisions of Section 2.3 would result in irreparable injuries to Employer, that
-----------
the remedy at law for any such breach will be inadequate and that upon breach of
this Section 2.3 Employer, in addition to all other available remedies, shall be
-----------
entitled as a matter of right to injunctive relief in any court of competent
jurisdiction.
2.3.3 Nothing herein shall prevent or prohibit the Employee, (a)
during her Employment, from owning less than five percent (5%) of the
outstanding debt or equity securities of (i) any corporation whose securities
are listed on any national securities exchange or on the Nasdaq Stock Market or
(ii) any mutual fund or co-mingled investment entity registered under the
Investment Company Act, or (b) during her Employment, serving on the board of
directors of corporations, in each case, as reasonably approved in writing by
the Employer and so long as such directorships do not adversely affect the
performance of the Employee's duties hereunder, as determined by the Employer,
or do not violate the covenants of Subsection 2.3.1.
----------------
3
<PAGE>
ARTICLE 3.
OBLIGATIONS OF EMPLOYER
3.1 General Provision: Employer shall provide Employee with the
-----------------
salary, incentives and benefits specified in this Agreement.
3.2 Office and Staff: Employer shall provide Employee with a private
----------------
office, secretarial support, office equipment, supplies and other facilities and
services reasonably suitable to Employee's position and adequate for the
performance of her duties.
3.3 Indemnification:
---------------
3.3.1 To the fullest extent permitted by law, Employee shall be
indemnified and held harmless by Employer from and against any and all losses,
claims, damages, liabilities (joint and several), expenses (including reasonable
legal fees and expenses), costs, charges, judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings in which Employee may be involved, or threatened to be involved, as
a party or otherwise by reason of Employee's status as an employee, officer or
consultant of Employer if (a) Employee acted in good faith and in a manner he in
good faith believed to be in, or not opposed to, the best interests of Employer,
and, with respect to any criminal proceedings, had no reasonable cause to
believe her conduct was unlawful, and (b) Employee's conduct did not constitute
gross negligence or willful or wanton misconduct. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that Employee acted in a manner contrary to that specified in clause
------
3.3.1(a) or clause 3.31(b) above.
- -------- --------------
4
<PAGE>
3.3.2 To the fullest extent permitted by law, reasonable
expenses (including legal fees and expenses) incurred by Employee in defending
any claim, demand, action, suit or proceeding shall be advanced by Employer
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by Employer of a written undertaking by or on behalf of Employee to
repay such amount if it shall be determined that Employee is not entitled to be
indemnified as authorized in this Section.
3.3.3 The indemnification provided by this Section shall be in
addition to any other rights which Employee may be entitled under any agreement,
as a matter of law or otherwise, both as to action in Employee's capacity as an
employee or consultant of Employer and to action in any other capacity.
ARTICLE 4.
COMPENSATION TO EMPLOYEE
4.1 Base Salary: As base compensation for the services to be
-----------
performed hereunder, Employee shall receive a base annual salary of One Hundred
and Sixty Five Thousand Dollars ($165,000) commencing as of the date Employee's
employment begins as specified in Section 1.1 of this Agreement. Such base
-----------
salary shall be paid pursuant to the general payroll practices of Employer and
shall be subject to increase from time to time, in the sole and absolute
discretion of Employer.
4.2 Annual Bonus:
------------
4.2.1 For each year, or part thereof, of her Employment Employee
will be considered for receipt of an annual bonus. The payment and amount of
the bonus shall be
5
<PAGE>
determined solely by Employer, in its sole and absolute discretion. At the
discretion of the Chief Executive Officer of Employer, Employee shall be paid an
annual bonus of up to Fifty Thousand Dollars ($50,000) based on satisfaction of
goals and objectives to be determined by the Chief Executive Officer.
4.2.2 If this Agreement is terminated by Employer for cause,
Employee shall not be entitled to an annual bonus for the fiscal year in which
that termination occurs.
4.2.3 Tax Withholding: Employer shall have the right to deduct or
---------------
withhold from the compensation due to Employee hereunder any and all sums
required for federal, state, local and foreign income tax, Social Security
taxes, unemployment insurance taxes, state compensation fund charges, and all
other federal, state, local and foreign taxes, assessments and charges, as the
case may be, now applicable or that may be enacted and become applicable in the
future.
ARTICLE 5.
EMPLOYEE BENEFITS
5.1 Vacation, Illness, Life Insurance and Other Benefits: Employer
----------------------------------------------------
shall provide Employee with vacation and illness time off, life insurance,
medical insurance covering Employee and her immediate family, use of an
automobile commensurate with Employee's position and current corporate vehicle
and such other fringe benefits as are customarily made available to employees of
like status employed by Employer, but in no event
6
<PAGE>
will such benefits be less favorable to Employee that the benefits provided to
employees of like compensation levels at affiliates of Employer.
ARTICLE 6.
BUSINESS EXPENSES
6.1 Business Expenses:
-----------------
6.1.1 Employer shall reimburse Employee for all expenses and
disbursements reasonably incurred by Employee in the performance of Employee's
duties for Employer during the Employment Term.
6.1.2 Each such expenditure shall be reimbursable only if
Employee furnishes to Employer reasonable and adequate written records and other
documentary evidence in accordance with Employer's policies established from
time to time and as requested by federal and state law, and regulations issued
by the appropriate taxing authorities, for the substantiation of each such
expenditure as an income tax deduction.
ARTICLE 7.
TERMINATION OF EMPLOYMENT
7.1 Termination for Cause:
---------------------
7.1.1 Employer reserves the right to terminate this Agreement
if: (i) Employee is convicted or pleads nolo contendere to a felony or a crime
involving moral turpitude; (ii) Employee willfully and intentionally, not due to
disability or illness, habitually fails to perform Employee's duties as
specified in the Agreement and fails to cure said failure
7
<PAGE>
within 15 days after specific notice from Employer; or (iii) Employee is found
by final judgement of an arbitrator or court of competent jurisdiction to have
committed fraud or theft against the Employer.
7.1.2 Subject to the notice and cure period set forth in Section
-------
7.1.1 above, Employer may at its option terminate this Agreement for the reasons
- -----
stated in this Section by giving written notice of termination to Employee
without prejudice to any other remedy to which Employer may be entitled either
at law, in equity or under this Agreement.
7.1.3 Termination under this Section 7.1 shall be considered "for
-----------
cause" for the purposes of this Agreement.
7.1.4 In the event the Employee's employment is terminated for
cause pursuant to Section 7.1.1, the Employer shall pay to the Employee the
-------------
compensation, benefits and reimbursement of reasonable expenses otherwise
payable to him as otherwise would have been payable pursuant to this Agreement
through the last day of her actual employment by the Employer. The Employer
shall have no further obligations to the Employee, and the Employee shall have
no further rights, including, without limitation, rights to any compensation,
whatsoever under this Agreement.
7.2 Effect of Merger, Transfer of Assets or Dissolution:
----------------------------------------------------
7.2.1 This Agreement shall terminate by any voluntary or
involuntary dissolution of Employer resulting from either a merger or
consolidation in which Employer is not the consolidated or surviving
corporation, or a transfer of all or substantially all of the assets of
Employer; provided, however, that this Section shall not apply in the case of:
(i) any such merger or consolidation approved in writing by the Chief Executive
Officer of Employer
8
<PAGE>
and in which the surviving or consolidated entity assumes the obligations of
Employer under this Agreement; or (ii) a merger into and with Public Storage
Properties XI, Inc. and an assumption of this Agreement by Public Storage
Properties XI, Inc.
7.2.2 Termination under this Section shall not be considered "for
cause" for the purposes of this Agreement. In the event that the Employee is
terminated pursuant to this Section, Employee shall be entitled to the same
severance as if terminated without cause and, in addition, all options on stock
of the Employer granted to Employee in respect of her employment which have not
vested and become exercisable shall become exercisable at the time of closing of
the transaction which terminates this Agreement pursuant to Section 7.2.1 above.
7.3 Termination by Employer Without Cause:
-------------------------------------
7.3.1 Notwithstanding any provision of this Agreement to the
contrary, if Employer terminates this Agreement without cause during its term
(i) Employer shall immediately pay Employee's annual salary, bonus and fringe
benefits and reimburse Employee for expenses in each case as set forth herein,
earned or reimbursable and unpaid through the effective date of termination, and
(ii), on the effective date of such termination, Employer shall also pay
Employee, in a lump sum, (a) the present value of the Employee's annual salary
(based on the base salary being earned at the time of the notice of termination)
for the remainder of the Employment Term as would otherwise be payable (based on
a discount rate of 5%) plus (b) the Employee's last annual bonus, pro rated for
the partial fiscal year already passed at the date of termination, so that if
60% of the fiscal year has passed, 60% of the prior years bonus shall be paid,
but in no event will the bonus payment payable under this
9
<PAGE>
subsection (ii) (b) be less than Employee's annual base salary at the time. In
addition, if Employer terminates this Agreement without cause during its term
all options on stock of the Employer granted to Employee in respect of her
employment which have not vested and become exercisable shall become exercisable
on the date of termination and shall be exercisable for a period of three months
thereafter.
7.4 Termination by Employee With Cause: Employee may terminate her
----------------------------------
obligations under this Agreement with cause after fifteen (15) days' written
notice to Employer fully and accurately describing the cause for termination and
Employer fails to cure the breach within such fifteen (15) day period. With
"cause" shall mean a material and continuing breach by Employer in failing to
pay to Employee amounts to which Employee is entitled under this Agreement. In
the event Employee terminates this Agreement pursuant to this Section 7.4, (i)
-----------
Employer shall immediately pay Employee's annual salary, bonus and fringe
benefits and reimburse Employee for expenses in each case as set forth herein,
earned or reimbursable and unpaid through the effective date of termination, and
(ii), on the effective date of such termination, Employer shall also pay
Employee, in a lump sum, (a) the present value of the Employee's annual salary
(based on the base salary being earned at the time of the notice of termination)
for the remainder of the Employment Term as would otherwise be payable (based on
a discount rate of 5%) plus (b) the Employees last annual bonus, pro rated for
the partial fiscal year already past at the date of termination, so that if 60%
of the fiscal year has past, 60% of the prior years bonus shall be paid, but in
no event will the bonus payment payable under this subsection (ii) (b) be less
than Employees annual base salary at the time. In addition, if Employee
terminates this Agreement with cause during its term all options on
10
<PAGE>
stock of the Employer granted to Employee in respect of her employment which
have not vested and become exercisable shall become exercisable on the date of
termination and shall be exercisable for a period of three months thereafter.
ARTICLE 8.
GENERAL PROVISIONS
8.1 Notices: Any notices to be given hereunder by either party to
-------
the other may be effected either by personal delivery in writing or by
registered or certified mail, postage prepaid with return receipt requested, by
nationally recognized overnight courier or by confirmed facsimile at the
following addresses or facsimile numbers:
If to Employee: Ms. Mary Jayne Howard
12808 Cumpston Street
Valley Village, California 91667
With a copy to:
Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars
Los Angeles, CA 90067
Attn: Steven J. Insel
Facsimile: (310) 203-0567
If to Employer: American Office Park Properties, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201
Facsimile: (818) 244-9267
Attn: Office of General Counsel
Notices delivered personally shall be deemed communicated upon actual
receipt; mailed notices shall be deemed communicated upon receipt of the
mailing; notices sent by overnight courier shall be deemed communicated and
received as of one (1) business day after
11
<PAGE>
delivery to the overnight courier; and notices sent by facsimile shall be deemed
communicated and received as of the time the sender receives written
confirmation of the sending of the facsimile.
8.2 Attorneys' Fees and Costs: If any action in law or equity is
--------------------------
necessary to enforce or interpret the terms of this Agreement, the non-
prevailing party shall pay the reasonable attorneys' fees and costs of the
prevailing party, unless otherwise provided by law or this Agreement. A party
shall not be considered a prevailing party unless he or it prevails in
substantially all of her or its position under dispute.
8.3 Partial Invalidity: If any provision of this Agreement is held
------------------
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated.
8.4 Applicable Law: This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of California as now enacted
and as may hereafter be modified and/or amended.
8.5 Construction of Terms: The terms and provisions of this
---------------------
Agreement, which are freely negotiated as between the parties, shall not be
construed either in favor of or against either party in the event of any
ambiguity or uncertainty.
8.6 Employee's consultation with Independent Attorney: Employee
-------------------------------------------------
expressly acknowledges that Employee has been requested to consult with
independent legal counsel of Employee's choosing to review and have explained to
Employee the legal significance and legal effect of the terms and conditions of
this Agreement prior to Employee's execution of this Agreement. In this regard,
Employee expressly acknowledges that the terms
12
<PAGE>
of this Agreement were not forced upon Employee by Employer, and that the terms
of this Agreement were negotiable and were not "cast in stone," and that
Employer has not imposed any time deadlines upon Employee with regard to the
execution of this Agreement. Employer agrees to reimburse Employee for legal
expenses hereunder up to a maximum of $5,000.
8.7 Entire Agreement: This Agreement supersedes any and all other
----------------
agreements, either oral or in writing, between the parties with respect to the
employment of Employee by Employer, and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement or promise not contained in this
Agreement shall be valid or binding.
8.8 Modifications: Any modification of this Agreement will be
-------------
effective only if it is in writing and signed by the party to be charged.
8.9 Waiver: A waiver of any of the terms and conditions hereof shall
------
not be construed as a general waiver of the same or any other term or condition
hereof or any subsequent breach thereof.
8.10 Dispute Resolution. Any controversy or claim arising out of, or
------------------
relating to, this Agreement or Employee's employment with Employer shall be
settled by arbitration in Los Angeles, California in accordance with the rules
of the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Employer and Employee agree to the
13
<PAGE>
personal jurisdiction of any court of competent subject matter jurisdiction in
the County of Los Angeles for the enforcement of any order or judgement related
hereto. The decision of the arbitrator shall be final and binding upon both
parties. The prevailing party in any arbitration shall be entitled to its costs
and expenses (including reasonable attorneys' fees) incurred in connection with
the arbitration from the other party. No punitive or exemplary damages may be
awarded by the arbitrator. The foregoing provisions of this Section shall not be
interpreted to restrict either party's right to pursue equitable relief from a
court of competent jurisdiction.
8.11 Waiver of Jury Trial: BY AGREEING TO ARBITRATE, ALL PARTIES, AS
--------------------
A PRACTICAL MATTER, HAVE WAIVED THE RIGHT TO JURY TRIAL. The parties hereby
waive trial by jury in any action, proceeding or counterclaim brought by any of
them against any other party on any matters whatsoever arising out of or in any
way connected with this Agreement, provided that all actions brought under this
Agreement shall be brought in the State of California.
14
<PAGE>
WHEREFORE, the parties hereby execute this Agreement this 23rd day
of December, 1997.
EMPLOYER:
AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ David Goldberg
--------------------------------
Name: David Goldberg
Title: Authorized Agent
EMPLOYEE:
/s/ Mary Jayne Howard
---------------------------
MARY JAYNE HOWARD
15
<PAGE>
EXHIBIT 10.15
COMMON STOCK PURCHASE AGREEMENT
5,740,741 SHARES OF COMMON STOCK
OF
AMERICAN OFFICE PARK PROPERTIES, INC.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. PURCHASE AND SALE OF STOCK.......................................... 2
1.1 Sale and Issuance of Common Stock.............................. 2
1.2 Closings....................................................... 2
1.3 Use of Proceeds; Acquisition Criterion......................... 3
1.4 Definitions.................................................... 4
II. REPRESENTATIONS AND WARRANTIES OF AOP............................... 4
2.1 Registration of PSP11 Common Stock............................. 5
2.2 Organization, Good Standing and Qualification.................. 5
2.3 Capitalization................................................. 7
2.4 Authorization; Enforcement..................................... 8
2.5 Valid Issuance of Shares....................................... 8
2.6 Compliance with Other Instruments.............................. 8
2.7 SEC Documents; Financial Statements; Other Information......... 9
2.8 Litigation..................................................... 10
2.9 Legal Compliance............................................... 10
2.10 Accountants.................................................... 11
2.11 Financial Statements........................................... 11
2.12 Registration Rights............................................ 11
2.13 Investment Company............................................. 12
2.14 Title to and Condition of the Properties and Assets............ 12
2.15 No Other Pending Transactions.................................. 13
2.16 Taxes.......................................................... 13
2.17 Licenses and Approvals......................................... 15
2.18 Legal Compliance............................................... 15
2.19 No Notices of Default.......................................... 15
2.20 Existing Financing............................................. 16
2.21 Material Contracts............................................. 16
2.22 Leases......................................................... 17
2.23 Labor Matters.................................................. 18
2.24 Employee Benefit Plans and Employee Pension Plans.............. 18
2.25 Insurance...................................................... 21
2.26 Environmental Compliance....................................... 22
2.27 Building, Subdivision and Land-Use Laws; Restrictive Covenants. 24
2.28 No Unpaid Assessments.......................................... 25
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
2.29 Condemnation.................................................. 25
2.30 Unpaid Bills; Mechanics Liens................................. 25
2.31 Proffers; Other Commitments................................... 26
2.32 Books and Records............................................. 26
2.33 Bankruptcy.................................................... 26
2.34 Disclosure.................................................... 26
III. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..................... 27
3.1 Organization, Good Standing and Qualification................. 27
3.2 Authorization; Enforcement.................................... 27
3.3 Compliance with Other Instruments............................. 28
3.4 Litigation.................................................... 28
3.5 Purchase Entirely for Own Account............................. 28
3.6 Acknowledgments............................................... 28
3.7 Accredited Investor........................................... 29
3.8 Restricted Securities......................................... 29
3.9 Certain Tax Matters........................................... 29
IV. CONDITIONS OF THE INVESTORS' OBLIGATIONS AT CLOSING................. 30
4.1 Representations and Warranties................................ 30
4.2 Performance................................................... 30
4.3 Compliance Certificate........................................ 31
4.4 Opinions of Company Counsel................................... 31
4.5 Opinion as to REIT Status..................................... 31
4.6 Opinion as to VCOC Status..................................... 31
4.7 No Material Change............................................ 32
4.8 Action by the Boards of Directors............................. 32
4.9 Affiliate Status.............................................. 32
4.10 Registration Rights Agreement................................. 33
4.11 Environmental Indemnity Agreement............................. 33
4.12 Reliance Letter............................................... 33
4.13 Signal Hill Indemnification Agreement......................... 33
4.14 Indemnification Agreement Concerning Title Issues............. 33
V. CONDITIONS OF AOP's OBLIGATIONS..................................... 33
5.1 Representations and Warranties................................ 33
5.2 Performance................................................... 34
VI. COVENANTS........................................................... 34
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
6.1 REIT Status................................................... 34
6.2 Stop Orders................................................... 34
6.3 Use of Proceeds............................................... 34
6.4 Confidentiality............................................... 34
6.5 Changes to Charter and By-Laws................................ 35
6.6 Changes in Capitalization..................................... 35
6.7 Issuance of Additional Capital Stock.......................... 35
6.8 Future Offerings.............................................. 37
6.9 Information................................................... 37
6.10 VCOC Status................................................... 37
6.11 Merger and Exchange........................................... 37
6.12 Subsequent Closings........................................... 38
6.13 Removal of Legend............................................. 38
6.14 Environmental Actions......................................... 38
6.15 Ownership Limits.............................................. 38
VII. INDEMNIFICATION..................................................... 38
7.1 Obligations of AOP............................................ 38
7.2 Obligations of Investors...................................... 39
7.3 Procedure..................................................... 40
7.4 Survival...................................................... 41
7.5 Remedies...................................................... 41
VIII. MISCELLANEOUS...................................................... 41
8.1 Survival of Warranties........................................ 41
8.2 Successors and Assigns........................................ 42
8.3 Governing Law................................................. 42
8.4 Counterparts.................................................. 42
8.5 Titles and Subtitles.......................................... 42
8.6 Notices....................................................... 42
8.7 No Finders' Fees.............................................. 44
8.8 Expenses...................................................... 45
8.9 Amendments and Waivers........................................ 45
8.10 Severability.................................................. 46
8.11 Entire Agreement.............................................. 46
EXHIBIT A INVESTORS...................................................... 1
EXHIBIT A-1 FIRST CLOSING ALLOCATION..................................... 1
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
EXHIBIT B FORM OF NOTICE OF SUBSEQUENT CLOSING........................... 1
EXHIBIT C INDEX OF DEFINITIONS........................................... 1
</TABLE>
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<PAGE>
COMMON STOCK PURCHASE AGREEMENT
This COMMON STOCK PURCHASE AGREEMENT is made as of the 23rd day of January,
1998 by and among American Office Park Properties, Inc., a California
corporation ("AOP"), ABKB/LaSalle Securities Limited Partnership, a registered
investment adviser ("ABKB"), Harvard Private Capital Realty, Inc., a
Massachusetts corporation ("HPCR"), Cohen & Steers Capital Management, Inc., a
registered investment adviser ("C&S"), Morgan Stanley Asset Management, a
registered investment adviser ("MSAM"), the Fidelity entities signatories hereto
(each a "Fidelity Entity," and collectively, "FIDO"), Stanford University ("SU")
and the State of Michigan Retirement Systems ("MICH"). AOP, Public Storage
Properties XI, Inc., a California corporation ("PSP11"), and Public Storage,
Inc., a California corporation ("PSI"), are each referred to herein as a
"Company," and collectively as the "Companies." ABKB, C&S and MSAM, are each
referred to herein as an "Agent Investor," and collectively as the "Agent
Investors." Each Agent Investor enters into this Agreement solely as agent for
and for the benefit of certain of such Agent Investor's clients (each a
"Pecuniary Owner," and collectively, the "Pecuniary Owners"). HPCR, each
Fidelity Entity, SU and MICH are each referred to herein as a "Direct Investor,"
and collectively as the "Direct Investors." The Agent Investors and the Direct
Investors are each referred to herein as an "Investor," and collectively as the
"Investors."
WHEREAS, the Companies have entered into an Amended and Restated Agreement
and Plan of Reorganization dated as of December 17, 1997 (the "Merger
Agreement") whereby, subject to the satisfaction of certain conditions,
including approval by the stockholders of PSP11, AOP will be merged with and
into PSP11 (the "Merger"), and PSP11 and PSI will exchange (the "Exchange") 13
predominantly mini-warehouse properties owned by PSP11 (the "Warehouse
Properties") for 11 commercial properties owned by PSI (the "Commercial
Properties");
WHEREAS, AOP has entered into an agreement (the "NYC Agreement") with the
New York Common Retirement Fund and certain of its subsidiaries (collectively,
"NYC") pursuant to which NYC transferred certain real estate (the "NYC
Properties") to AOP in exchange for the issuance of AOP's Common Stock, par
value $0.10 per share (the "AOP Common Stock"), and units representing limited
partnership interests in American Office Park Properties, L.P. (the "Operating
Partnership);
WHEREAS, in connection with the proposed Merger, each share of AOP Common
Stock would be converted into 1.18 shares of PSP11's Common Stock, par value
$0.01 per share (the "PSP11 Common Stock");
<PAGE>
AND WHEREAS, each Direct Investor and each Agent Investor, as agent for and
for the benefit of certain Pecuniary Owners, desires to invest in AOP (or PSP11
after consummation of the Merger and the Exchange);
THE PARTIES HEREBY AGREE AS FOLLOWS:
I. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF COMMON STOCK.
Subject to the terms and conditions of this Agreement, the Investors agree
to purchase at one or more Closings (as defined below) and AOP agrees to sell
and issue to the Investors an aggregate of up to 5,740,741 shares (the "Shares")
of AOP Common Stock for an aggregate purchase price of up to $155,000,007 (the
"Purchase Price") based upon a per-share price of $27.00 (the "Per-Share
Price"). If the proposed Merger is consummated before all of the Shares have
been issued and purchased hereunder, the issuer of the Shares to be purchased
thereafter shall be PSP11, as the surviving corporation in the Merger, and the
Per-Share Price shall be adjusted to equal the Per-Share Price immediately prior
to the Merger divided by the number of shares of PSP11 Common Stock received in
the Merger for each share of AOP Common Stock. Following the Merger, references
to AOP throughout this Section I shall be read as references to PSP11 and the
---------
aggregate number of Shares shall be adjusted accordingly.
1.2 CLOSINGS.
The transactions contemplated by this Agreement will be effected at one or
more Closings (each, a "Closing"). The date for the first Closing (the "First
Closing") shall be January 30, 1998 (the "First Closing Date"), at which time
$50,000,031 of the Purchase Price will be funded. Each Closing other than the
First Closing (each, a "Subsequent Closing") shall be held upon ten (10) days'
written notice from AOP to the Investors setting forth the amount of the
Purchase Price to be funded at that Subsequent Closing (which amount shall be at
least $20,000,000, except in the case of the final Subsequent Closing) and
enclosing the information required by Section 1.3 below. At each Closing, each
-----------
Investor shall deliver to AOP by means of a wire transfer to AOP's account the
same proportion of the amount of the Purchase Price being funded at that Closing
as the amount set forth opposite such Investor's name on Exhibit A bears to
---------
$155,000,007, against confirmation of physical delivery by AOP to each Investor
or its designee of certificates representing the Shares to be sold to such
Investor hereunder, in the names and amounts supplied in writing by the
Investors at least three (3) days prior to each Closing; provided that, if any
Shares are to be issued in names other than those of the
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Investors, such writing shall include a certification by the applicable Investor
that each such other name is that of a Pecuniary Owner or its nominee. Physical
delivery into escrow with counsel to the Investors of certificates representing
the Shares shall be made at least one (1) day prior to each Closing to the
addresses of the Investors shown in Section 8.6 hereof. Exhibit A-1 sets forth
----------- -----------
the amount of the Purchase Price to be funded and the number of Shares to be
issued in connection with the First Closing. No Subsequent Closing shall be
held after July 31, 1998.
1.3 USE OF PROCEEDS; ACQUISITION CRITERION.
(a) Use of Proceeds. AOP and PSP11, as the case may be, will use the net
----------------
proceeds from each Closing for the acquisition, development and/or renovation
of, and to pay down debt and closing costs incurred in connection with the
acquisition after the date hereof of, commercial properties, including light
industrial, flex, industrial and office real estate located within the United
States (the "Acquisition Properties"). Except as provided below with respect to
the final Subsequent Closing, AOP shall not give notice of any Subsequent
Closing unless the proceeds therefrom will be used for Acquisition Properties
that are then owned or under contract of purchase and that meet the Acquisition
Criterion defined below. The notice of the final Subsequent Closing may include
funds needed to purchase Acquisition Properties meeting the Acquisition
Criterion and then under letter of intent so long as the aggregate funds so
included with respect to the Acquisition Properties under letter of intent do
not exceed $25,000,000.
(b) Acquisition Criterion. At the time of delivery of the notice by AOP
---------------------
of a Subsequent Closing, AOP shall represent and provide a pro forma analysis
indicating that the Acquisition Properties acquired or to be acquired with the
proceeds of such Subsequent Closing are expected, in its good faith judgment at
the time of such notice, to generate either an NOI Yield (as defined in (c)
below) of 9.25% or more for the first twelve calendar months following the
acquisition or an NOI Yield of 10.25% or more within 24 calendar months
following the acquisition (the "Acquisition Criterion"). AOP shall include with
the notice of each Subsequent Closing a schedule showing the calculation of the
projected NOI Yield for each of the Acquisition Properties and in the aggregate
for all of the Acquisition Properties acquired or to be acquired with the
proceeds of such Subsequent Closing. Any notice pursuant to this Section 1.3
-----------
shall be in the form attached hereto as Exhibit B. NOI Yields for the
---------
Acquisition Properties subject to a particular Subsequent Closing shall be
determined on the basis of a weighted average yield for all the Acquisition
Properties acquired or to be acquired with the proceeds of a particular
Subsequent Closing, and not on an individual Acquisition Property basis. In the
event the Acquisition Criterion is not satisfied as to the Acquisition
Properties that are the subject of a particular Subsequent Closing, the
Subsequent Closing shall nevertheless be funded by all of the Investors if (i)
AOP provides information regarding those
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Acquisition Properties' expected NOI Yields to all Investors and (ii) receives
written approval of the proposed acquisition of those Acquisition Properties
from at least two of ABKB, HPCR, C&S, MSAM and FIDO. The delivery of the notice
required this Section 1.3(b) shall create no implication that AOP is making a
--------------
representation as to, or guaranteeing, the actual NOI Yield of any Acquisition
Property and, provided any such notice is delivered in good faith by AOP, AOP
shall have no liability to the Investors, the Pecuniary Owners or to any other
person with respect to such notice or the financial projections contained
therein.
(c) NOI Yield. "NOI Yield" shall mean the gross revenues derived from an
----------
Acquisition Property over a given twelve month period less operating expenses
relating to such Acquisition Property (including AOP's (or PSP11's after the
Merger) expected management costs relating thereto, but excluding brokerage
commissions, tenant improvement costs, capital reserves and depreciation)
divided by the purchase price for such Acquisition Property (including closing
costs and deferred maintenance costs required to be funded at closing). The
calculation of NOI Yield shall employ generally accepted accounting principles
("GAAP"), except that rents shall not be calculated on a straight-line basis.
1.4 DEFINITIONS.
Exhibit C sets forth an index of defined terms used in this Agreement.
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II. REPRESENTATIONS AND WARRANTIES OF AOP.
AOP hereby makes the following representations and warranties to the
Investors and the Pecuniary Owners. As used in this Agreement, "AOP's
knowledge" or words of similar import, shall mean the knowledge of Ronald L.
Havner, Jr., Mary Jayne Howard, John Reyes and David Goldberg, after due
inquiry, except that with respect to the representations and warranties
contained in Sections 2.8, 2.14, 2.17, 2.18, 2.20, 2.22, 2.23, 2.26, 2.27, 2.28
------------------------------------------------------------------
and 2.29, such term shall also include the knowledge of those persons identified
- --------
on Schedule 2.0 with respect to matters relating directly to the Properties
------------
listed beside such person's name on Schedule 2.0. For purposes of the
------------
environmental representations in Section 2.26, the term "due inquiry" means that
------------
one or more of the persons listed in this Section or on Schedule 2.0 have
------------
performed an environmental site walk at each of the Properties within the six
(6) months prior to the date of this Agreement. The disclosures in any schedule
attached hereto in response to the following representations and warranties
shall qualify other schedules and other paragraphs of this Section II to the
----------
extent, and only to the extent, that it is clear from a reading of such
disclosure that such disclosure is applicable to such other schedules or
paragraphs.
4
<PAGE>
2.1 REGISTRATION OF PSP11 COMMON STOCK.
(a) A preliminary proxy statement in connection with the vote of
shareholders of PSP11 with respect to the Merger has been prepared and filed
with the Securities and Exchange Commission (the "Commission") by PSP11 in
conformity in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Exchange Act"). The second amended
copy of such preliminary proxy statement filed with the Commission on December
30, 1997 is referred to herein as the "Preliminary Proxy Statement." A
registration statement on Form S-4 (the "S-4 Registration Statement"),
containing a definitive proxy statement (the "Definitive Proxy Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder (collectively, the
"Securities Act"), of the PSP11 Common Stock to be issued in connection with the
Merger will be filed with the Commission and will be declared effective under
the Securities Act prior to consummation of the Merger. AOP has provided each
of the Investors with a copy of the Preliminary Proxy Statement as filed with
the Commission and any amendments thereto.
(b) PSP11 complies with the conditions for the use of Form S-4. The
Commission has not issued an order preventing or suspending the use of the
Preliminary Proxy Statement relating to the proposed offering of the PSP11
Common Stock nor instituted proceedings for that purpose. The Preliminary Proxy
Statement and any amendments or supplements thereto contain all statements which
are required to be stated therein by, and in all material respects conform to
the requirements of, the Securities Act or the Exchange Act, as applicable. The
documents incorporated by reference in the Preliminary Proxy Statement, at the
time they were filed with the Commission, conformed in all material respects to
the requirements of the Exchange Act or the Securities Act, as applicable.
Neither the Preliminary Proxy Statement nor any amendment thereto, including any
documents incorporated by reference therein, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
2.2 ORGANIZATION, GOOD STANDING AND QUALIFICATION.
(a) Each of AOP, PSP11 and PSI has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with power and authority (corporate and other) to own its properties
and conduct its business as now being conducted, and as proposed to be
conducted. Each of AOP and PSP11 has been duly qualified as a foreign
corporation for the conduct of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties, or
5
<PAGE>
conducts any business so as to require such qualification, and which would cause
a Material Adverse Effect by reason of the failure to be so qualified in any
such jurisdiction. " Material Adverse Effect" means any material adverse effect
on the operations, assets, business, affairs, Properties (as defined below) or
financial or other condition of AOP and its Subsidiaries (as defined below)
taken as a whole prior to the Merger, or PSP11 and its Subsidiaries taken as a
whole following the Merger; provided that, if the context requires, Material
Adverse Effect prior to the Merger with respect to any of the Properties then
owned by PSP11 or PSI shall be determined assuming that the Merger and Exchange
have been consummated.
(b) Each "significant subsidiary" (as such term is defined in Rule 1-02 of
Regulation S-X) of AOP and PSP11 (each a "Subsidiary," and collectively, the
"Subsidiaries") is listed on Schedule 2.2 hereto. Each Subsidiary is a
------------
corporation, limited partnership, limited liability company or trust, as the
case may be, duly organized or formed and validly existing and in good standing
under the laws of its jurisdiction of incorporation or formation. Each
Subsidiary has the power and authority (corporate and other) to conduct its
businesses as now being conducted, and each Subsidiary has been duly qualified
as a foreign corporation for the conduct of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such qualification, and where the
failure to be so qualified in any such jurisdiction would cause a Material
Adverse Effect. All of the outstanding capital stock, partnership interests,
limited liability company membership interests or trust beneficial interests, as
the case may be, issued by the Subsidiaries or created by agreements to which
the Subsidiaries are parties (i) have been duly and validly issued or created
(and in the case of capital stock are fully paid and nonassessable) and (ii) are
owned or held, directly or indirectly by AOP or PSP11 in the percentage amounts
set forth on Schedule 2.2 hereto free and clear of any security interest, lien,
------------
adverse claim, equity or other encumbrance (each of the foregoing, a "Lien")
except for such Liens as (A) are set forth on Schedule 2.2 or (B) would not have
------------
a Material Adverse Effect.
(c) This Agreement constitutes the legal, valid and binding obligation of
AOP, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
(d) References to the Companies or any Company in the representations and
warranties shall be deemed to include each Subsidiary of such Company or
Companies, as the case may be, unless the context otherwise requires.
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<PAGE>
2.3 CAPITALIZATION.
(a) The authorized capital stock (collectively, the "AOP Capital Stock")
of AOP consists of 200,000,000 shares, consisting of 100,000,000 shares of AOP
Common Stock and 100,000,000 shares of Preferred Stock, par value $.10 per
share, of which 8,062,130 shares of AOP Common Stock are issued and outstanding
as of the date hereof. All of such outstanding shares have been duly authorized
and validly issued and are fully paid and nonassessable.
(b) The authorized capital stock (collectively, the "PSP11 Capital Stock")
of PSP11 consists of 3,356,000 shares currently classified as Common Stock, par
value $.01 per share, consisting of 2,828,929 of Series A Common Stock, of which
1,819,937 shares are issued and outstanding, 184,453 shares of Series B Common
Stock, all of which are issued and outstanding and 522,618 shares of Series C
Common Stock, all of which are issued and outstanding. All of such outstanding
shares have been duly authorized and validly issued and are fully paid and
nonassessable. The AOP Capital Stock and the PSP11 Capital Stock are
collectively referred to herein as the "Capital Stock."
(c) Except pursuant to the Agreement Among Shareholders and the Company
(the "NYC Shareholders Agreement") executed in connection with the NYC
Agreement, no shares of Capital Stock are entitled to preemptive rights. NYC
has waived all of its preemptive rights with respect to the transactions
contemplated by this Agreement. Except as set forth on Schedule 2.3, there are
------------
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of Capital Stock or stock of any of the
subsidiaries of AOP or PSP11, or contracts, commitments, understandings or
arrangements by which AOP, PSP11 or any Subsidiary thereof is or may become
bound to issue additional shares of capital stock of AOP, PSP11 or any
Subsidiary thereof, as the case may be. AOP has furnished to the Investors true
and correct copies of each Company's Articles of Incorporation, as amended as of
the date hereof (as to each, the "Charter") and each Company's Bylaws as in
effect on the date hereof (as to each, the "Bylaws").
(d) Except as set forth on Schedule 2.3, each of AOP and PSP11 has no
------------
obligation (contingent or other) to purchase, redeem or otherwise acquire any of
its respective Capital Stock or any interest therein or to pay any dividend or
make any other distribution in respect thereof, other than as required by the
Real Estate Investment Trust provisions of the Internal Revenue Code.
(e) Except as set forth on Schedule 2.3, AOP has no knowledge of any
------------
voting agreements, voting trusts, stockholders' agreements, proxies or other
agreements or
7
<PAGE>
understandings that are currently in effect or that are currently contemplated
with respect to the voting of any Capital Stock of AOP or PSP11.
(f) All of the outstanding securities of each of AOP and PSP11 were issued
in material compliance with all applicable federal and state securities laws.
2.4 AUTHORIZATION; ENFORCEMENT.
(a) AOP has the requisite corporate power and authority to enter into and
perform this Agreement. AOP has the requisite corporate power and authority to
issue the AOP Common Stock in accordance with the terms hereof. Except for the
Ownership Limit (as defined in the Charters of AOP and PSP11) and related
provisions, the AOP and PSP11 Charters do not in any way prevent or restrict the
transactions contemplated hereby or preclude the Investors, acting directly or
as agents on behalf of the Pecuniary Owners, from owning or holding the amount,
value or class of Capital Stock to be purchased hereby.
(b) The execution and delivery of this Agreement by AOP and the
consummation by it of the transactions contemplated hereby have been duly
authorized by the Board of Directors of AOP and no further consent or
authorization of AOP, PSP11 or PSI or any of their Boards of Directors or
stockholders is required.
(c) This Agreement has been duly executed and delivered by AOP.
2.5 VALID ISSUANCE OF SHARES.
(a) The AOP Common Stock (and PSP11 Common Stock after the Merger) being
purchased by the Investors hereunder, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable and will be issued in
material compliance with all applicable federal and state laws and stock
exchange requirements.
(b) The PSP11 Common Stock to be issued to the holders of AOP Common Stock
pursuant to the Merger Agreement, when issued, sold and delivered in accordance
with the terms thereof for the consideration expressed therein, will be duly and
validly issued, fully paid and nonassessable and will be issued in material
compliance with all applicable federal and state laws and stock exchange
requirements.
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2.6 COMPLIANCE WITH OTHER INSTRUMENTS.
The execution, delivery and performance of this Agreement by AOP and the
consummation by it of the transactions contemplated hereby do not (i) result in
a violation of the Charter or Bylaws of any of the Companies or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which any of the Companies or any of their Subsidiaries is a party
(including the NYC Agreement and the Merger Agreement), or result in a violation
of any law, rule, regulation, order, judgment or decree applicable to the
Companies, any of their Subsidiaries or by which any property or asset of the
Companies or any of their Subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect or materially impair the ability of AOP to perform its
obligations under the Agreement). AOP is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order to execute, deliver or perform any of its
obligations under this Agreement or issue and sell the AOP Common Stock in
accordance with the terms hereof, except such as have been or will be obtained
prior to the First Closing.
2.7 SEC DOCUMENTS; FINANCIAL STATEMENTS; OTHER INFORMATION.
(a) Since January 1, 1995, PSP11 has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
Commission pursuant to the reporting requirements of Section 13 of the Exchange
Act (all of the foregoing filed prior to the date hereof, being hereinafter
referred to as the "SEC Documents"). AOP is not subject to the reporting
requirements of Section 13 of the Exchange Act. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder applicable to such SEC Documents, and none of the SEC Documents (when
read together with all exhibits included therein and financial statement
schedules thereto and documents (other than exhibits) incorporated by reference)
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 in which they were made, not misleading.
(b) The financial statements of PSP11 included in the SEC Documents and
the financial statements of AOP for the three years ended December 31, 1996 and
the nine months ended September 30, 1997 comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the
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Commission with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the consolidated financial position of AOP and PSP11, as the case may
be, and their respective Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(c) Since January 1, 1997, (i) the business of each of AOP and PSP11 has
been conducted in the ordinary course and (ii) there has been no Material
Adverse Effect as to AOP, PSP11 or any of the Properties that has not been
described in the SEC Documents or other items provided to the Investors. As of
the First Closing and as of the date hereof, there are no material liabilities,
contingent or otherwise, of any of the Companies that have not been disclosed in
the financial statements (including the notes thereto) referred to above or
otherwise disclosed in the SEC Documents.
2.8 LITIGATION.
Except as disclosed to the Investors in connection with Section 2.26
------------
hereto:
(a) There is no action, suit, proceeding, investigation or claim pending
or, to the knowledge of AOP, threatened, against AOP or PSP11 in law, equity or
otherwise before any federal, state, municipal or local court, administrative
agency, commission, board, bureau, instrumentality or arbitrator (an "Applicable
Authority") which either (i) questions the validity of this Agreement or the AOP
Common Stock or any action taken or to be taken pursuant hereto, (ii) questions
the validity of the Merger Agreement or the NYC Agreement or any action taken or
to be taken pursuant thereto, (iii) may adversely affect the right, title or
interest of any Investor or Pecuniary Owner to the Shares or (iv) if decided
adversely to such Company, could be reasonably expected to individually or in
the aggregate have a Material Adverse Effect.
(b) AOP is not aware of facts or circumstances that could give rise to a
legal action that, if determined adversely, reasonably could be expected to have
a Material Adverse Effect. There is no action or suit by AOP or PSP11 pending
or threatened against others except litigation in the ordinary course of
business such as tenant eviction proceedings, none of which individually or in
the aggregate reasonably could be expected to result in a Material Adverse
Effect.
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2.9 LEGAL COMPLIANCE.
Except as disclosed to the Investors in connection with Section 2.26
------------
hereto:
(a) Each of AOP and PSP11 have complied with all applicable laws, rules,
regulations, orders, licenses, judgments, writs, injunctions, decrees or demands
(the "Applicable Laws"), except to the extent that failure to comply would not
have a Material Adverse Effect. Each of AOP and PSP11 have all necessary
permits, licenses and other authorizations required to conduct its business as
currently conducted, and as proposed to be conducted, in all material respects.
(b) There are no adverse orders, judgments, writs, injunctions, decrees or
demands of any court or administrative body, domestic or foreign, or of any
other governmental agency or instrumentality, domestic or foreign, outstanding
against AOP or PSP11 which could reasonably be expected to result in a Material
Adverse Effect.
(c) There is no existing law, rule, regulation or order and AOP is not
aware of any proposed law, rule, regulation or order, which would prohibit or
materially restrict AOP or PSP11 from, or otherwise materially adversely affect
AOP or PSP11 in, conducting their business as now being conducted and as
proposed to be conducted.
2.10 ACCOUNTANTS.
Ernst & Young LLP, who have certified the financial statements included or
incorporated by reference in the SEC Documents (or any amendment or supplement
thereto) and the Preliminary Proxy Statement, are independent public accountants
with respect to PSP11 as required by the Securities Act.
2.11 FINANCIAL STATEMENTS.
Attached hereto as Schedule 2.11 is a pro forma balance sheet and income
-------------
statement of AOP and PSP11 as of September 30, 1997, and for the nine months
then ended, as adjusted to assume issuance of the Shares to be issued in the
First Closing in accordance with the terms and conditions of this Agreement and
consummation of the NYC transaction (the "Pro Forma Financial Statements"). The
Pro Forma Financial Statements have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma basis described
therein, and, in the opinion of AOP, the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
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<PAGE>
2.12 REGISTRATION RIGHTS.
No holder of any security of AOP and PSP11 has any unwaived right to
require registration of shares of Capital Stock or any other security of AOP or
PSP11 because of the filing of the S-4 Registration Statement or the
consummation of any of the transactions contemplated by this Agreement.
2.13 INVESTMENT COMPANY.
AOP and PSP11 are not now, and after the sale of the Common Stock to be
sold hereunder and application of the net proceeds from such sale as described
herein, neither of them will be, an "investment company" or an entity controlled
by an "investment company" as such terms are defined in the Investment Company
Act of 1940, as amended.
2.14 TITLE TO AND CONDITION OF THE PROPERTIES AND ASSETS.
(a) Except as set forth on Schedule 2.14 hereto, AOP, PSP11 or PSI, as the
-------------
case may be, hold (or upon consummation of the Merger will hold) fee simple
absolute or leasehold title to the Properties, free and clear of all mortgages
or deeds of trust, liens, claims, defects, restrictions and encumbrances which,
taken as a whole, reasonably could be expected to have a Material Adverse
Effect. To AOP's knowledge, title to each of the Properties shall be good,
marketable and insurable at rates customarily charged by nationally recognized
title insurance companies, without payment of additional premiums. The
"Properties" means all real property and improvements owned or leased as lessee
by AOP or PSP11, or that will be owned or leased as lessee by AOP or PSP11
(including the Commercial Properties) upon consummation of the transactions
contemplated by the Merger Agreement. Schedule 2.14 hereto sets forth a true
-------------
and correct list of the Properties as of the date hereof. AOP or PSP11, as the
case may be, hold good and valid title to all of the other Assets, in each case
free and clear of all liens, defects, restrictions and encumbrances which, taken
as a whole, reasonably could be expected to have a Material Adverse Effect. The
"Assets" means all of the assets, properties, licenses and other agreements
which are presently being used or are reasonably related to the business of AOP
or PSP11 or the Commercial Properties, and includes all assets, properties,
licenses and other agreements necessary to permit AOP, PSP11 or PSI (as to the
Commercial Properties) to conduct their business in the same manner as such
business has been conducted prior to the date hereof and the First Closing Date,
or that will be necessary to permit PSP11 to conduct its business after
consummation of the transactions contemplated by the Merger Agreement. Except
as disclosed to the Investors in connection with Section 2.26 hereto or as set
------------
forth on Schedule 2.14, the Assets and Properties comply with all applicable
-------------
requirements under
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each of the Licenses and Approvals (as defined below) and Applicable Laws,
except for such non-compliance as reasonably would not be expected to cause a
Material Adverse Effect.
(b) Other than as disclosed in the engineering reports listed on Schedule
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2.14, to AOP's knowledge, no Property has suffered any unrepaired casualty,
- ----
damage or destruction of any kind whatsoever, nor does any Property contain any
defects in structural, mechanical (including HVAC systems), or physical portions
(including roofs) at, on, or of such Property, except to the extent any such
casualty, damage, destruction or defect, individually or in the aggregate, does
not cause and is not reasonably expected to cause a Material Adverse Effect.
(c) Certain of the Properties are held under lease, and AOP is not aware
of any material default by the lessor under any such lease or any pending or
threatened claim or action by any lessor of any such Property to terminate any
such lease. Each lease or agreement to which any of the Companies is a party
under which it is the lessee of any Property, or any Assets, is a valid and
subsisting lease agreement without any material default of the Company
thereunder and, to the best of AOP's knowledge, without any material default
thereunder of any other party thereto, except for such defaults as reasonably
would not be expected to cause a Material Adverse Effect. No event has occurred
and is continuing which, with due notice or lapse of time or both, would
constitute a default or event of default by AOP under any such lease or
agreement or, to the best of AOP's knowledge, by any party thereto, except for
such defaults that would not individually or in the aggregate have or cause a
Material Adverse Effect. AOP's possession of such property has not been
disturbed and, to the best of AOP's knowledge, no claim has been asserted
against it adverse to its rights in such leasehold interests, except for such
disturbances or claims as reasonably would not be expected to cause a Material
Adverse Effect.
2.15 NO OTHER PENDING TRANSACTIONS.
Except for the transactions contemplated by this Agreement, the NYC
Agreement and the Merger Agreement, or disclosed on Schedule 2.15 hereto, (a)
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neither AOP nor PSP11 is a party to or bound by or subject to any agreement,
letter of intent, undertaking or commitment to merge or consolidate with, or
acquire all, substantially all or a material portion of the property and/or
assets of, any other person, corporation, or entity, or to sell, lease, convey,
assign or exchange all, substantially all or a material portion of their assets
to any other person, corporation, or entity, and (b) no person has an option,
right-of-first refusal, or other right to acquire any of the Properties or
Assets of either AOP or PSP11, or with respect to the Commercial Properties,
PSI.
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2.16 TAXES.
(a) AOP, PSP11 and PSI (with respect to the Commercial Properties) have
filed all federal, state, local and other tax returns and reports (except for
foreign returns and reports the failure to file which will not result in any
material liability to AOP or PSP11), and any other material returns and reports
relating to taxes with any Applicable Authority, required to be filed by them.
AOP, PSP11 and PSI (with respect to the Commercial Properties) have paid or
caused to be paid all material taxes that are due and payable, except those
which are being contested by such Company in good faith by appropriate
proceedings and in respect of which adequate reserves are being maintained on
its books in accordance with generally accepted accounting principles
consistently applied. Except as disclosed on Schedule 2.16 hereto, no taxes are
-------------
being contested by AOP, PSP11 or PSI (with respect to the Commercial
Properties). AOP, PSP11 and PSI (with respect to the Commercial Properties) do
not have any material liabilities for taxes other than those incurred in the
ordinary course of business and in respect of which adequate reserves are being
maintained by them in accordance with generally accepted accounting principles
consistently applied. Except as described in Schedule 2.16, federal and state
-------------
income tax returns for AOP, PSP11 and PSI (with respect to the Commercial
Properties) have not been audited by the Internal Revenue Service or state
authorities. No deficiency assessment with respect to or proposed adjustment of
AOP's, PSP11's or PSI's (with respect to the Commercial Properties) federal,
state, local or other tax returns is pending or, to the best of AOP's knowledge,
threatened. There is no material tax lien, whether imposed by any federal,
state, local or other tax authority outstanding against the assets or business
of AOP or PSP11, or against any of the Properties. There are no applicable
taxes, fees or other governmental charges payable by AOP or PSP11 in connection
with the execution and delivery of this Agreement or the issuance by AOP or
PSP11 of the Shares, except for governmental fees paid in connection with
securities law filings. Except for provisions customary in the acquisition and
disposition of real estate, neither AOP, PSP11 nor PSI (with respect to the
Commercial Properties) have entered into any agreement to prorate the payment of
any currently unpaid taxes. The term "taxes" means any net income, alternative
or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, real property, personal property, or
windfall profit tax, custom, duty or other tax, governmental fee or other like
assessment or charge of any kind whatsoever, addition to tax or additional
amounts imposed by any Applicable Authority responsible for the imposition of
any such tax (domestic or foreign), together with any interest or penalties
thereon.
(b) As to PSP11, with respect to all tax periods regarding which the
Internal Revenue Service is or will be entitled to assert any claim, and as to
AOP, with respect to 1997, each of AOP and PSP11 has met the requirements for
qualification as a real estate
14
<PAGE>
investment trust under Sections 856 through 860 of the Internal Revenue Code, as
amended, and their present and contemplated operations, assets and income
continue to meet such requirements.
(c) AOP and PSP11 are not "foreign persons" within the meaning of Section
1445 of the Code, and AOP and PSP11, if requested by the Investors, will each
furnish to the Investors an affidavit in form satisfactory to the Investors
confirming the same.
2.17 LICENSES AND APPROVALS.
AOP and PSP11 hold all of the licenses, permits, certificates, franchises,
rights, variances, interim permits, approvals, authorizations or consents,
whether federal, state, local or foreign, required for the ownership of the
Properties or the operation of their respective businesses, except for such
Licenses and Approvals the lack of which reasonably would not be expected to
cause a Material Adverse Effect (the "Licenses and Approvals"). All of the
Licenses and Approvals are in full force and effect and the Companies are not in
violation with respect to any of them, except for such violations as reasonably
would not be expected to cause a Material Adverse Effect. No proceedings are
pending nor, to the best of AOP's knowledge, are any proceedings threatened or
in prospect by any Applicable Authority to revoke or limit the scope of any of
the Licenses and Approvals, except for such proceedings as reasonably would not
be expected to cause a Material Adverse Effect. None of the Licenses and
Approvals would be rendered ineffective or be required to be reissued as a
result of the consummation of the transactions contemplated hereby or by the NYC
Agreement or as a result of the Merger.
2.18 LEGAL COMPLIANCE.
Except as disclosed to the Investors in connection with Section 2.26
------------
hereto:
(a) AOP and PSP11 have not received notice from any Applicable Authority
that AOP or PSP11 are not in compliance with one or more Applicable Laws or that
the present condition of the Properties or any of their other Assets fails to
comply with one or more Applicable Laws, except for such noncompliance as
reasonably would not be expected to cause a Material Adverse Effect, and to the
best of AOP's knowledge, no such notice is pending or threatened to be given.
(b) Neither AOP, PSP11, the present condition of the Properties and the
other Assets, nor the operation of AOP's and PSP11's business violates any
judicial decree applicable to it or them or violates any Applicable Laws,
including those pertaining to occupational safety or health, environmental
protection, Americans with Disabilities Act, equal employment opportunity,
pension, and employee's retirement income security,
15
<PAGE>
except for such violations as reasonably would not be expected to cause a
Material Adverse Effect. AOP does not have knowledge of any proposed changes in
any Applicable Laws that would or could reasonably be expected to have a
Material Adverse Effect.
2.19 NO NOTICES OF DEFAULT.
Except as disclosed to the Investors in connection with Section 2.26
------------
hereto, neither AOP, PSP11 nor PSI (with respect to the Commercial Properties)
has received any notice from any Applicable Authority, mortgagee, insurer or
insurance board of underwriters or any other person or entity of the existence
of any default or unsafe condition with respect to the Properties that remains
unsatisfied or uncured or that will remain unsatisfied or uncured as of the
First Closing Date, except for such default or condition as reasonably would not
be expected to cause a Material Adverse Effect.
2.20 EXISTING FINANCING.
Attached hereto as Schedule 2.20 is a true and complete list of all
--------------
instruments and documents to which AOP, PSP11 or PSI (as to the Commercial
Properties) is a party or is otherwise bound in connection with loans to or from
AOP or PSP11 or facilities for the borrowing of funds in excess of One Million
Dollars $1,000,000 (the "Existing Debt") including all amendments, modifications
and supplements thereto or substitutions therefor (collectively, the "Loan
Documents"). AOP has made available to the Investors true and complete copies
of each of the Loan Documents. AOP and PSP11 have not received any notice of
default with respect to the Existing Debt or any of the Loan Documents and, to
the best of AOP's knowledge, neither AOP nor PSP11 are in default thereunder,
nor to the best of AOP's knowledge, would AOP or PSP11 be in default after the
giving of any required notice and/or the expiration of any required cure period.
Neither AOP nor PSP11 have delivered any notice of default to any lender with
respect to the Existing Debt or under the Loan Documents and, to the best of
AOP's knowledge, no lender is in default with respect thereto, nor, to the best
of AOP's knowledge, would any lender be in default after the giving of any
required notice and/or the expiration of any required cure period. Except as
set forth on Schedule 2.20 hereto, the terms of the Loan Documents do not
-------------
require the payment of a prepayment penalty, prepayment premium or other
surcharge in connection with the repayment in full or in part of the Existing
Debt prior to maturity.
2.21 MATERIAL CONTRACTS.
(a) Attached hereto as Schedule 2.21 is a true and complete list of all
--------------
contracts, agreements or understandings to which either AOP or PSP11 is a party,
other
16
<PAGE>
than Loan Documents and Leases (as hereinafter defined), that constitute
"material contracts" within the meaning of Item 601(b)(10) of Regulation S-K
(collectively, the "Material Contracts"), or to which PSI is a party that
constitute Material Contracts as to the Commercial Properties (the "PSI Material
Contracts"). The term "Material Contracts" shall be deemed to include (i) the
Amended Management Agreement dated as of February 21, 1995 between the
predecessor in interest to AOP and the predecessor in interest to PSI, (ii) the
NYC Agreement and (iii) the Merger Agreement.
(b) AOP has made available to the Investors true and complete copies
of all of the Material Contracts and the PSI Material Contracts and all
amendments, modifications and supplements thereto (or Schedule 2.21 attached
--------------
hereto contains an accurate and complete summary description of any such item
that is not in writing).
(c) Except as set forth in Schedule 2.21 attached hereto, all of the
--------------
Material Contracts and the PSI Material Contracts are in full force and effect,
the Companies are not in default or, to the knowledge of AOP, alleged to be in
default with respect to their obligations under any of the Material Contracts or
the PSI Material Contracts (nor would they be in default or, to the knowledge of
AOP, alleged to be in default with the giving of notice, passage of time, or
both), neither AOP nor PSP11 has delivered a notice of default to any other
party to any of the Material Contracts or the PSI Material Contracts, and, to
AOP's knowledge, no other party to any of the Material Contracts or the PSI
Material Contracts is in default with respect to its obligations thereunder (nor
would be in default with the giving of notice, passage of time, or both).
(d) Except as noted on Schedule 2.21 attached hereto, none of the
--------------
Material Contracts or the PSI Material Contracts requires the consent or
approval of any party thereto other than AOP or the consent or approval of any
third party in connection with the consummation of the transactions contemplated
hereby or by the NYC Agreement or as a result of the Merger.
2.22 LEASES.
(a) The rent roll dated as of December 27, 1997 as previously
delivered to the Investors is a true and complete rent roll for each of the
Properties, except that with respect to the NYC Properties such rent roll is
dated as of December 23, 1997 and with respect to the Property commonly known as
"Ammendale" (the "Ammendale Property") such rent roll is dated as of January 12,
1998 (all of the foregoing, collectively, the "Rent Roll"). The information set
forth in the Rent Roll is accurate in all material respects and current as of
December 27, 1997, except that in the case of the NYC Properties and the
Ammendale Property, such information is accurate in all material respects and
current as of the date such Property was acquired by AOP).
17
<PAGE>
(b) One of the Companies is the landlord (or the successor landlord)
with respect to all of the leases, subleases, rental agreements, and other
occupancy agreements for the use or occupancy of portions of each of the
Properties, together with all amendments to, modifications of, renewals and
extensions thereof, all guaranties with respect thereto, all work letter
agreements for unfunded work, improvement agreements, and other present
agreements between AOP or PSP11 and any tenant (collectively, the "Leases"), and
is entitled to receive the rental payments from the Leases. AOP has made
available to the Investors true and complete copies of all of the Leases. The
Companies have not assigned or encumbered any of their rights, title or interest
under any of the Leases nor agreed to any material oral modifications of any of
the provisions of any of the Leases.
(c) Except as set forth on Schedule 2.22 hereto, all of the Leases
-------------
are in full force and effect, the Companies are not in material default with
respect to any of their obligations under any of the Leases (nor would be in
material default with the giving of notice, passage of time, or both), the
Companies have not delivered a notice of default to any other party to any of
the Leases, and, to the best of AOP's knowledge, no party other than the
landlord under any of the Leases is in material default with respect to such
party's obligations under any of the Leases (nor would be in material default
with the giving of notice, passage of time, or both). For purposes of this
subparagraph (c), a "material default" shall mean a default (i) entitling the
non-defaulting party to terminate the Lease or (ii) requiring the payment of
Fifty Thousand Dollars ($50,000) or more to cure.
(d) Except as noted on Schedule 2.22 attached hereto, none of the
-------------
Leases requires the consent or approval of any party thereto other than AOP or
the consent or approval of any third party in connection with the consummation
of the transactions contemplated hereby or by the NYC Agreement or as a result
of the Merger.
2.23 LABOR MATTERS.
AOP has complied in all material respects with all Applicable Laws relating
to the employment of labor, including the provisions thereof relating to wages,
hours, collective bargaining, and the payment of social security and taxes, and
AOP is not liable for any arrearages of wages or any penalties or taxes for
failure to comply with any of the foregoing, except for such noncompliance as
reasonably would not be expected to cause a Material Adverse Effect. No labor
dispute, strike, work stoppage, employee action or labor relations problem of
any kind which has affected or may affect AOP, or the operation of AOP's
business, is pending, has occurred since the inception of AOP or, to the best of
AOP's knowledge, is threatened, except as reasonably would not be expected to
cause a Material Adverse Effect. To the best of AOP's knowledge, no managerial
or
18
<PAGE>
supervisory employees of AOP are planning or intend to terminate their
relationship with AOP or PSP11 or do not intend to continue with AOP or PSP11
(other than normal retirement) after the First Closing Date. Schedule 2.23
-------------
lists all employment agreements to which AOP or PSP11 are parties and such
agreements remain in full force and effect as of the date hereof.
2.24 EMPLOYEE BENEFIT PLANS AND EMPLOYEE PENSION PLANS.
(a) Attached hereto as Schedule 2.24 is a complete and correct list of
--------------
all material employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA")) and any other employee benefit
arrangements or payroll practices maintained by AOP or PSP11 or to which AOP or
PSP11 has contributed or is or was obligated to make payments, including
employment agreements, severance agreements, executive compensation
arrangements, incentive programs or arrangements, sick leave, vacation pay,
severance pay policies, plant closing benefits, salary continuation for
disability, consulting or other compensation arrangements, workers'
compensation, retirement, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement or
scholarship programs, and any plans providing benefits or payments in the event
of a change of control, change in ownership, or sale of a substantial portion
(including all or substantially all) of the AOP Assets (collectively, the "AOP
Employee Benefit Plans"). Schedule 2.24(a) shall separately list all AOP
----------------
Employee Benefit Plans which are employee pension plans as defined in Section
3(2) of ERISA (collectively, the "AOP Employee Pension Plans").
(b) Except as set forth on Schedule 2.24 attached hereto:
--------------
(1) the AOP Employee Pension Plans intended to qualify under
Section 401 of the Code are so qualified and the trusts maintained pursuant
thereto are exempt from federal income taxation under Section 501 of the Code,
and nothing has occurred with respect to the operation of such plans which could
cause the loss of such qualification or exemption (except for any such loss that
could be corrected without causing a Material Adverse Effect) or the imposition
of any material liability, lien, penalty, or tax under ERISA or the Code;
(2) no AOP Employee Pension Plans have been amended in any
manner which would require the posting of any security under Section 401(a)(29)
of the Code or Section 307 of ERISA;
(3) AOP would have no withdrawal or other liability (contingent
or otherwise) under Sections 4201, 4063 or 4064 of ERISA to any multiemployer
plan as defined in Section 3(37) ("Multiemployer Plan") or multiple employer
plan subject to
19
<PAGE>
Section 4063 and 4064 of ERISA ("Multiple Employer Plan") that would reasonably
be expected to cause a Material Adverse Effect if it ceased contributions and
withdrew from any Multiemployer Plan or Multiple Employer Plan as of the First
Closing;
(4) the benefit liabilities (as defined in Section 4001(a)(16)
of ERISA) of each of the AOP Employee Pension Plans which are "defined benefit
plans" (other than Multiemployer Plans) calculated using the actuarial
assumptions that would be used by the Pension Benefit Guaranty Corporation
("PBGC") in the event of the termination of each such plan do not exceed the
fair market value of the assets of such plan by an amount that would reasonably
be expected to cause a Material Adverse Effect;
(5) true, correct and complete copies of the following
documents, with respect to each of the AOP Employee Benefit Plans, have been
made available or delivered to the Investors: (i) all plan documents, including
trust agreements, insurance policies and service agreements and amendments
thereto; (ii) the most recent Forms 5500 and any financial statements attached
thereto and those for the prior three years; (iii) the last Internal Revenue
Service determination letter; (iv) summary plan descriptions; and (v) written
descriptions of all non-written agreements relating to any such plan;
(6) there are no material pending claims or lawsuits which have
been asserted or instituted by or against any the AOP Employee Benefit Plans,
against the assets of any of the trusts under such plans, or by or against the
plan sponsor, plan administrator, or any fiduciary of any of the AOP Employee
Benefit Plans (other than routine benefit claims) that, if determined adversely,
would reasonably be expected to cause a Material Adverse Effect, nor does AOP
have knowledge of facts which could form the basis for any such claim or
lawsuit;
(7) all amendments and actions required to bring the AOP
Employee Benefit Plans into conformity in all material respects with all of the
applicable provisions of ERISA, the Code and any other Applicable Laws
(including the rules and regulations thereunder) have been made or taken, except
to the extent that such amendments or actions are not required by law to be made
or taken until a date after the First Closing Date and are disclosed on Schedule
--------
2.24;
- ----
(8) the AOP Employee Benefit Plans have been maintained, in all
material respects, in accordance with their plan documents and with all
provisions of the Code and ERISA (including rules and regulations thereunder)
and other Applicable Laws, and none of AOP, PSP11 and, to the knowledge of AOP,
any parties in interest and disqualified persons with respect to the AOP
Employee Benefits Plans has engaged in a "prohibited transaction" within the
meaning of Section 4975 of the Code or Title I, Part 4 or ERISA that would
reasonably be expected to cause a Material Adverse Effect;
20
<PAGE>
(9) neither AOP not PSP11 has incurred any material outstanding
liability under Section 4062 of ERISA to the PBGC, to a trust established under
Section 4041 or 4042 of ERISA, or to a trustee appointed under Section 4042 of
ERISA;
(10) none of the AOP Employee Benefit Plans contains any provisions
which would prohibit the transactions contemplated by this Agreement or which
would give rise to any severance, termination or other payments or liabilities
as a result of the transactions contemplated by this Agreement; and
(11) AOP has no liability (whether actual, contingent, with respect to
any of its assets, or otherwise) with respect to any employee benefit plan (as
defined in Section 3(3) of ERISA) maintained by any affiliate other than the AOP
Employee Benefit Plans disclosed in Schedule 2.24.
-------------
(c) Attached hereto as Schedule 2.24 is the most recent quarterly
-------------
listing of workers' compensation claims of AOP and a schedule of workers'
compensation claims of AOP for the last three (3) fiscal years.
(d) Except as disclosed on Schedule 2.24 attached hereto, neither AOP
-------------
nor PSP11 has prepaid or prefunded any AOP Employee Benefit Plan that is a
welfare benefit plan (as defined in Section 3(1) of ERISA) through a trust,
reserve, premium stabilization or similar account.
2.25 INSURANCE.
(a) Attached hereto as Schedule 2.25 are certificates or other
--------------
summaries that provide a description of all policies or binders of fire,
liability, compensation, business interruption, rent loss, directors' and
officers' liability, employee and title insurance held by AOP, PSP11 and PSI
insuring any of the Properties, AOP or PSP11 in each case, specifying the
insurer, policy number or covering note number (for binders), limits of
coverage, expiration dates, and describing each pending claim with respect to
AOP, PSP11 or PSI (with respect to the Commercial Properties) of more than One
Hundred Thousand Dollars ($100,000). All policies and binders described therein
are current and in full force and effect. AOP, PSP11 and PSI are each in
compliance in all material respects with the requirements and provisions of each
such policy or binder, each has paid all premiums due therefor, and has not
failed to give any notice or present any claim under any such policy or binder
in due and timely fashion, except for such failure as would not reasonably be
expected to cause a Material Adverse Effect. Except for claims set forth in
Schedule 2.25 attached hereto, there are no outstanding, material unpaid claims
- -------------
under any such policy or binder. None of AOP or PSP11 has received a notice of
cancellation or non-renewal for any such policy or binder, except for such
cancellation or non-renewal as would not reasonably be expected to cause a
Material
21
<PAGE>
Adverse Effect. AOP has no knowledge of any inaccuracy in any application for
such policies or binders or any similar basis of facts which might form the
basis for termination of any such insurance.
(b) AOP and PSP11 have maintained a commercially reasonable program of
insurance with respect to the Properties in such a manner as may be required by
any Material Contracts or Loan Documents or other franchises, licenses or
agreements applicable to the Properties. AOP has made available to the Investors
a complete and accurate list of all property damage or personal injury claims
asserted against AOP or PSP11 during the past two (2) years involving any claim
in excess of One Hundred Thousand Dollars ($100,000).
(c) AOP and PSP11 and their Subsidiaries maintain insurance with insurers
of recognized financial responsibility against losses and risks and in such
amounts as are generally deemed adequate for their respective businesses and
consistent with coverage maintained by similar companies in the businesses in
which they are engaged; and neither the Companies nor any Subsidiary has any
reason to believe that it will not be able to renew the coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a Material
Adverse Effect.
2.26 ENVIRONMENTAL COMPLIANCE.
Except as disclosed on Schedule 2.26(a) hereto:
----------------
(a) AOP and PSP11, their Subsidiaries, all Properties, owned or leased, and
to AOP's knowledge, the operations conducted thereon comply and heretofore have
complied in all material respects with all applicable Environmental Laws (as
defined below), except as disclosed in the Environmental Reports (as defined
below) or as would not reasonably be expected to cause a Material Adverse
Effect.
(b) The Companies and their Subsidiaries have not at any time, and to AOP's
knowledge no other person has at any time, handled, buried, stored, retained,
refined, transported, processed, manufactured, generated, produced, spilled,
allowed to seep, leak, escape or leach, or be pumped, poured, emitted, emptied,
discharged, injected, dumped, transferred or otherwise released or disposed of
Hazardous Materials (as defined below) into the environment at, on, adjacent to
or beneath the Properties, except as disclosed in the environmental site
assessment reports and other documents related to environmental matters at any
of the Properties obtained by AOP or PSP11 on or before the date hereof
(collectively, the "Environmental Reports") or as would not reasonably be
expected to cause a Material Adverse Effect on the relevant Property. All of
the Environmental Reports are identified on Schedule 2.26(b) hereto. Except as
----------------
to circumstances identified
22
<PAGE>
in the Environmental Reports, neither AOP, PSP11 nor any of their Subsidiaries
shall use or permit the use of the Properties or any subsequently acquired
properties for the purpose of handling, storing, retaining, transporting,
processing, manufacturing, generating, producing or otherwise managing Hazardous
Materials except in accordance with Environmental Laws or burying, spilling,
seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying,
discharging, injecting, dumping, transferring or otherwise releasing or
disposing of Hazardous Materials into the environment at, on, adjacent to or
beneath the Properties except in accordance with Environmental Laws.
(c) To AOP's knowledge, no seepage, leak, escape, leaching, discharge,
injection, release, emission, spill, pumping, pouring, emptying, dumping or
disposing of Hazardous Materials into waters on, adjacent to or beneath the
Properties has occurred or is occurring except as disclosed in the Environmental
Reports or as would not reasonably be expected to cause a Material Adverse
Effect.
(d) AOP, PSP11, and their Subsidiaries have received no notice from any
Applicable Authority or other person, and to AOP's knowledge there is no pending
or threatened claim regarding any occurrence or circumstance which, with notice,
passage of time, or failure to act, would give rise to, any claim under or
pursuant to any Environmental Law or under common law pertaining to Hazardous
Materials on, affecting or originating from the Properties or arising out of the
conduct of any person with respect to Hazardous Materials on, affecting or
originating from the Properties, except as disclosed in the Environmental
Reports or as would not reasonably be expected to cause a Material Adverse
Effect.
(e) Except as disclosed in the Environmental Reports, to AOP's knowledge,
the Properties are not included or proposed for inclusion on any federal, state,
or local lists of sites which require or might require environmental cleanup,
including, but not limited to, the National Priorities List or CERCLIS List
issued pursuant to CERCLA (as defined below) by the United States Environmental
Protection Agency.
(f) No environmental approvals, clearances or consents are required under
applicable law from any governmental authority or entity in order to consummate
this transaction or for AOP, PSP11 or their Subsidiaries to continue owning and
leasing each of the Properties after the Closing Date.
(g) To AOP's knowledge, AOP has disclosed all environmental matters that
would reasonably be expected to cause a Material Adverse Effect and have
disclosed all reports, assessments, remedial action plans or similar documents
relating to environmental conditions at the Properties in the possession or
control of AOP, PSP11 or PSI.
23
<PAGE>
As used herein, "Hazardous Material" means (i) any flammable, explosive or
radioactive materials, contaminants, or hazardous or toxic wastes, materials or
substances or related materials, whether solid, liquid or gaseous in nature,
including, without limitation, substances defined as "hazardous substances,"
"hazardous materials," toxic substances" or "solid waste" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, 49
-- ---
U.S.C. Section 1801, et seq.; the Toxic Substances Control Act, 15 U.S.C.,
-- ---
Section 2601 et seq.; the Resources Conservation and Recovery Act of 1976, 42
U.S.C. Section 6901 et seq.; and in the regulations adopted and publications
-- ---
promulgated pursuant to said laws; (ii) those substances listed in the United
States Department of Transportation Table (49 C.F.R. 172.101 and amendments
thereto) or by the Environmental Protection Agency (or any successor agency) as
hazardous substances (40 C.F.R. Part 302 and amendments thereto); (iii) those
substances defined as "hazardous wastes," "hazardous substances" or "toxic
substances" in any similar federal, state or local laws or in the regulations
adopted and publications promulgated pursuant to any of the foregoing laws or
which otherwise are regulated by any governmental authority, agency, department,
commissions, board or instrumentality of the United States of America, the state
in which the applicable Property is situated, or any political subdivision
thereof; (iv) any pollutant or contaminant, hazardous, dangerous or toxic
chemicals, materials, or substances within the meaning of any other applicable
federal, state, or local law, regulation, ordinance, or requirement (including
consent decrees and administrative orders) relating to or imposing liability or
standards of conduct concerning any hazardous, toxic, or dangerous waste,
substance or material, all as amended; (v) petroleum or any by-products thereof;
(vi) any radioactive material, including any source, special nuclear or by-
product material as defined at 42 U.S.C. Sections 2011 et seq.; as amended, and
-- ---
in the regulations adopted and publications promulgated pursuant to said law;
(vii) asbestos in any form or condition; and (viii) polychlorinated biphenyls.
As used herein, "Environmental Law" shall mean all applicable federal,
state and local statutes, regulations, rules, ordinances, codes, licenses,
permits, orders, approvals, plans, authorizations, concessions, franchises and
similar items, of all governmental agencies, departments, commissions, boards,
bureaus or instrumentalities of the United States, states and political
subdivisions thereof and all applicable judicial and administrative and
regulatory decrees, judgments and orders relating to the protection of human
health or the environment, including, without limitation, all requirements,
including but not limited to those pertaining to reporting, licensing,
permitting, investigation and remediation of emissions, discharges, releases or
threatened releases of Hazardous Materials, chemical substances, materials or
wastes whether solid, liquid or gaseous in nature, into the air, surface water,
ground water or land, or relating to the manufacture, processing, distribution,
use, generation, treatment, storage, disposal, transportation or handling of
Hazardous Materials, chemical substances, pollutants,
24
<PAGE>
contaminants or hazardous or toxic substances, materials, or wastes, whether
solid, liquid or gaseous in nature.
2.27 BUILDING, SUBDIVISION AND LAND-USE LAWS; RESTRICTIVE COVENANTS.
Except as disclosed to the Investors in connection with Section 2.26 or as
------------
set forth on Schedule 2.27 hereto:
-------------
(a) The improvements on the Properties (the "Improvements"), as currently
constructed, comply with all Applicable Laws, including those relating to
building, certificates of occupancy, subdivision, zoning and land-use and all
applicable restrictive covenants and other agreements (whether public or
private), except for such noncompliance as would not reasonably be expected to
cause a Material Adverse Effect. The use and occupancy of the Improvements by
the Companies, as currently used, operated and occupied by the Companies, and,
to the knowledge of AOP, the use, operation and occupancy of the Improvements by
others, as currently used, operated and occupied by them, all comply with all
Applicable Laws, including those relating to building, subdivision, zoning and
land-use, and comply with all applicable restrictive covenants and other
agreements (whether public or private), except for such noncompliance as would
not reasonably be expected to cause a Material Adverse Effect.
(b) Except as disclosed on Schedule 2.27, to AOP's knowledge without
-------------
inquiry, in the event of substantial damage to or destruction of any of the
Properties or Improvements, reconstruction of such improvements as currently
constructed or used will be permitted by Applicable Authorities without further
action on the part of AOP. To AOP's knowledge, no proceedings to "down-zone" or
otherwise change the zoning classification applicable to any of the Properties
are currently pending and, to the best of AOP's knowledge, none are threatened.
2.28 NO UNPAID ASSESSMENTS.
No material general or special assessments for public improvements have
been made against any of the Properties which are unpaid, and the Companies have
not received any notice of any material proposed, pending or anticipated general
or special assessments against any of the Properties, nor to the best of AOP's
knowledge, are any such assessments threatened or in prospect.
2.29 CONDEMNATION.
Except for a condemnation proceeding involving a portion of the PSP11
Warehouse Property located in Pasadena, California, no condemnation proceedings
have
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been commenced or completed with respect to any portion of the Properties by any
Applicable Authority having or claiming jurisdiction and, to the best of AOP's
knowledge, no such proceedings are threatened or in prospect.
2.30 UNPAID BILLS; MECHANICS LIENS.
No material claims or bills for labor and/or materials provided to the
Properties are unpaid and none will remain unpaid or otherwise unsatisfied at
the First Closing, and there will be no material mechanics' or materialmens'
liens affecting the Properties as of the First Closing Date.
2.31 PROFFERS; OTHER COMMITMENTS.
As of the First Closing Date, all material commitments to Applicable
Authorities and utility companies, whether by proffer or otherwise, to make
contributions of money, dedications of land, rights of way or easements, or to
install or maintain any public instrumentality on the Properties shall have been
satisfied, and neither the Companies nor any of their subsidiaries shall have
any further obligations with respect thereto from and after First Closing Date.
2.32 BOOKS AND RECORDS.
The books of account, minute books, stock record books, and other records
of AOP, all of which have been made available to the Investors, are complete and
correct and have been maintained in accordance with sound business practices and
the requirements of Section 13(b)(2) of the Exchange Act (regardless of whether
or not AOP is subject to that Section), including the maintenance of an adequate
system of internal controls. The minute books of AOP contain accurate and
complete records of all meetings held of, and corporate action taken by, the
stockholders, the Board of Directors and committees of the Board of Directors of
AOP, and no meeting of any such stockholders, Board of Directors or committee
has been held for which minutes have not been prepared and are not contained in
such minute books. At the First Closing, all of those books and records will be
in the possession of AOP.
2.33 BANKRUPTCY.
There are no attachments, executions or assignments for the benefit of
creditors, or voluntary or involuntary proceedings in bankruptcy or under any
other debtor relief laws pending or, to the knowledge of AOP, contemplated by or
threatened against AOP (or PSP11 after the Merger). Without limiting the
generality of the foregoing, none of the
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following have been done by, against or with respect to AOP (or PSP11 after the
Merger): (a) the commencement of a case under Title 11 of the U.S. Code as now
constituted or hereafter amended, or under any applicable federal or state
bankruptcy law or other similar law, (b) the appointment of a trustee or
receiver of any property interest, (c) an assignment for the benefit of
creditors, (d) an attachment, execution or other judicial seizure of a
substantial property interest, (e) the taking of, failure to take, or submission
to, any action indicating an inability to meet its financial obligations as they
accrue or (f) a dissolution or liquidation.
2.34 DISCLOSURE.
All agreements, schedules, exhibits, documents, certificates, reports or
statements furnished or to be furnished to the Investors by or on behalf of the
Companies in connection with this Agreement or the transactions contemplated
hereby are true, complete and accurate in all material respects, and no
representation or warranty made in this Agreement or information furnished
pursuant hereto to the Investors (including information contained in the
schedules or documents referred to herein) contains any untrue statement of a
material fact or fails to include a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they are made, not misleading.
III. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each Investor, severally and not jointly, with respect to itself and in the
case of any Agent Investor, as agent for and on behalf of each Pecuniary Owner
for which it acquires Shares, hereby makes the representations and warranties
set forth below to AOP.
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION.
(a) The Investor has been duly incorporated or formed and is validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation, as the case may be, with power and authority
(corporate and other) to conduct its business as now being conducted.
(b) This Agreement constitutes the legal, valid and binding obligation of
the Investor enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
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3.2 AUTHORIZATION; ENFORCEMENT.
(a) The Investor has the requisite power and authority (corporate and
other) to enter into and perform this Agreement.
(b) The execution and delivery of this Agreement by the Investor and the
consummation by it of the transactions contemplated hereby have been duly
authorized by such Investor, and no further consent or authorization of such
Investor is required.
(c) This Agreement has been duly executed and delivered by the Investor.
3.3 COMPLIANCE WITH OTHER INSTRUMENTS.
The execution, delivery and performance of this Agreement by the Investor
and the consummation by it of the transactions contemplated hereby do not result
in a violation of the organizational documents of such Investor, or conflict
with or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Investor is a party, or result in a violation of any
law, rule, regulation, order, judgment or decree applicable to such Investor
(except for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate,
materially impair the ability of such Investor to perform its obligations under
the Agreement). Such Investor is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order to execute, deliver or perform any of its
obligations under this Agreement, except such as have been or will be obtained
prior to the First Closing.
3.4 LITIGATION.
There is no action, suit, proceeding, investigation or claim pending
against or, to the knowledge of the Investor, threatened against the Investor in
law, equity or otherwise before any Applicable Authority which questions the
validity of this Agreement or any action taken or to be taken pursuant hereto.
3.5 PURCHASE ENTIRELY FOR OWN ACCOUNT.
This Agreement is made with each Investor in reliance upon the Investor's
representations to the Companies, which by such Investor's execution of this
Agreement such Investor hereby confirms, that the Shares will be acquired for
investment by the Investor for itself, or in the case of any Agent Investor, as
agent for and on behalf of the
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Pecuniary Owners, for the Pecuniary Owners' own accounts, not as a nominee or
agent for any other person, and not with a view to the resale or distribution of
any part thereof in violation of any federal securities laws, and that neither
the Investors nor any Pecuniary Owners for which any Investor is acting as
agent, have any present intention of selling, granting any participation in, or
otherwise distributing the same, in violation of any federal securities laws.
3.6 ACKNOWLEDGMENTS.
The Investor, and if applicable, each Pecuniary Owner acknowledge that (i)
its investment is being made prior to and not conditioned upon the consummation
of the proposed Merger; (ii) the Investor has received and reviewed AOP's
business plan and financial projections; and (iii) it has been advised that
immediately prior to consummation of the transactions contemplated hereby, AOP
will be a "pension held REIT" within the meaning of the Code if NYC's ownership
is treated as held by a "qualified plan" within the meaning of the Code.
3.7 ACCREDITED INVESTOR.
The Investor and if applicable, each Pecuniary Owner, is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D and a "qualified
institutional buyer" with the meaning of SEC Rule 144A, as presently in effect,
and the Investor represents that the purchase of the Shares by it is made in the
ordinary course of business and is made solely for the purpose of investment.
3.8 RESTRICTED SECURITIES.
The Investor and if applicable, each Pecuniary Owner understand that the
Shares are characterized as "restricted securities" under the federal securities
laws inasmuch as they are being acquired from AOP (or PSP11 after the Merger) in
a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. In this connection,
the Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the
Securities Act and is aware that SEC Rule 144 is not presently available for use
by such Investor for resale of the Shares. The Investor acknowledges that the
certificates representing the Shares will contain a legend substantially in the
following form:
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<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD
OR TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT OR LAWS OR PURSUANT TO AN
EXEMPTION FROM SUCH REGISTRATION.
3.9 CERTAIN TAX MATTERS.
Applying the stock ownership rules of Section 856(h) of the Internal
Revenue Code of 1986, as amended (the "Code") and the applicable regulations to
Sections 542(a)(2) and 544 as modified (relating to the restriction that
generally precludes any five or fewer individuals from owning more than 50% of
the value of the outstanding shares of a REIT), no "individual" will be treated
as owning more than two percent (2%) of any outstanding class or series of the
shares of AOP solely as a result of the ownership of Shares by any Investor or
Pecuniary Owner as a result of the transactions contemplated by this Agreement.
For this purpose, a qualified trust that qualifies for the look-through rule of
the Code Section 856(h)(3)(A)(i) shall not be considered an "individual." In
addition, no Investor or Pecuniary Owner will own 10% or more of any outstanding
class or series of the shares of AOP as a result of the completion of the
transactions contemplated by this Agreement. In lieu of the representation
contained in the first sentence of this section, C&S represents and warrants
that the Pecuniary Owners of the Shares of AOP which it owns as an Investor are
those parties listed on Schedule 3.9(a) hereto, which Schedule also shows the
---------------
number of Shares to be purchased by each Pecuniary Owner in this transaction,
and that no "individual" owns more than ten percent (10%) of the shares or
ownership interests (after applying the Code's attribution rules referenced in
this Section) of any of the Pecuniary Owners (excluding those Pecuniary Owners
which are either a governmental plan or qualified retirement trust as so
designated with respect to such Pecuniary Owner on Schedule 3.9(a) hereto)
---------------
as of the date hereof. In lieu of the representation contained in the first
sentence of this section, SU represents and warrants that the information
contained on Schedule 3.9(b) is true and correct as of the date hereof.
IV. CONDITIONS OF THE INVESTORS' OBLIGATIONS AT CLOSING.
The Investors' obligations at the First Closing and, unless otherwise
indicated, at each Subsequent Closing under Subsection 1.1 of this Agreement are
--------------
subject to the fulfillment on or before the date of such Closing of each of the
following conditions:
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4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of AOP contained in this Agreement shall
be and shall have been true in all material respects on and as of the First
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the First Closing. The representations and
warranties of AOP contained in Sections 2.2(a), 2.2(c), 2.4, 2.5(a), 2.6, 2.8(a)
-------------------------------------------------
(as to clauses (i) and (iii)) and 2.33) shall be and shall have been true in all
- ---------------------------------------
material respects on and as of each Subsequent Closing with the same effect as
though such representations and warranties had been made on and as of the date
of such Subsequent Closing.
4.2 PERFORMANCE.
AOP shall have performed and complied with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before such Closing.
4.3 COMPLIANCE CERTIFICATE.
The President of AOP shall have delivered to the Investors at the Closing a
certificate certifying that the conditions specified in Sections 4.1, 4.2, 4.7
----------------------
and 4.8, if applicable to such Closing, have been fulfilled, and that, in his
- -------
good faith judgment at the time of such Closing, no action, suit, proceeding,
investigation or claim before any Applicable Authority that is of the type
described in clause (iv) of Section 2.8(a) hereof is pending, or to his
----------- --------------
knowledge threatened, against AOP or PSP11.
4.4 OPINIONS OF COMPANY COUNSEL.
The Investors shall have received on the date of the Closing the opinion of
counsel for AOP, dated as of the Closing, in the form attached hereto as Exhibit
-------
E.
- -
4.5 OPINION AS TO REIT STATUS.
At or before the First Closing, the Investors and the Pecuniary Owners
shall have received from counsel for AOP and PSP11, respectively (or such other
counsel as shall be reasonably acceptable to the Investors and the Pecuniary
Owners), an opinion of counsel satisfactory to the Investors and the Pecuniary
Owners to the effect that (i) AOP should be classified as a "real estate
investment trust" under Section 856 of the Internal Revenue Code of 1986, as
amended (after giving effect to the investment contemplated by this Agreement)
and (ii) PSP11 should be classified as a "real estate investment trust" under
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Section 856 of the Internal Revenue Code of 1986, as amended (after giving
effect to the Merger and the investment contemplated by this Agreement).
4.6 OPINION AS TO VCOC STATUS.
At or before the First Closing, the Investors and the Pecuniary Owners
shall have received from counsel for AOP (or such other counsel as shall be
reasonably acceptable to the Investors and the Pecuniary Owners) an opinion of
counsel satisfactory to the Investors and the Pecuniary Owners to the effect
that AOP qualifies as a venture capital operating company ("VCOC") as defined in
29 C.F.R. section 2510.3-101 (the "Plan Assets Regulation"). Commencing on the
last day of AOP's "first annual valuation period" described in paragraph
(d)(5)(ii) of the Plan Assets Regulation, and on each anniversary of such day
thereafter, unless and until such time as the Shares qualify as "publicly-
offered securities" as defined in the Plan Assets Regulation, such counsel for
AOP shall deliver an opinion to the effect that, as of the date the opinion is
to be delivered, the underlying assets of AOP would not be deemed to constitute
"plan assets" for purposes of the Plan Assets Regulation.
4.7 NO MATERIAL CHANGE.
In the case of the First Closing only, no event or change of circumstances
shall have occurred and be continuing at the time of the First Closing which, in
the reasonable opinion of the Investors, is likely to have a Material Adverse
Effect on AOP, PSP11 or the Properties.
4.8 ACTION BY THE BOARDS OF DIRECTORS.
The Boards of Directors of AOP and PSP11 shall have adopted a resolution
waiving the application of the Ownership Limit (as defined in such Company's
Charter) to the Investors and the Pecuniary Owners to the extent necessary to
permit the transactions contemplated hereby and with respect to any direct
transferee of any of the Investors; provided that such transferee first provides
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AOP (or PSP11 after the Merger) with representations and undertakings reasonably
deemed appropriate by AOP (or PSP11 after the Merger) or its counsel to
establish that (a) such transfer will not jeopardize AOP's (or PSP11's after the
Merger) REIT status and (b) that such transferee either (i) is controlled by,
controlling or under common control with, such transferor or (ii) on not more
than six occasions per Investor, that such transferee is a person or entity of
the type eligible to use Exchange Act Form 13G pursuant to Rule 13d-1(b)(1)(ii)
under the Exchange Act, as amended from time to time, or any successor
provision. The Boards of Directors of each of the Companies shall have agreed
to the issuance of the AOP Common Stock (or PSP11 Common Stock after the Merger)
contemplated hereby, and
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the issuance of PSP11 Common Stock to the holders of AOP Common Stock in
connection with the Merger.
4.9 AFFILIATE STATUS.
Based solely on factual information provided to AOP by the Investors by
letter dated January 22, 1998 and other assumptions contemplated by such letter,
the Company shall have confirmed in writing that it will not take the position
under existing law that any of the Investors are, or will following the Merger
be, "affiliates" of AOP (or PSP11 after the Merger) as that term is defined in
Securities Act Rule 144(a)(1) after giving effect to the transactions
contemplated hereby; provided that the failure of this condition to be satisfied
with respect to any Investor shall not affect the obligation of the other
Investors to purchase their proportionate share of the Shares to be purchased in
the applicable Closing in accordance with Section 1.2.
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4.10 REGISTRATION RIGHTS AGREEMENT.
AOP and the Investors shall have entered into a Registration Rights
Agreement substantially in the form attached hereto as Exhibit E.
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4.11 ENVIRONMENTAL INDEMNITY AGREEMENT.
PSI shall have entered into an Environmental Indemnification Agreement
substantially in the form attached hereto as Exhibit F.
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4.12 RELIANCE LETTER.
The Investors shall have received a Reliance Letter from ENSR and any other
environmental consultants who prepared any Environmental Reports substantially
in the form attached hereto as Exhibit G.
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4.13 SIGNAL HILL INDEMNIFICATION AGREEMENT.
PSI shall have entered into an Indemnification Agreement with respect to
the property commonly known as Signal Hill substantially in the form attached
hereto as Exhibit H.
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4.14 INDEMNIFICATION AGREEMENT CONCERNING TITLE ISSUES.
PSI shall have entered into an Indemnification Agreement Concerning Title
Issues substantially in the form attached hereto as Exhibit I.
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<PAGE>
V. CONDITIONS OF AOP'S OBLIGATIONS.
5.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Investors contained in Section
-------
III shall be and shall have been true in all material respects on and as of the
- ---
First Closing with the same effect as though such representations and warranties
had been made on and as of the date of the First Closing.
5.2 PERFORMANCE.
Each of the Investors shall have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by them on or before such Closing.
VI. COVENANTS.
6.1 REIT STATUS.
Unless the respective boards of directors determine that it is no longer in
the best interests of their respective stockholders, each of AOP and PSP11 will
use all commercially reasonable efforts to operate in a manner which will not
cause them to be classified other than as a "real estate investment trust" under
Section 856 of the Internal Revenue Code of 1986, as amended (after giving
effect to the investment contemplated by this Agreement, and both before and
after consummation of the Merger).
6.2 STOP ORDERS.
AOP will use all commercially reasonable efforts to cause PSP11 to cause
the S-4 Registration Statement to be filed with and declared effective by the
Commission prior to the Merger. AOP will promptly advise the Investors in
writing of (i) any request by the Commission for amendment of or a supplement to
the Preliminary Proxy Statement or the S-4 Registration Statement, and (ii) any
issuance by the Commission of any stop order suspending the effectiveness of the
S-4 Registration Statement or of the suspension of qualification of the PSP11
Common Stock for offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose. If at any time the Commission shall issue a stop
order suspending the effectiveness of the S-4 Registration Statement, AOP will
use all commercially reasonable efforts to cause PSP11 to obtain the withdrawal
of such order as soon as possible.
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6.3 USE OF PROCEEDS.
AOP (and PSP11 after the Merger) will apply the net proceeds from the sale
of the Shares substantially in accordance with Section 1.3 hereof.
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6.4 CONFIDENTIALITY.
The parties to this Agreement will not disclose to any other person any
information about this Agreement, the transactions contemplated hereby and the
parties hereto, except as required by law or regulation, the rules of the
Commission or the rules of any stock exchange or stock market on which capital
stock of AOP or PSP11 is listed or approved for trading, or with the prior
written consent of each of the other parties. Notwithstanding the foregoing,
any announcement of this Agreement or the parties' commitment must be approved
by AOP and a majority in interest of the Investors and/or their representatives
(except as required by applicable law, regulation, the rules of the Commission
or the rules of any stock exchange or stock market on which capital stock of AOP
or PSP11 is listed or approved for trading); provided that, except as required
by applicable law or regulation, each Investor shall have the right to have its
name, or the name of any Pecuniary Owner represented by such Investor, excluded
from any such publicity, and each Investor whose name is included in such
publicity shall have the right to approve the use of its name or the name of any
Pecuniary Owner represented by such Investor.
6.5 CHANGES TO CHARTER AND BY-LAWS.
Prior to the Merger, AOP and PSP11 will not make any alteration or
amendment to their respective Charters or By-Laws that would materially
adversely affect the Investors except as set forth on Schedule 6.5 without the
------------
prior written consent of the holders of at least two-thirds of the Shares
purchased by the Investors hereunder.
6.6 CHANGES IN CAPITALIZATION.
AOP (and PSP11 after the Merger) will cause to be issued to the Investors
additional Shares so as to maintain the Investors' percentage interest in the
Companies in the event that either of AOP or PSP11 undertake any stock splits,
mergers, stock dividends or other recapitalizations between the date hereof and
the First Closing Date or any Subsequent Closing Date. In the event of any of
the foregoing, the Per-Share Price for any future Closings shall be adjusted
accordingly. The Investors, as stockholders of AOP, will participate in the
Merger, if approved, and receive in accordance with the Merger Agreement the
shares of PSP11 Common Stock issuable with respect to each
35
<PAGE>
share of AOP Common Stock held by such Investor immediately prior to
consummation of the Merger.
6.7 ISSUANCE OF ADDITIONAL CAPITAL STOCK.
(a) Prior to the earlier of (i) the Merger, (ii) a Qualifying Transaction
(as defined below), or (iii) April 30, 1998, AOP shall not issue AOP Common
Stock (or securities convertible into, exercisable or exchangeable for AOP
Common Stock), except pursuant to a Permitted Issuance (as defined below), at a
per share price below the Per-Share Price; regardless of whether the
consideration for the issuance is cash or assets.
(b) On or after April 30, 1998, if AOP has not then completed any of (i)
the Merger, (ii) a Qualifying Transaction or (iii) an IPO (as defined below) and
until the earlier of (i) the Merger, (ii) a Qualifying Transaction, (iii) an
IPO, or (iv) the second anniversary of the First Closing Date, AOP shall not
issue AOP Common Stock (or securities convertible into, exercisable or
exchangeable for AOP Common Stock), except pursuant to a Permitted Issuance, at
a per share price below the Per-Share Price, regardless of whether the
consideration for the issuance is cash or assets, except in an IPO, without the
written consent of a majority in interest of the Investors.
(c) After completion of the Merger or completion of an IPO (or the second
anniversary of the First Closing Date if AOP has not then completed the Merger
or an IPO), but prior to completion of a Qualifying Transaction, AOP (and PSP11
after the Merger) shall not issue AOP Common Stock (or PSP11 Common Stock, as
the case may be) or securities convertible into, exercisable or exchangeable for
AOP Common Stock (or PSP11 Common Stock, as the case may be), except pursuant to
a Permitted Issuance, at a per share price below the Per-Share Price (regardless
of whether the consideration for the issuance is cash or assets) without first
offering to each of the Investors (with 15 days' prior written notice) the right
to purchase for cash such AOP Common Stock (or PSP11 Common Stock, as the case
may be) or other securities on terms and conditions at least as favorable as
those offered to third parties in amounts sufficient to permit the Investors to
maintain their percentage ownership in AOP (or PSP11, as the case may be).
(d) After completion of a Qualifying Transaction, the Investors shall have
no further rights under this Section 6.7.
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(e) An "IPO" shall mean a registered underwritten initial public offering
by AOP or PSP11 (after the Merger) of shares of Common Stock with gross proceeds
of at least $25 million. AOP and PSP11 are not guaranteeing the price for
shares offered publicly by them in an IPO and no additional Shares will be
issued to the Investors if the public offering price in the IPO is less than the
Per-Share Price. A "Qualifying Transaction" shall be deemed to have been
completed immediately after closing on (i) a
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registered public offering by AOP (or PSP11 after the Merger) of shares of
Common Stock with gross proceeds of at least $155 million (or a series of such
offerings with aggregate gross proceeds of $155 million), or (ii) a merger with
another entity following which AOP (or PSP11 after the Merger) has a total
Equity Float of at least $310 million. For purposes of this provision, "Equity
Float" shall mean the market value of the outstanding publicly-traded shares of
AOP (or PSP11 after the Merger), excluding shares held by Affiliates, and
"Affiliates" shall include all executive officers, directors, and beneficial
owners (within the meaning of Rule 13d-3 of the Exchange Act) of more than 10%
of the outstanding shares of the Capital Stock of AOP (or PSP11 after the
Merger). A "Permitted Issuance" shall mean any issuance of AOP Common Stock,
PSP11 Common Stock or securities convertible into, exercisable for or
exchangeable for AOP Common Stock or PSP11 Common Stock (i) upon the conversion,
exercise or exchange of any convertible or exchangeable security or any option,
warrant or the like, (ii) as a dividend or distribution payable to all holders
of AOP Common Stock or PSP11 Common Stock or by reason of a stock split of AOP
Common Stock or PSP11 Common Stock or (iii) to employees or directors of, or
consultants to, AOP or PSP11 pursuant to a plan adopted by the Board of
Directors and approved by the stockholders of AOP or PSP11, as the case may be.
(f) Any waiver of part or all of this Section 6.7 must be by a vote of
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Investors holding at least a majority of Shares held by all Investors.
6.8 FUTURE OFFERINGS.
AOP and PSP11 will use reasonable efforts to allow the Investors to
participate as buyers pro rata in any future underwritten offerings of the
Capital Stock of AOP (and PSP11 after the Merger) made prior to January 31,
1999, exclusive of "spot offerings."
6.9 INFORMATION.
Until the earlier of consummation of the Merger, consummation of a public
offering pursuant to a registration statement or AOP otherwise becoming subject
to the reporting requirements of the Exchange Act, AOP shall provide each
Investor with quarterly financial information customary for a company subject to
the reporting requirements of the Exchange Act and such other information as the
Investors shall reasonably request including, but not limited to, consolidating
financial statements and summaries of material litigation and other material
developments.
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6.10 VCOC STATUS.
AOP shall use all commercially reasonable efforts to operate in a manner
which will cause it to be a VCOC for purposes of the Plan Assets Regulation,
unless and until such time as the Shares qualify as "publicly-offered
securities" as defined in the Plan Assets Regulation.
6.11 MERGER AND EXCHANGE.
AOP shall, and shall cause PSP11 and PSI to, use all commercially
reasonable efforts to consummate the transactions contemplated by the Merger and
the Exchange, if approved by PSP11's stockholders.
6.12 SUBSEQUENT CLOSINGS.
AOP (and PSP11 after the Merger) shall use all commercially reasonable
efforts to (a) locate potential Acquisition Properties meeting the Acquisition
Criterion and (b) call for the balance of the entire Purchase Price in
Subsequent Closings with respect to the acquisition of such properties on or
before July 31, 1998.
6.13 REMOVAL OF LEGEND.
AOP (and PSP11 after the Merger) shall promptly remove the legend set forth
in Section 3.8 from any certificates representing the Shares at such time as the
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Shares represented thereby are registered under the Securities Act or, at the
request of the holder thereof, at such time as the Shares represented thereby
become eligible for resale pursuant to SEC Rule 144(k).
6.14 ENVIRONMENTAL ACTIONS.
AOP (and PSP11 after the Merger) shall use commercially reasonable efforts
to complete the actions listed on Exhibit J within 90 days after the First
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Closing.
6.15 OWNERSHIP LIMITS.
As soon as commercially practicable, AOP (or PSP11 after the Merger) shall
request its Board of Directors to consider the desirability of raising the
percentage Ownership Limitation contained in the Company's Charter in order to
make AOP (and PSP11 after the Merger) more attractive to institutional
investors.
38
<PAGE>
VII. INDEMNIFICATION.
7.1 OBLIGATIONS OF AOP.
In partial consideration of the commitment of the Investors directly and as
agent for and on behalf of the Pecuniary Owners hereunder, AOP agrees to
indemnify and hold harmless each Investor and the Pecuniary Owners and any of
their respective affiliates, directors, officers, agents and employees and each
other person, if any, controlling the Investors or the Pecuniary Owners or any
of their respective affiliates (each an "Investor Indemnified Person") from and
against any losses (or actions in respect thereof) to which such Investor
Indemnified Person may become subject as a result of, or based upon or arising
out of, directly or indirectly, any inaccuracy in, breach or nonperformance of,
any of the representations, warranties, covenants or agreements made by AOP in
or pursuant to this Agreement, and will reimburse any Investor Indemnified
Person for all reasonable expenses (including the reasonable fees of counsel) as
they are incurred by any such Investor Indemnified Person in connection with
investigating, preparing or defending any such action or claim pending or
threatened, whether or not such Investor Indemnified Person is a party hereto.
In the event that the foregoing indemnity is unavailable or insufficient to hold
the Investor Indemnified Person harmless, AOP shall contribute to amounts paid
or payable by such Investor Indemnified Person in respect of such losses,
claims, damages, liabilities and expenses in such proportion as appropriately
reflects the relative benefits received by and fault of AOP, on the one hand,
and the Investors and the Pecuniary Owners, on the other hand, in connection
with the matters as to which such losses, claims, damages, liabilities or
expenses relate. Notwithstanding the foregoing, AOP shall have no liability
under this Section until such time as the aggregate losses and expenses of the
Investor Indemnified Persons as a group exceed $500,000; provided that the
aggregate amount of liability of AOP to the Investor Indemnified Persons as a
group under this Section shall not exceed the amount of the Purchase Price
funded pursuant to this Agreement.
7.2 OBLIGATIONS OF INVESTORS.
In partial consideration of the commitment of AOP hereunder, each Direct
Investor and each Agent Investor as agent for and on behalf of its respective
Pecuniary Owners agrees to indemnify and hold harmless AOP and any of its
respective affiliates, directors, officers, agents and employees and each other
person, if any, controlling AOP or any of its respective affiliates (each an
"AOP Indemnified Person") from and against any losses (or actions in respect
thereof) to which such AOP Indemnified Person may become subject as a result of,
or based upon or arising out of, directly or indirectly, any inaccuracy in,
breach or nonperformance of, any of the representations, warranties, covenants
or agreements made by such Investor in or pursuant to this Agreement, and
39
<PAGE>
will reimburse any AOP Indemnified Person for all reasonable expenses (including
the reasonable fees of counsel) as they are incurred by any such AOP Indemnified
Person in connection with investigating, preparing or defending any such action
or claim pending or threatened, whether or not such AOP Indemnified Person is a
party hereto. In the event that the foregoing indemnity is unavailable or
insufficient to hold the AOP Indemnified Person harmless, such Investor shall
contribute to amounts paid or payable by such AOP Indemnified Person in respect
of such losses, claims, damages, liabilities and expenses in such proportion as
appropriately reflects the relative benefits received by and fault of such
Investor, on the one hand, and AOP, on the other hand, in connection with the
matters as to which such losses, claims, damages, liabilities or expenses
relate. Notwithstanding the foregoing, no Investor shall have liability under
this Section until such time as the aggregate losses and expenses of the AOP
Indemnified Persons as a group exceed $500,000; provided that the aggregate
--------
amount of liability of such Investor to the AOP Investor Indemnified Persons as
a group under this Section shall not exceed the amount of the Purchase Price
funded by such Investor pursuant to this Agreement.
7.3 PROCEDURE.
(a) Any Investor Indemnified Person and any AOP Indemnified Person shall
each be referred to collectively herein as an "Indemnified Person." Any
Indemnified Person seeking indemnification with respect to any losses, claims,
damages, liabilities or expenses shall give notice to the person from whom
indemnification is sought (each, an "Indemnifying Person") on or before the date
specified in Section 7.4.
-----------
(b) If any claim, demand or liability is asserted by any third party
against any Indemnified Person, the Indemnifying Person shall have the right,
unless otherwise precluded by applicable law, to conduct and control the
defense, compromise or settlement of any action or threatened action brought
against the Indemnified Person in respect of matters addressed by the indemnity
set forth in this Section 7 (an "Action"). The Indemnified Person shall have
---------
the right to employ counsel separate from counsel employed by the Indemnifying
Person in connection with any such Action or threatened Action and to
participate in the defense thereof, but the fees and expenses of such counsel
employed by the Indemnified Person shall be at the sole expense of the
Indemnified Person unless (i) the Indemnifying Person shall have elected not,
or, after reasonable written notice of any such Action or threatened Action,
shall have failed, to assume or participate in the defense thereof, (ii) the
employment thereof has been specifically authorized by the Indemnifying Person
in writing, or (iii) the parties to any such Action or threatened Action
(including any impleaded parties) include both the Indemnifying Person and the
Indemnified Person and the Indemnifying Person shall have been advised in
writing by counsel for the Indemnified Person that there may be one or more
defenses available to the Indemnified Person that are not available to the
Indemnifying Person or
40
<PAGE>
legal conflicts of interest pursuant to applicable rules
of professional conduct between the Indemnifying Person and the Indemnified
Person (in any such case, the Indemnifying Person shall not have the right to
assume the defense of such Action on behalf of the Indemnified Person), in
either of which events referred to in clauses (i), (ii) and (iii) the fees and
expenses of one such separate counsel employed by the Indemnified Person shall
be at the expense of the Indemnifying Person. The Indemnifying Person shall not,
without the written consent of the Indemnified Person, settle or compromise any
such Action or threatened Action or consent to the entry of any judgment which
does not include as an unconditional term thereof the giving by the claimant or
the plaintiff to the Indemnified Person a release from all liability in respect
of such Action or threatened Action. Unless the Indemnifying Person shall have
elected not, or shall have after reasonable written notice of any such Action or
threatened Action failed, to assume or participate in the defense thereof, the
Indemnified Person may not settle or compromise any Action or threatened Action
without the written consent of the Indemnifying Person. If, after reasonable
written notice of any such Action or threatened Action, the Indemnifying Person
neglects to defend the Indemnified Person, a recovery against the latter for
damages suffered by it in good faith, is conclusive in its favor against the
Indemnifying Person; provided, however, that no such conclusive presumption
-------- -------
shall be made if the Indemnifying Person have not received reasonable written
notice of the Action against the Indemnified Person.
7.4 SURVIVAL.
The indemnity set forth in this Section 7 shall survive the Closings or any
termination of this Agreement and shall remain in effect (a) with respect to a
breach of a representation or warranty, except as provided in (b) below, for the
period through which such representation or warranty shall continue pursuant to
Section 8.1 (including such period of time through which such representation or
warranty shall be extended until resolution of a claim with respect thereto) and
(b) with respect to a breach of a representation or warranty referred to in
Sections 2.3 and 2.4, forever.
- --------------------
7.5 REMEDIES.
The parties acknowledge and agree that the remedies set forth in this
Section 7 shall be the exclusive remedies of the parties under this Agreement,
- ---------
and the parties hereby waive any right to pursue any other remedy; provided that
--------
nothing in this Section shall prevent a party from bringing an action (a) on the
basis of fraud or (b) for specific performance of any of the covenants or
agreements of any of the other parties hereto. Each party hereto agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and
41
<PAGE>
hereby agrees to waive the defense that a remedy at law would be adequate in any
action for specific performance hereunder.
VIII. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES.
The warranties, representations and covenants of AOP (or PSP11 after the
Merger) and the Investors contained in or made pursuant to this Agreement shall
survive for a period of two years after the date of this Agreement, and shall in
no way be affected by any investigation of the subject matter thereof made by or
on behalf of the Investors or AOP (or PSP11 after the Merger).
8.2 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, including the Pecuniary Owners.
Nothing in this Agreement, express or implied, is intended to confer upon any
person other than the parties hereto and the Pecuniary Owners or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except that each Investor
shall, in its discretion, be entitled to transfer Shares (and the rights
associated therewith) between the accounts of any of the Pecuniary Owners for
which it serves as agent. In the event that any Agent Investor is terminated as
agent by a Pecuniary Owner prior to the final Subsequent Closing, the Agent
Investor shall have the right to substitute another client for which it serves
as agent as a Pecuniary Owner. By making any such substitution, the Agent
Investor shall be deemed to have made, on behalf of and with respect to such
Pecuniary Owner, as of the date of such substitution, the representations set
forth in Article III to the extent they expressly relate to the Pecuniary
Owners.
8.3 GOVERNING LAW.
This Agreement shall be governed by and construed under the internal laws
of the State of Maryland.
8.4 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
42
<PAGE>
8.5 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
8.6 NOTICES.
Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given (a)
upon personal delivery to the party to be notified, (b) upon receipt after
deposit with the United States Post Office, by registered or certified mail,
postage prepaid return receipt requested, (c) on the next business day after
dispatch via nationally recognized overnight courier or (d) upon confirmation of
transmission by facsimile (provided such transmission is also contemporaneously
sent via one of the methods specified in clauses (a), (b) or (c)), all addressed
to the party to be notified at the address indicated for such party below, or at
such other address as such party may designate by ten (10) days' advance written
notice to the other parties. Notices should be provided in accordance with this
Section at the following addresses:
If to the Investors, to: With a copy to:
ABKB/LaSalle Securities Limited Partnership Piper & Marbury L.L.P.
100 East Pratt Street 36 South Charles Street
Baltimore, MD 21202 Baltimore, MD 21201
Fax: (410) 347-0612 Fax: (410) 576-1684
Attn: Stanley J. Kraska, Jr. Attn: Elizabeth Grieb, Esq.
Managing Director
And to: With a copy to:
Harvard Private Capital Realty, Inc. Ropes & Gray
600 Atlantic Avenue One International Place
Boston, MA 02210-2203 Boston, MA 02110
Fax: (617) 722-9285 Fax: (617) 951-7050
Attn: Michael Braver Attn: Larry Rowe, Esq.
And to: With a copy to:
Cohen & Steers Capital Management, Inc. Dechert, Price & Rhoads
757 Third Avenue, 27th Floor 30 Rockefeller Plaza
New York, NY 10017-2013 New York, NY 10112
43
<PAGE>
Fax: (212) 832-3622 Fax: (212) 698-3599
Attn: Mark J. McAllister Attn: Paul Gluck, Esq.
And to: With a copy to:
Morgan Stanley Asset Management Morgan Stanley Asset Management
1221 Avenue of the Americas, 22nd Floor 1221 Avenue of the Americas
New York, NY 10020 New York, NY 10020
Fax: (212) 762-7536 Fax: 212-762-7377
Attn: Theodore R. Bigman Attn: General Counsel
And to: With a copy to:
Fidelity Management & Research Co. Goodwin, Procter & Hoar
82 Devonshire Street Exchange Place
Boston, MA 02109-3614 Boston, MA 02109
Fax: (617) 476-7774 Fax: (617) 570-8150
Attn: William P. Wall, Esq. Attn: Laura Hodges-Taylor, Esq.
And to: With a copy to:
Stanford University McCutchen, Doyle, Brown &
2770 Sand Hill Road Enersen LLP
Menlo Park, CA 94025 3 Embarcadero Center, Suite 1800
Fax: (650) 854-9268 San Francisco, CA 94111
Attn: Larry Owen Fax: (415) 393-2286
Director of Real Estate Investments Attn: Edward Merrill, Esq.
And to: With a copy to:
State of Michigan Retirement Systems Department of Attorney General
Department of Treasury, Bureau of Investments Finance and Development Division
Mortgage and Real Estate Division One Michigan Building, 4th Floor
430 West Allegan Street 120 North Washington Avenue
Lansing, MI 48922 Lansing, MI 48933
Fax: (517) 373-0635 Fax: (517) 338-3088
Attn: Administrator - Mortgage and Attn: Assistant in Charge
Real Estate Division
If to AOP (or PSP11 after the Merger), to: With copies to:
44
<PAGE>
American Office Park Properties, Inc. American Office Park Properties
701 Western Avenue, Suite 200 701 Western Avenue, Suite 200
Glendale, CA 91201 Glendale, CA 91201
Fax: (818) 244-9267 Fax: (818) 244-9267
Attn: Ronald L. Havner, Jr. Attn: David Goldberg, Esquire
And:
Hale and Dorr LLP
1455 Pennsylvania Avenue, NW
Washington, D.C. 20004
Fax: (202) 942-8484
Attn: Steven S. Snider, Esquire
8.7 NO FINDERS' FEES.
Each party represents that it neither is nor will be obligated for any
finders' fee or commission in connection with this transaction, except that AOP
will be obligated to pay a finders' fee to Triton Pacific Capital ("Triton") and
Donaldson, Lufkin & Jenrette ("DLJ"). Each Investor, severally and not jointly,
agrees to indemnify and to hold harmless AOP from any liability for any
commission or compensation in the nature of a finders' fee (and the costs and
expenses of defending against such liability or asserted-liability) for which
the Investor or any of its officers, partners, employees, or representatives is
responsible. AOP agrees to indemnify and hold harmless the Investors from any
liability for any commission or compensation in the nature of a finders' fee,
including any fees owed to Triton and DLJ (and the costs and expenses of
defending against such liability or asserted liability) for which AOP or any of
its officers, employees or representatives is responsible.
8.8 EXPENSES.
AOP shall pay all costs and expenses incident to the performance by AOP of
its obligations hereunder and pay (i) the Investors' costs associated with
engineering due diligence up to $25,000 in the aggregate, (ii) the fees and
expenses of Piper & Marbury L.L.P., lead counsel for the Investors, incurred in
connection with the transactions contemplated by this Agreement up to $125,000
in the aggregate, regardless of whether the First Closing shall occur and (iii)
the other fees and expenses of Piper & Marbury L.L.P. incurred in connection
with the transactions contemplated by this Agreement up to $100,000 in the
aggregate, but only if the First Closing shall occur. In addition, if the First
Closing occurs, AOP shall reimburse each Investor (other than ABKB) for the
reasonable fees of its separate counsel up to $20,000; provided that the amount
--------
so
45
<PAGE>
reimbursed to all of the Investors shall not exceed $100,000; and provided
--------
further that for this purpose, all of the Fidelity Entities shall be treated
- -------
together as one Investor. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
8.9 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended, and the observance of any term
of this Agreement may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of AOP
(or PSP11 after the Merger) and the Investors. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding, each future
holder of all such securities, and AOP (or PSP11 after the Merger).
8.10 SEVERABILITY.
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement and
the balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
8.11 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth
herein.
46
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
"COMPANY" AMERICAN OFFICE PARK
PROPERTIES, INC.
By: /s/ Ronald L. Havner, Jr.
-------------------------
Name: Ronald L. Havner, Jr.
-----------------------
Title: President/CEO
----------------------
Date: 1/23/98
----------------------
(Signatures continue on following pages)
47
<PAGE>
"AGENT INVESTORS" ABKB/LA SALLE SECURITIES
LIMITED PARTNERSHIP
By: /s/ Stanley J. Kraska, Jr.
-----------------------------
Stanley J. Kraska, Jr.
Managing Director
Date: 1\23\98
---------------------------
COHEN & STEERS CAPITAL
MANAGEMENT, INC.
By: /s/ Martin Cohen
-----------------------------
Name: Martin Cohen
----------------------------
Title: President
---------------------------
Date: 1/28/98
----------------------------
MORGAN STANLEY ASSET
MANAGEMENT
By: /s/ Theodore R. Bigman
-----------------------------
Name: Theodore R. Bigman
--------------------------
Title: Principal
--------------------------
Date: 1\23\98
--------------------------
"DIRECT INVESTORS" HARVARD PRIVATE CAPITAL
REALTY, INC.
By: ABKB/LaSalle Securities Limited
Partnership, as Agent
By: /s/ Stanley J. Kraska, Jr.
-----------------------------
Name: Stanley J. Kraska, Jr.
--------------------------
Title: Managing Director
--------------------------
Date: 1\23\98
---------------------------
(Signatures continue on following page)
48
<PAGE>
THE BOARD OF TRUSTEES OF THE
LELAND STANFORD JUNIOR
UNIVERSITY
By: /s/ Larry S. Owen
-----------------------------
Name: Larry S. Owen
----------------------------
Title: Director of Real Estate Investments
------------------------------------
Date: 1/26/98
----------------------------
STATE OF MICHIGAN RETIREMENT
SYSTEMS
By: /s/ Phillip L. Van Syckle
-----------------------------
Name: Phillip L. Van Syckle
----------------------------
Title: Administrator
---------------------------
Date: 1/21/98
---------------------------
"FIDELITY ENTITIES" THE FIDELITY REIT COLLECTIVE POOL
By: Fidelity Management Trust
Company, as Trustee of the Fidelity Group
Trust for Employee Benefits Plans
By: /s/ Barry Greenfield
-----------------------------
Name: Barry Greenfield
----------------------------
Title: P.M. and S.V.P.- R.E.
---------------------------
Date: 1/23/98
----------------------------
(Signatures continue on following page)
49
<PAGE>
STATE EMPLOYEES' RETIREMENT FUND
OF THE STATE OF DELAWARE
By: Fidelity Management Trust
Company, as Investment Manager
and Not Individually
By: /s/ Barry Greenfield
----------------------------
Name: Barry Greenfield
----------------------------
Title: S.V.P. and P.M.- R.E.
----------------------------
Date: 1/23/98
----------------------------
J.W. MCCONNELL FAMILY FOUNDATION
By: Fidelity Management Trust
Company, as Investment Manager
and Not Individually
By: /s/ Barry Greenfield
----------------------------
Name: Barry Greenfield
----------------------------
Title: S.V.P.- R.E. and P.M.
----------------------------
Date: 1/23/98
----------------------------
(Signatures continue on following page)
50
<PAGE>
FIDELITY REAL ESTATE INVESTMENT
PORTFOLIO
By: /s/ Barry Greenfield
----------------------------
Name: Barry Greenfield
----------------------------
Title: P.M. and S.V.P. - R.E.
----------------------------
Date: 1/23/98
----------------------------
Representative Capacity.
- -----------------------
Fidelity Real Estate Investment Portfolio (the "Fund") hereby gives
notice to the parties to this Agreement (the "Parties") that the Fund is a
portfolio of the Fidelity Devonshire Trust (the "Trust"), which is a
Massachusetts business trust, and that a copy of the Trust's Declaration of
Trust is on file with the Secretary of the Commonwealth of Massachusetts. Each
of the Parties hereto acknowledges and agrees that this Agreement is not
executed on behalf of the trustees of the Trust as individuals, and the
obligations of the Fund under this Agreement are not binding upon any of the
trustees, officers or shareholders of the Trust individually or upon any
portfolio or assets of the Trust except the assets and property of the Fund.
51
<PAGE>
EXHIBIT A
INVESTORS
<TABLE>
<CAPTION>
Investor Amount Shares
- -------- ------ ------
<S> <C> <C>
ABKB* $ 20,000,007 740,741
HPCR $ 20,000,007 740,741
C&S** $ 29,999,997 1,111,111
MSAM $ 25,000,002 925,926
SU $ 9,999,990 370,370
MICH $ 29,999,997 1,111,111
FIDO:
Fidelity Real Estate Investment
Portfolio $17,602,488 651,944
The Fidelity REIT Collective
Pool $ 1,511,271 55,973
State Employees' Retirement
Fund of the State of Delaware $ 707,292 26,196
J.W. McConnell Family
Foundation $ 178,956 6,628
---------- ----------- --------
FIDO Subtotal $ 20,000,007 740,741
============= ============ ===========
TOTAL $155,000,007 5,740,741
</TABLE>
* The investment of ABKB and HPCR together shall not exceed 20% of the AOP
Common Stock outstanding
** The investment of C&S will not exceed 14.9% of the AOP Common Stock
outstanding
<PAGE>
EXHIBIT A-1
FIRST CLOSING ALLOCATION
<TABLE>
<CAPTION>
Investor Amount Shares
- -------- ------ ------
<S> <C> <C>
ABKB* $ 6,451,623 238,949
HPCR $ 6,451,623 238,949
C&S** $ 9,677,421 358,423
MSAM $ 8,064,522 298,686
SU $ 3,225,798 119,474
MICH $ 9,677,421 358,423
FIDO:
Fidelity Real Estate Investment
Portfolio $5,678,235 210,305
The Fidelity REIT Collective
Pool $ 487,512 18,056
State Employees' Retirement
Fund of the State of Delaware $ 228,150 8,450
J.W. McConnell Family
Foundation
---------- $ 57,726 2,138
---------- --------
FIDO Subtotal $ 6,451,623 238,949
============= =========== ==========
TOTAL $50,000,031 1,851,853
</TABLE>
* The investment of ABKB and HPCR together shall not exceed 20% of the AOP
Common Stock outstanding
** The investment of C&S will not exceed 14.9% of the AOP Common Stock
outstanding
A-1
<PAGE>
EXHIBIT B
FORM OF NOTICE OF SUBSEQUENT CLOSING
A. Subsequent Funding:
-------------------
Date of Proposed Funding:
Amount of Proposed Funding:
Number of Shares to be Issued:
Payment Instructions:
B. As to Each Acquisition Property:
--------------------------------
Description of Property:
Purchase Price:
In-Place NOI Yield:
Projected NOI Yield:
Time-Frame for Reaching Projected NOI Yield:
C. Aggregate for All Acquisition Properties Proposed to be Funded:
---------------------------------------------------------------
Purchase Price:
In-Place NOI Yield:
Projected NOI Yield:
Time-Frame for Reaching Projected NOI Yield:
D. Assumptions used for Projected NOI Yield:
-----------------------------------------
B-1
<PAGE>
EXHIBIT C
INDEX OF DEFINITIONS
"ABKB" shall have the meaning set forth in the Recitals.
"Acquisition Properties" shall have the meaning set forth in Section 1.3 hereof.
"Acquisition Criterion" shall have the meaning set forth in Section 1.3 hereof.
"Action" shall have the meaning set forth in Section 7.2 hereof.
"Agent Investor" shall have the meaning set forth in the Recitals.
"AOP" shall have the meaning set forth in the Recitals.
"AOP Capital Stock" shall have the meaning set forth in Section 2.3 hereof.
"AOP Common Stock" shall have the meaning set forth in the Recitals.
"AOP Employee Benefit Plans" shall have the meaning set forth in Section
2.24 hereof.
"AOP Employee Pension Plans" shall have the meaning set forth in Section
2.24 hereof.
"AOP Indemnified Person" shall have the meaning set forth in Section 7.2
hereof.
"Applicable Authority" shall have the meaning set forth in Section 2.8
hereof.
"Applicable Laws" shall have the meaning set forth in Section 2.9 hereof.
"Assets" shall have the meaning set forth in Section 2.14 hereof.
"Bylaws" shall have the meaning set forth in Section 2.3 hereof.
"C&S" shall have the meaning set forth in the Recitals.
"CERCLA" shall have the meaning set forth in Section 2.26 hereof.
"Charter" shall have the meaning set forth in Section 2.3 hereof.
"Closing" shall have the meaning set forth in Section 1.2 hereof.
<PAGE>
"Commercial Properties" shall have the meaning set forth in the Recitals.
"Commission" shall have the meaning set forth in Section 2.1 hereof.
"Company" shall have the meaning set forth in the Recitals.
"DLJ" shall have the meaning set forth in Section 8.7 hereof.
"Definitive Proxy Statement" shall have the meaning set forth in Section
2.1 hereof.
"Direct Investor" shall have the meaning set forth in the Recitals.
"Environmental Law" shall have the meaning set forth in Section 2.26
hereof.
"Environmental Reports" shall have the meaning set forth in Section 2.26
hereof.
"Equity Float" shall have the meaning set forth in Section 6.7 hereof.
"ERISA" shall have the meaning set forth in Section 2.24 hereof.
"Exchange" shall have the meaning set forth in the Recitals.
"Exchange Act" shall have the meaning set forth in Section 2.1 hereof.
"FIDO" shall have the meaning set forth in the Recitals.
"First Closing" shall have the meaning set forth in Section 1.2 hereof.
"First Closing Date" shall have the meaning set forth in Section 1.2
hereof.
"Financial Statements" shall have the meaning set forth in Section 2.11
hereof.
"GAAP" shall have the meaning set forth in Section 1.3 hereof.
"Hazardous Material" shall have the meaning set forth in Section 2.26
hereof.
"HPCR" shall have the meaning set forth in the Recitals.
"Improvements" shall have the meaning set forth in Section 2.27 hereof.
"Indemnified Person" shall have the meaning set forth in Section 7.3
hereof.
"Indemnifying Person" shall have the meaning set forth in Section 7.3
hereof.
<PAGE>
"IPO" shall have the meaning set forth in Section 6.7 hereof.
"Investor Indemnified Person" shall have the meaning set forth in Section
7.1.
"Investors" shall have the meaning set forth in the Recitals.
"Leases" shall have the meaning set forth in Section 2.22 hereof.
"Lien" shall have the meaning set forth in Section 2.22 hereof.
"Licenses and Approvals" shall have the meaning set forth in Section 2.17
hereof
"Material Adverse Effect" shall have the meaning set forth in Section 2.2
hereof.
"Material Contracts" shall have the meaning set forth in Section 2.21
hereof.
"Merger Agreement" shall have the meaning set forth in the Recitals.
"MICH" shall have the meaning set forth in the Recitals.
"MSAM" shall have the meaning set forth in the Recitals.
"Multiemployer Plan" shall have the meaning set forth in Section 2.24
hereof.
"Multiple Employer Plan" shall have the meaning set forth in Section 2.24
hereof.
"NOI Yield" shall have the meaning set forth in Section 1.3 hereof.
"NYC" shall have the meaning set forth in the Recitals.
"NYC Agreement" shall have the meaning set forth in the Recitals.
"NYC Properties" shall have the meaning set forth in the Recitals.
"NYC Shareholders Agreement" shall have the meaning set forth in Section
2.3.
"Operating Partnership" shall have the meaning set forth in the recitals.
"PBGC" shall have the meaning set forth in Section 2.24 hereof.
"Pecuniary Owners" shall have the meaning set forth in the Recitals.
"Preliminary Proxy Statement" shall have the meaning set forth in Section
2.1 hereof.
<PAGE>
"Pro Forma Financial Statements" shall have the meaning set forth in
Section 2.11 hereof.
"Properties" shall have the meaning set forth in Section 2.14 hereof.
"Proxy Statement" shall have the meaning set forth in Section 2.1 hereof.
"PSP11" shall have the meaning set forth in the Recitals.
"PSI" shall have the meaning set forth in the Recitals.
"PSP11 Capital Stock" shall have the meaning set forth in Section 2.3
hereof.
"PSP11 Common Stock" shall have the meaning set forth in the Recitals.
"PSI Material Contracts" shall have the meaning set forth in Section 2.24
hereof.
"Purchase Price" shall have the meaning set forth in Section 1.1 hereof.
"Qualifying Transaction" shall have the meaning set forth in Section 6.7
hereof.
"Rent Roll" shall have the meaning set forth in Section 2.22 hereof.
"S-4 Registration Statement" shall have the meaning set forth in Section
2.1 hereof.
"SEC Documents" shall have the meaning set forth in Section 2.7 hereof.
"Shares" shall have the meaning set forth in Section 1.1 hereof.
"SU" shall have the meaning set forth in the Recitals.
"Subsequent Closing" shall have the meaning set forth in Section 1.2
hereof.
"Subsidiary" shall have the meaning set forth in Section 2.2 hereof.
"Taxes" shall have the meaning set forth in Section 2.16 hereof.
"Triton" shall have the meaning set forth in Section 8.7 hereof.
"VCOC" shall have the meaning set forth in Section 4.6 hereof.
"Warehouse Properties" shall have the meaning set forth in the Recitals.
[Other exhibits to this agreement have been omitted and will be furnished to the
Securities and Exchange Commission upon request]
<PAGE>
EXHIBIT 10.16
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement") is made and entered
into as of January 30, 1998, by and among American Office Park Properties, Inc.,
a California corporation ("AOP" or the "Company"), ABKB/LaSalle Securities
Limited Partnership, a registered investment adviser ("ABKB"), Harvard Private
Capital Realty, Inc., a Massachusetts corporation ("HPCR"), Cohen & Steers
Capital Management, Inc., a registered investment adviser ("C&S"), Morgan
Stanley Asset Management, a registered investment adviser ("MSAM"), the Fidelity
entities signatories hereto (each a "Fidelity Entity" and collectively, "FIDO"),
Stanford University ("SU") and the State of Michigan Retirement Systems
("MICH"). ABKB, C&S, and MSAM are each referred to herein as an "Agent
Investor," and collectively as the "Agent Investors." Each Agent Investor
enters into this Agreement solely as agent for and for the benefit of such Agent
Investor's clients referred to in the Purchase Agreement (as defined below).
HPCR, each Fidelity Entity, SU and MICH are each referred to herein as a "Direct
Investor," and collectively as the "Direct Investors." The Agent Investors and
the Direct Investors are each referred to herein as an "Investor," and
collectively as the "Investors."
WHEREAS, pursuant to that certain Common Stock Purchase Agreement dated as
of the Initial Funding Date (as defined below), between the AOP, the Direct
Investors and the Agent Investors, as agents for and on behalf of the Pecuniary
Owners (the "Purchase Agreement"), the Investors have agreed to purchase up to
5,740,741 shares of AOP's Common Stock, par value $0.10 per share (the "Shares")
for themselves or as agent for and for the benefit of the Pecuniary Owners;
WHEREAS, pursuant to the terms of the Purchase Agreement, the Company and
the Investors agreed that the Company would grant certain registration rights to
the Investors with respect to the Shares;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions.
-----------
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Agent Investor: As defined in the Recitals to this Agreement.
--------------
AOP Common Stock: The Common Stock, $0.10 of AOP.
----------------
Appraisal: See Section 2(e) hereof.
--------- ------------
1
<PAGE>
Direct Investor: As defined in the Recitals to this Agreement.
---------------
Exchange Act: The Securities Exchange Act of 1934 and the rules and
------------
regulation promulgated thereunder, as amended from time to time.
Fair Market Value: See Section 2(e) hereof.
----------------- ------------
Initial Demand Registration: See Section 2(b) hereof.
--------------------------- ------------
Initial Funding Date: The date of the Initial Funding as defined in
--------------------
the Purchase Agreement.
Investor: As defined in the Recitals to this Agreement.
--------
IPO: As defined in the Purchase Agreement.
---
Merger: As defined in the Purchase Agreement.
------
Person: An individual, partnership, corporation, limited liability
------
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
Prospectus: The prospectus included in any Registration Statement, as
----------
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
Purchase Agreement: As defined in the Recitals to this Agreement.
------------------
Put: As defined in Section 2(e) hereof.
--- ------------
Registrable Securities: (a) The Shares, (b) any securities issued or
----------------------
issuable with respect to the Shares by way of stock dividend or stock split or
in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise and (c) any additional Common
Stock of AOP or any successor of AOP purchased by the Investors (for themselves
or as agents for and on behalf of the Pecuniary Owners) pursuant to the Initial
Funding or any Subsequent Funding pursuant to the Purchase Agreement. Any
Registrable Security will cease to be a Registrable Security when (i) a
registration statement covering such Registrable Security has been declared
effective by the SEC and the Registrable Security has been disposed of pursuant
to such effective registration statement, (ii) the Registrable Security is sold
under circumstances in which all of the applicable conditions of Rule l44 or
Rule 144A (or any similar provisions then in force) under the Securities Act are
met, (iii) the Registrable Security has been otherwise transferred, the Company
has delivered a new certificate or other evidence of ownership for it not
bearing a legend restricting further transfer, and it may be resold
2
<PAGE>
without subsequent registration under the Securities Act, or (iv) the
Registrable Security is eligible for resale pursuant to Rule 144(k).
Registration Expenses: See Section 5 hereof.
--------------------- ---------
Registration Statement: Each Registration Statement of the Company
----------------------
that covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.
SEC: The Securities and Exchange Commission or any successor entity.
---
Securities Act: The Securities Act of 1933 and the rules and
--------------
regulations promulgated thereunder, as amended from time to time.
Shares: As defined in the Recitals to this Agreement.
------
Shelf Registration: See Section 2(a) hereof.
------------------ ------------
Subsequent Demand Registration: See Section 2(c) hereof.
------------------------------ ------------
Subsequent Funding Date: The date of any Subsequent Funding as
-----------------------
defined in the Purchase Agreement.
Underwritten Registration or Underwritten Offering: A registration in
--------------------------------------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
2. Registration Rights.
-------------------
In the event that the Merger is consummated, the Investors shall have
the rights set forth in Section 2(a) hereof as to Shares issued to them
------------
thereafter pursuant to the Purchase Agreement. In the event that the Merger is
not consummated on or before April 30, 1998, AOP will undertake efforts to
- ---
complete an IPO promptly thereafter. In the event that AOP (or any successor) is
not eligible to use Securities Act Form S-3 (or comparable successor form) on or
before April 30, 1998 (because AOP or any successor is not then subject to the
reporting requirements of the Exchange Act or for any other reason), then the
Investors shall have the rights set forth in Sections 2(b), 2(c), and 2(d)
-----------------------------
hereof, subject to the provisions of Section 2(f) hereof.
------------
(a) Shelf Registration. In the event that the Merger is
------------------
consummated, Company will file a "shelf" registration statement on any
appropriate form pursuant to Rule 415 (or similar rule that may be adopted by
the SEC) under the Securities Act (a "Shelf Registration"), as soon as
practicable after any Subsequent Funding registering the resale of any
Registrable Securities issued in such Subsequent Funding.
3
<PAGE>
The Company hereby agrees to use all commercially reasonable efforts
to cause such Shelf Registration to become effective as soon as practicable
thereafter and to keep it continuously effective for a period terminating on the
second year anniversary of the date on which the SEC declares the Shelf
Registration effective, or such shorter period as shall terminate on the date on
which all the Registrable Securities covered by the Shelf Registration have been
sold pursuant to such Shelf Registration or are no longer Registrable
Securities.
The Company further agrees to promptly supplement or make amendments
to the Shelf Registration, if required by the rules, regulations or instructions
applicable to the registration form utilized by the Company or by the Securities
Act or the rules and regulations thereunder for shelf registration; provided
--------
that no supplement or amendment to the Shelf Registration Statement shall be
made that would adversely affect an Investor or a Pecuniary Owner without such
Person's prior written consent. If Investors holding in the aggregate in excess
of 50% of the Registrable Securities covered by the Shelf Registration so elect,
the offering of Registrable Securities pursuant to such registration shall be in
the form of an Underwritten Offering.
(b) Initial Demand Registration. In the event that the Company or
---------------------------
its successor is not eligible to use Securities Act Form S-3 (or comparable
successor form) on or before April 30, 1998 (because AOP or its successor is not
then subject to the reporting requirements of the Exchange Act or for any other
reason), then Investors holding not less than a majority of the aggregate
Registrable Securities outstanding may make a written request (the "Initial
Demand Notice") for registration under the Securities Act (the "Initial Demand
Registration") of the Registrable Securities then held by the Investors. The
Initial Demand Notice shall be sent to the Company and all of the Investors in
accordance with Section 9(e) hereof. The Initial Demand Notice will specify the
------------
number of shares of Registrable Securities proposed to be sold, provided that
the aggregate amount of Shares to be registered pursuant to the Initial Demand
Registration shall not be less than a majority of the Registrable Securities
then held by the Investors. Following receipt of the Initial Demand Notice from
the Investors, the Company promptly will file and use all commercially
reasonable efforts to cause to be effective a registration statement on any
available form (including, if no other form is available, Form S-11) which will
cover the resale of the Registrable Securities that the Company has been so
requested to register by the Investors. Notwithstanding the foregoing, the
Company shall file and cause to be effective a Shelf Registration on Securities
Act Form S-3 (or comparable successor form) pursuant to Section 2(a) above as
------------
soon as practicable after it becomes eligible to use such form.
The Company shall not be required to effect more than one Initial
Demand Registration under this Section 2(b). A registration requested pursuant
------------
to this Section 2(b) will not be deemed to have been effected (and it shall not
------------
count as the Initial Demand Registration) unless the Registration Statement
relating thereto has become effective under the Securities Act; provided,
--------
however, that if, after such Registration Statement has become effective, the
- -------
offering of the Registrable Securities pursuant to such registration is
interfered with by any stop order, injunction or other order or requirement of
the SEC or other governmental agency or court, such
4
<PAGE>
registration will be deemed not to have been effected (and it shall not count as
the Initial Demand Registration); provided further that, if such Registration
-------- -------
Statement does not become effective primarily due to an act or failure to act on
the part of the Investors or a decision by the Investors to revoke the Initial
Demand Notice as contemplated below, then the registration will be deemed to
have been effected (and shall count as the Initial Demand Registration).
Investors holding in excess of 50% of the Registrable Securities covered by the
Initial Demand Registration may at any time prior to the effective date of the
Registration Statement relating to such registration revoke the Initial Demand
Notice by providing a written notice to the Company (in which case such Initial
Demand Registration shall count as the Initial Demand Registration).
If Investors holding in the aggregate in excess of 50% of the
Registrable Securities covered by the Demand Registration so elect, the offering
of Registrable Securities pursuant to such registration shall be in the form of
an Underwritten Offering. If the managing underwriter or underwriters of such
offering advise the Company and the Investors in writing that in their opinion
the number of shares of Registrable Securities requested to be included in such
offering is sufficiently large to materially and adversely affect the success of
such offering, the Company will include in such registration the aggregate
number of Registrable Securities which in the opinion of such managing
underwriter or underwriters can be sold without any such material adverse
effect. If more than 10% of the Registrable Securities requested to be included
in such offering are excluded, such registration shall not count as the one
Initial Demand Registration. If any Registrable Securities are excluded, the
number of Registrable Securities of the Investors to be included in such
Registration shall be reduced pro rata (according to the total number of
Registrable Securities or shares, as the case may be, requested to be registered
by each such holder and all other holders of registration rights who have
indicated the desire to participate in such registration), to the extent
necessary to reduce the total amount necessary to be included in the Offering to
the amount recommended by such managing underwriter or underwriters.
No registration pursuant to a request or requests referred to in this
Section 2(b) shall be deemed to be a Subsequent Demand Registration (as defined
- ------------
below).
(c) Subsequent Demand Registration. In the event that the Company
------------------------------
(or any successor) is not eligible to use Securities Act Form S-3 (or comparable
successor form) on or before April 30, 1998 (because AOP (or any successor) is
not then subject to the reporting requirements of the Exchange Act or for any
other reason), then at any time during the three year period following the
Initial Funding Date, Investors holding in the aggregate not less than 25% of
the aggregate Registrable Securities then outstanding may make a written request
(the "Subsequent Demand Notice") for registration under the Securities Act (a
"Subsequent Demand Registration") of such Registrable Securities. The
Subsequent Demand Notice shall be sent to the Company and all of the Investors
in accordance with Section 9(e) hereof. The Initial Demand Notice and the
------------
Subsequent Demand Notice are sometimes referred to collectively as a "Demand
Notice." The Initial Demand Registration and the Subsequent Demand Registration
are sometimes referred to collectively as a "Demand Registration." The
Subsequent Demand Notice will specify the number of shares of Registrable
Securities proposed to be sold and will also specify the intended method of
disposition thereof. Following receipt of a Subsequent Demand
5
<PAGE>
Notice from the Investors, the Company promptly will file and use all
commercially reasonable efforts to cause to be effective a registration
statement on any appropriate form which will cover the Registrable Securities
that the Company has been so requested to register by the Investors.
The Company shall not be required to effect more than two Subsequent
Demand Registrations under this Section 2(c). A registration requested pursuant
------------
to this Section 2(c) will not be deemed to have been effected (and it shall not
------------
count as one of the two Subsequent Demand Registrations) unless the Registration
Statement relating thereto has become effective under the Securities Act;
provided, however that if, after such Registration Statement has become
- -------- -------
effective, the offering of the Registrable Securities pursuant to such
registration is interfered with by any stop order, injunction or other order or
requirement of the SEC or other governmental agency or court, such registration
will be deemed not to have been effected (and it shall not count as one of the
two Subsequent Demand Registrations); provided further that, if such
-------- -------
Registration Statement does not become effective primarily due to an act or
failure to act on the part of the Investors or a decision by the Investors to
revoke the Subsequent Demand Notice as contemplated below, then the registration
will be deemed to have been effected (and shall count as one of the Subsequent
Demand Registrations). Investors holding in excess of 50% of the Registrable
Securities covered by a Demand Registration may at any time prior to the
effective date of the Registration Statement relating to such registration
revoke a Subsequent Demand Notice by providing a written notice to AOP (in which
case such Subsequent Demand Registration shall count as one of the two
Subsequent Demand Registrations).
If Investors holding in the aggregate in excess of 50% of the
Registrable Securities covered by the Subsequent Demand Registration so elect,
the offering of Registrable Securities pursuant to such registration shall be in
the form of an Underwritten Offering. If the managing underwriter or
underwriters of such offering advise the Company and the Investors in writing
that in their opinion the number of shares of Registrable Securities requested
to be included in such offering is sufficiently large to materially and
adversely affect the success of such offering, the Company will include in such
registration the aggregate number of Registrable Securities requested to be
included, which in the opinion of such managing underwriter or underwriters can
be sold without any such material adverse effect. If more than 10% of the
Registrable Securities requested to be included in such offering are excluded,
such registration shall not count as one of the two Subsequent Demand
Registrations. If any Registrable Securities proposed to be registered
hereunder are required to be excluded pursuant to this paragraph, the number of
Registrable Securities of the Investors to be included in such Registration
shall be reduced pro rata (according to the total number of Registrable
Securities or shares, as the case may be, requested to be registered by each
such holder and all other holders of registration rights who have indicated the
desire to participate in such registration), to the extent necessary to reduce
the total amount to be included in the Offering to the amount recommended by
such managing underwriter or underwriters.
No registration pursuant to a request or requests referred to in this
Section 2(c) shall be deemed to be a Shelf Registration or an Initial Demand
- ------------
Registration.
6
<PAGE>
(d) Incidental Registration. If at any time during the period
-----------------------
beginning April 30, 1998 and ending three years following the Initial Funding
Date, a Shelf Registration Statement on Form S-3 covering the Registrable
Securities is not then in effect, the Company proposes to file a registration
statement under the Securities Act (other than in connection with a Registration
Statement on Form S-4 or S-8, or any form that is substituting therefor or is a
successor thereto) with respect to an offering of any class of security by the
Company for its own account or for the account of any of its security holders
(including the Investors), then the Company shall give written notice of such
proposed filing to the Investors as soon as practicable (but in no event less
than thirty days before the anticipated filing date), and such notice shall (i)
offer the Investors the opportunity to register such number of Registrable
Securities as they may request and (ii) describe such securities and specify the
form and manner and other relevant facts involved in such proposed registration
(including, without limitation, (x) whether or not such registration will be in
connection with an Underwritten Offering and, if so, the identity of the
managing underwriter and whether such Underwritten Offering will be pursuant to
a "best efforts" or "firm commitment" underwriting and (y) the price (net of any
underwriting commissions, discounts and the like) at which the Registrable
Securities are reasonably expected to be sold, if such disclosure is acceptable
to the managing underwriter). The Investors shall advise the Company in writing
within twenty (20) days after the date of receipt of such notice from the
Company of the number of Registrable Securities for which registration is
requested. The Company shall include in such Registration Statement all such
Registrable Securities so requested to be included therein, and, if such
registration is an Underwritten Registration, the Company shall use its
commercially reasonable efforts to cause the managing underwriter or
underwriters to permit the Registrable Securities requested to be included in
the registration statement for such offering to be included (on the same terms
and conditions as similar securities of the Company included therein to the
extent appropriate); provided, however, that if the managing underwriter or
-------- -------
underwriters of such offering advise the Company and the Investors in writing
that in their opinion, either because of (i) the kind of securities which the
Investors, the Company or any other Persons intend to include in such offering
or (ii) the size of the offering which the Investors or such other Persons
intend to make, the success of the offering would be materially and adversely
affected by inclusion of the Registrable Securities requested to be included,
then (A) in the event that the size of the offering is the basis of such
managing underwriter's opinion, the amount of securities to be offered for the
account of the Investors and other holders registering securities of the Company
pursuant to similar incidental registration rights shall be reduced pro rata
(according to the total number of Registrable Securities or shares, as the case
may be, requested to be registered by each such holder and all other holders of
registration rights who have indicated the desire to participate in such
registration) to the extent necessary to reduce the total amount of securities
to be included in such offering to the amount recommended by such managing
underwriter or underwriters; and (B) in the event that the combination of
securities to be offered is the basis of such managing underwriter's opinion,
(x) the Registrable Securities and other securities to be included in such
offering shall be reduced as described in clause (A) above or, (y) if the
actions described in clause (A) would, in the judgment of the managing
underwriter, be insufficient to substantially eliminate the adverse effect that
inclusion of the Registrable Securities requested to be included would have on
such offering,
7
<PAGE>
such Registrable Securities will be excluded from such offering. The Company
shall have the right to postpone or withdraw any registration effected pursuant
to this Section 2(d) without obligation to any Investor or Pecuniary Owner.
------------
No registration pursuant to a request or requests referred to in this
Section 2(d) shall be deemed to be a Shelf Registration or a Demand
- ------------
Registration.
(e) Put Rights. In the event that within eighteen (18) months after
----------
the Initial Funding Date (i) the Merger has not closed and (ii) AOP (or any
successor) has not closed on an IPO, AOP shall notify the Investors that it will
have its business as a whole appraised on a going concern basis in accordance
with the procedures set forth in this Section 2(e) (the "Appraisal"). Each
------------
Investor shall have the right to elect, by delivering written notice to the
Company during the thirty (30) day period following delivery of the Appraisal,
to have AOP redeem all, but not less than all, of the Shares then held by such
Investor (the "Put"). The price to be paid for the Shares upon exercise of the
Put shall be their fair market value based on the Appraisal (the "Fair Market
Value"). Payment shall be made in immediately available funds within forty-five
(45) days after delivery of the Appraisal.
AOP and the Investors shall use reasonable efforts to agree on a single MAI
certified appraiser to conduct the Appraisal. If they are unable to agree on a
single appraiser within 15 days after the date that is eighteen (18) months
after the Initial Funding Date, the Appraisal shall be conducted by a panel of
three MAI certified appraisers qualified to appraise AOP on a going concern
basis, one of whom shall be selected by AOP, one of whom shall be selected by
Investors then holding a majority in interest of the Shares within 10 days after
AOP's selection of an appraiser, and the third of whom shall be selected by the
first two within three days after the first two are selected. Each appraiser,
within 15 days after the third such party is so selected, shall submit to AOP
and the Investors a determination of such Fair Market Value, and the mean of the
two closest determinations shall be the Fair Market Value. AOP and the
Investors shall each pay fifty percent (50%) of the cost of the Appraisal. PSI
shall be deemed to have consented to all transfers of AOP's assets necessary to
effect the payments required by this Section 2(e), if any.
------------
(f) General Provisions. The Company shall not be required to effect
------------------
any registration hereunder (other than on Form S-3 or any successor form
relating to secondary offerings) within three months after the effective date of
any other registration statement of the Company (other than a Form S-4 or S-8 or
any successor form). If, at the time of any request to register Registrable
Securities pursuant to Section 2(b) or (c), the Company is engaged or has fixed
-------------------
plans to engage within thirty (30) days of the time of the request in a
registered public offering as to which the Investors may include Registrable
Securities pursuant to Section 2(d) or is engaged in any other material activity
------------
which, in the good faith determination of the Company's Board of Directors,
would be materially adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period not in excess of one hundred twenty
(120) days from the effective date of such offering or the date of commencement
of such other material activity, as the case may be,
8
<PAGE>
such right to delay a request to be exercised by the Company not more than once
in any twelve-month period.
3. Restriction on Sale of Securities. (a) The Company agrees not to
---------------------------------
effect for its own account any public sale or distribution of any securities
similar to those being registered, or any securities convertible into or
exchangeable or exercisable for such securities (except pursuant to a
registration statement on Form S-4 or S-8, or any substitute form that may be
adopted by the SEC) during the ten days prior to the filing of a registration
statement with respect to an Underwritten Offering, and during the 90-day period
beginning on the effective date of such Registration Statement (except as part
of such Registration Statement).
(b) In an Underwritten Offering of securities of the Company pursuant to a
registration statement, if requested by the Company and the managing underwriter
and if each Direct Investor and Pecuniary Owner has been given the opportunity
to participate as seller in such Underwritten Offering in accordance with the
procedures specified in Section 2(d) hereof, each Direct Investor and Pecuniary
------------
Owner shall agree not to sell publicly or otherwise transfer or dispose of any
Registrable Securities or other securities of the Company held by such Direct
Investor or Pecuniary Owner for a specified period of time (not to exceed 180
days in the case of an initial public offering (which cannot occur post-Merger),
or 90 days in all other cases) following the effective date of such registration
statement, provided that all other stockholders of the Company (other than the
Direct Investors and Pecuniary Owners) holding not less than the number of
shares of Common Stock held by such Direct Investor or Pecuniary Owner and all
executive officers and directors of the Company enter into similar agreements.
4. Registration Procedures. In connection with the Company's
-----------------------
registration obligations pursuant to Section 2 hereof, the Company will use its
---------
commercially reasonable efforts to effect such registration to permit the sale
of such Registrable Securities in accordance with the intended method or methods
of distribution thereof, and pursuant thereto the Company will use commercially
reasonable efforts to effect such registration as expeditiously as possible, and
to:
(a) prepare and file with the SEC, as soon as practicable, and in any
event within 60 days from the date of request, a Registration Statement relating
to the applicable registration on any appropriate form under the Securities Act,
which forms shall be available for the sale of the Registrable Securities in
accordance with the intended method or methods of distribution thereof and shall
include all required financial statements of the Company, and use its
commercially reasonable efforts to cause such Registration Statement to become
effective; provided that before filing a Registration Statement or Prospectus or
--------
any amendments or supplements thereto, including documents incorporated by
reference after the initial filing of the Registration Statement, the Company
will furnish the Investors and the underwriters, if any, copies of all such
documents proposed to be filed, which documents will be subject to the review of
the Investors and the underwriters, if any, and the Company will not file any
Registration Statement or amendment thereto or any Prospectus or any supplement
thereto (including such documents incorporated by reference) (i) unless the
Investors shall have had a reasonable
9
<PAGE>
opportunity to review and comment on such documents or (ii) to which the
underwriters, if any, shall reasonably object (except in the case of a filing
pursuant to Section 2(d) hereof);
------------
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep the
Registration Statement effective for the applicable period, or such shorter
period which will terminate when all Registrable Securities included in such
Registration Statement have been sold; cause the Prospectus to be supplemented
by any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Securities Act; and comply with the provisions of
all securities included in such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
sellers thereof set forth in such Registration Statement or supplement to the
Prospectus; the Company shall not be deemed to have used commercially reasonable
efforts to keep a Registration Statement effective during the applicable period
if it voluntarily takes any action that would result in the Investors not being
able to sell Registrable Securities during that period unless such action is
required under applicable law; provided that the foregoing shall not apply to
--------
actions taken by the Company in good faith and for valid business reasons,
including without limitation the acquisition or divestiture of assets, so long
as the Company promptly thereafter complies with the requirements of Section
-------
4(j) hereof, if applicable;
- ----
(c) notify the Investors and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such advice in writing,
(l) when the Prospectus or any Prospectus supplement or post-effective amendment
has been filed, and, with respect to the Registration Statement or any post-
effective amendment, when the same has become effective, (2) of any request by
the SEC for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (3) of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) if at any time during the
distribution of any Registrable Securities the representations and warranties of
the Company contemplated by paragraph (l) below cease to be true and correct,
-------------
(5) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such purpose
and (6) of the happening of any event which makes any statement made in the
Registration Statement, the Prospectus or any document incorporated therein by
reference untrue or which requires the making of any changes in the Registration
Statement, the Prospectus or any document incorporated therein by reference in
order to make the statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriter or
underwriters or by Investors holding in the aggregate in excess of 50% of the
Registrable Securities covered by the Registration Statement, promptly
incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters and the Investors agree should be
10
<PAGE>
included therein relating to the sale of the Registrable Securities, including,
without limitation, information with respect to the number of Registrable
Securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
Underwritten (or best efforts underwritten) Offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(f) furnish to each Investor and each managing underwriter, if any,
without charge, at least one signed copy of the Registration Statement and any
post-effective amendment thereto, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference);
(g) deliver to each Investor and the underwriters, if any, without
charge, as many copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such Persons may reasonably request;
the Company consents to the use of the Prospectus or any amendment or supplement
thereto by the Investors and the underwriters, if any, in connection with the
offering and sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto;
(h) prior to any public offering of Registrable Securities, register
or qualify or cooperate with the Investors, the underwriters, if any, and their
respective counsel in connection with the registration or qualification of such
Registrable Securities for offer and sale under the securities or blue sky laws
of such jurisdictions as the Investors or any underwriter reasonably requests in
writing and do any and all other acts or things necessary or advisable to enable
the disposition in such jurisdictions of the Registrable Securities covered by
the Registration Statement; provided, however, that the Company shall not be
required in connection with this paragraph (h) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(i) cooperate with the Investors and the managing underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any restrictive
legends; and enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriters may request at least two
business days prior to any sale of Registrable Securities to the underwriters;
(j) upon the occurrence of any event contemplated by Section 4(c)(6)
---------------
above, prepare a supplement or post-effective amendment to the Registration
Statement or the related Prospectus or any document incorporated therein by
reference or file any other required document as promptly as practicable so
that, as thereafter delivered to the purchasers of the Registrable Securities,
the Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading;
11
<PAGE>
(k) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(l) in connection with any Underwritten Offering: enter into such
agreements (including an underwriting agreement) and take all such other actions
in connection therewith in order to expedite or facilitate the disposition of
such Registrable Securities and in connection therewith, (1) make such
representations and warranties to the underwriters, in form, substance and scope
as are customarily made by issuers to underwriters in primary Underwritten
Offerings; (2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters), if any, covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by the Investors and the
underwriters, if any; (3) obtain "cold comfort" letters and updates thereof from
the Company's independent certified public accountants addressed to the
underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters by underwriters in
connection with primary Underwritten Offerings; (4) if an underwriting agreement
is entered into, the same shall set forth in full the indemnification provisions
and procedures of Section 6 hereof or substantially similar provisions with
---------
respect to all parties to be indemnified pursuant to said Section; (5) deliver
such documents and certificates as may be reasonably requested by the managing
underwriters, if any, to evidence compliance with clause (1) above and with any
----------
customary conditions contained in the underwriting agreement or other agreement
entered into by the Company; and (6) participate in a "road show" or other
general solicitation of interest with respect to such Registrable Securities as
may be requested by the managing underwriters. The above shall be done at each
closing under such underwriting or similar agreement or as and to the extent
required thereunder;
(n) make available for inspection by one representative of the
Investors, any underwriter participating in any disposition pursuant to such
registration, and any attorney or accountant retained by any underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company and cause the Company's officers, trust managers and employees to supply
all information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with such registration; provided that all
--------
such records, information or documents made available by the Company shall be
kept confidential by such Persons unless disclosure of such records, information
or documents is required by court or administrative order;
(o) otherwise use its commercially reasonable efforts to comply with
all applicable rules and regulations of the SEC, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the Registration Statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act;
12
<PAGE>
(p) cooperate with the Investors and each underwriter participating
in the disposition of such Registrable Securities and their respective counsel
in connection with any filings required to be made with the National Association
of Securities Dealers, Inc. (the "NASD"); and
(q) give prompt notice to the Investors of (i) the filing of a
registration statement filed pursuant to the Exchange Act relating to any class
of equity securities of the Company ("an Exchange Act Registration Statement");
and (ii) the effectiveness of such Exchange Act Registration Statement and the
number of shares of such class of equity securities outstanding as reported in
such Exchange Act Registration Statement, in order to enable the Investors to
comply with any reporting requirements under the Exchange Act or the Securities
Act.
The Company may require the Investors and each Pecuniary Owner, as
applicable, to furnish to the Company such information regarding the Investors,
Pecuniary Owners and the distribution of Registrable Securities as the Company
may from time to time reasonably request in writing.
Each Investor agrees by acquisition of the Registrable Securities that,
upon receipt of any notice from the Company of the happening of any event of the
kind described in Section 4(c)(3), (5) or (6) hereof, the Investors will
---------------------------
forthwith discontinue disposition of Registrable Securities until the Investors'
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 4(j) hereof, or until it is advised in writing (the "Advice") by the
- ------------
Company that the use of the Prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference in
the Prospectus, and, if so directed by the Company, each Investor will deliver
to the Company (at the Company's expense), all copies, other than permanent file
copies then in each Investor's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time periods regarding the
effectiveness of Registration Statements set forth in Section 2 hereof and
---------
Sections 4(b) and 4(c) hereof shall be extended by the number of days during the
- ------------- ----
period from and including the date of the giving of such notice pursuant to
Section 4(c)(6) hereof to the date when the Investors shall receive copies of
- ---------------
the supplemented or amended prospectus contemplated by Section 4(j) hereof or
------------
the Advice.
5. Registration Expenses. All expenses incident to the Company's
---------------------
performance of or compliance with this Agreement, including without limitation:
all registration and filing fees; fees with respect to filings required to be
made with the NASD; fees and expenses of compliance with securities or blue sky
laws (including reasonable fees and disbursements of counsel for the
underwriters or the Investors in connection with blue sky qualifications of the
Registrable Securities and determination of their eligibility for investment
under the laws of such jurisdictions as the managing underwriters and the
Investors may designate, but no other expenses of counsel for the underwriters);
printing expenses, messenger, telephone and delivery expenses; fees and
disbursements of counsel for the Company and fees and expenses for independent
certified public accountants retained by the Company (including the expenses of
any
13
<PAGE>
comfort letters or costs associated with the delivery by independent
certified public accountants of a comfort letter or comfort letters requested
pursuant to Section 4(l) hereof); securities acts liability insurance, if the
------------
Company so desires; all internal expenses of the Company (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties); the expense of any annual audit; the fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed; and the fees and expenses of any Person, including
special experts, retained by the Company (all such expenses being herein called
"Registration Expenses") will be borne by the Company regardless of whether the
Registration Statement becomes effective. The Company shall not have any
obligation to pay any underwriting fees, discounts or commissions attributable
to the sale of Registrable Securities, or any legal fees and expenses of counsel
to the Investors in excess of $20,000, except as expressly provided in this
Agreement or the Purchase Agreement.
6. Indemnification; Contribution.
------------------------------
(a) Indemnification by Company. The Company agrees to indemnify and
--------------------------
hold harmless each Investor and each Pecuniary Owner and their respective
partners, officers, directors, employees and agents, and each Person who
controls any such Persons (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) against all losses claims, damages,
liabilities and expenses arising out of or based upon any violation of the
Securities Act, the Exchange Act or any untrue or alleged untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by or on behalf of any Investor
or any Pecuniary Owner, as the case may be, expressly for use therein. The
Company will also indemnify underwriters participating in the distribution and
each Person who controls such Persons (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) to the same extent as provided
above with respect to the indemnification of each Investor and each Pecuniary
Owner, if requested.
(b) Indemnification By Holder of Registrable Securities. Each
---------------------------------------------------
Investor and each Pecuniary Owner, severally and not jointly, agrees to
indemnify and hold harmless the Company and its directors, officers, employees
and agents, each underwriter participating in the distribution and each Person
who controls the Company or any such underwriter (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or preliminary prospectus or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, to the extent, but only to the extent,
that such untrue statement or omission is contained in any information or
affidavit so furnished in writing by such Investor, for itself or as agent for
and on behalf of any Pecuniary Owner, to the Company specifically for inclusion
in such Registration Statement or Prospectus.
14
<PAGE>
In no event shall the liability of any Investor or any Pecuniary Owner under
this Section 6 be greater in amount than the dollar amount of the proceeds
---------
received by such Person upon the sale of the Registrable Securities sold by such
Person giving rise to such indemnification obligation. The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above with respect to information
so furnished in writing by such Persons specifically for inclusion in any
Prospectus or Registration Statement.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any Person
-------- -------
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such Person unless (a) the
indemnifying party has agreed to pay such fees or expenses, (b) the indemnifying
party shall have failed to assume the defense of such claim and employ counsel
reasonably satisfactory to such Person or (c) based upon written advice of
counsel to such Person, there shall be one or more defenses available to such
Person that are not available to the indemnifying party or there shall exist
actual or potential conflicts of interest pursuant to applicable rules of
professional conduct between such Person and the indemnifying party (in which
case, if the Person notifies the indemnifying party in writing that such Person
elects to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such claim
on behalf of such Person), in each of which events the fees and expenses of such
counsel shall be at the expense of the indemnifying party, provided, however,
that if the Company is the indemnifying party, the Company shall not be
obligated to bear the expense of more than one separate counsel. The
indemnifying party will not be subject to any liability for any settlement made
without its consent (but such consent will not be unreasonably withheld), but if
settled with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, the indemnifying party shall
indemnify and hold harmless the indemnified parties from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment.
No indemnified party will be required to consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
(d) Contribution. If for any reason the indemnification provided for in
------------
the preceding clauses (a) and (b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by the preceding clauses (a)
and (b), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable
15
<PAGE>
considerations, provided, that no Investor and no Pecuniary Owner shall be
--------
required to contribute an amount greater than the dollar amount of the proceeds
received by such Person with respect to the sale of the Registrable Securities
sold by such Person giving rise to such indemnification obligation. The relative
fault of the Company on the one hand and of each Investor and each Pecuniary
Owner on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
10(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentations.
7. Rule 144 and Rule 144A. The Company hereby agrees that, from and after
----------------------
the date on which it becomes subject to the reporting requirements of the
Exchange Act, it will file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
SEC thereunder (or, if the Company is not required to file such reports, it
will, upon the request of any of the Investors, make publicly available other
information so long as necessary to permit sales pursuant to Rule 144 and Rule
144A under the Securities Act), and it will take such further action as the
Investors may reasonably request, all to the extent required from time to time
to enable the Investors to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, (b) Rule 144A under the Securities Act, as such Rule may be amended from
time to time, or (c) any similar rule or regulation hereafter adopted by the
SEC. Upon the request of an Investor, the Company will deliver to each such
Investor a written statement as to whether it has complied with such information
and requirements.
8. Participation in Underwritten Registrations.
-------------------------------------------
(a) If any of the Registrable Securities covered by the Shelf
Registration or a Demand Registration are to be sold in an Underwritten
Offering (excluding under Section 2(d)), the investment banker or investment
------------
bankers and manager or managers that will administer the offering will be
selected by Investors holding in the aggregate in excess of 50% of the
Registrable Securities covered thereby; provided that such investment bankers
--------
and managers must be reasonably satisfactory to the Company.
(b) No Person may participate in any Underwritten Offering hereunder unless
such Person (i) agrees to sell such Person's securities on the basis provided in
any underwriting arrangements approved by the Persons entitled hereunder to
approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements, unless such Person
is prohibited by applicable law from executing such documents. Nothing in this
Section 8 shall be construed to create any additional rights regarding the
- ---------
registration of Registrable Securities in any Person otherwise than as set forth
herein.
16
<PAGE>
9. Miscellaneous.
-------------
(a) Remedies. Each party hereto, in addition to being entitled to exercise
--------
all rights provided herein or granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement to
the extent available under applicable law. Each party hereto agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate.
(b) Third Party Registration Rights. The Company will not on or after the
-------------------------------
date of this Agreement enter into any agreement granting registration rights to
any other Person with respect to the securities of the Company that are senior
to the rights granted to the Investors hereunder without the written consent of
the Investors. Except as disclosed on Exhibit A attached hereto, the Company
---------
has not previously entered into any agreement with respect to its securities
granting any registration rights to any Person.
(c) Agent Investors.
---------------
(i) The Company acknowledges and agrees that each of the Pecuniary
Owners has initially appointed certain of the Agent Investors to act as its
agent and on its behalf in connection with the matters contemplated by this
Agreement. Until such time as the Company shall have received a written notice
from any Pecuniary Owner or any Agent Investor that such Agent Investor is no
longer acting as such Pecuniary Owner's agent hereunder, the Company shall be
entitled to rely on any instructions and notices received from the Agent
Investors on behalf of the Pecuniary Owner as if received from such Pecuniary
Owner directly. The parties hereto further acknowledge and agree that the Agent
Investors shall act solely as agent for and on behalf of the Pecuniary Owners in
connection with the matters set forth in this Agreement and that no Agent
Investor is acting in its individual capacity in connection with this Agreement
or the transactions contemplated hereby.
(ii) In the event that any Pecuniary Owner shall at any time
subsequent to the date hereof appoint a successor agent to any Agent Investor in
connection with the matters set forth in this Agreement, such successor or
Pecuniary Owner shall be entitled to, and to exercise on behalf of such
Pecuniary Owner, all of the rights and remedies provided for herein with respect
to such Investor or such Pecuniary Owner, as the case may be, and the rights and
remedies of such Pecuniary Owner hereunder shall not in any way be modified,
limited, delayed or impaired as a consequence of such appointment.
(iii) The provisions of Sections 5, 6 and this Section 9(c) shall
------------- ------------
remain in full force and effect with respect to each Agent Investor
notwithstanding any termination of any Agent Investor's appointment as agent for
and on behalf of any or all of the Pecuniary Owners hereunder.
17
<PAGE>
(iv) Reference herein to the Agent Investors "holding" Registrable
Securities shall mean holding such securities as agent for and on behalf of the
Pecuniary Owners.
(d) Amendments and Waivers. The provisions of this Agreement, including
----------------------
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given without the written consent of the Company and the Investors holding not
less than one hundred percent (100%) of the Registrable Shares then outstanding;
provided, that the provisions of Sections 5, 6, and 9(c) may not, under any
- -------- ------------- ----
circumstances and notwithstanding any termination of any Agent Investor's
appointment as agent for and on behalf of any or all of its Pecuniary Owners
hereunder, be amended, modified, supplemented or waived without the written
consent of each Investor.
(e) Notices. The notice provisions contained in Section 8.6 of the Purchase
------- -----------
Agreement shall be incorporated herein and shall be governing under this
Agreement.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
holders of Registrable Securities who are permitted transferees of the
Registrable Securities under the Purchase Agreement, provided further, that the
Company cannot assign its rights hereunder except pursuant to a merger.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE
-------------
PARTIES HERETO, SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO
ITS PRINCIPLES OF CONFLICTS OF LAWS.
(j) Severability. If any provision of this Agreement is held to be
------------
illegal, invalid or unenforceable under any current or future law, and if the
rights or obligations of the parties under this Agreement would not be
materially and adversely affected thereby, such provision shall be fully
separable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
and the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added simultaneously as a part of this
18
<PAGE>
Agreement, a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the parties
hereto request the court or any arbitrator to whom disputes relating to this
Agreement are submitted to reform the otherwise illegal, invalid or
unenforceable provision in accordance with this Section 9(j).
------------
(k) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(l) Survival. This Agreement and the rights and obligations of the parties
---------
hereunder shall survive only so long as there continue to exist Registrable
Securities hereunder; provided that the rights and obligations contained in
Sections 6 and 7 shall continue forever.
- ----------------
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first written above.
"COMPANY" AMERICAN OFFICE PARK PROPERTIES, INC.
By: /s/ RONALD L. HAVNER, JR.
--------------------------------
Name: Ronald L. Havner, Jr.
Title: President
PUBLIC STORAGE, INC., as to the obligations set forth
in Section 2(e) hereof
By: /s/ DAVID GOLDBERG
--------------------------------
Name: David Goldberg
Title: Senior Vice President
(Signatures continue on next page)
20
<PAGE>
"AGENT INVESTORS" ABKB/LA SALLE SECURITIES LIMITED
PARTNERSHIP
By: /s/ STANLEY J. KRASKA, JR.
----------------------------------
Name: Stanley J. Kraska, Jr.
Title: Managing Director
COHEN & STEERS CAPITAL MANAGEMENT, INC.
By: /s/ MARTIN COHEN
----------------------------------
Name: Martin Cohen
Title: President
MORGAN STANLEY ASSET MANAGEMENT
By: /s/ THEODORE R. BIGMAN
----------------------------------
Name: Theodore R. Bigman
Title: Principal
"DIRECT INVESTORS" HARVARD PRIVATE CAPITAL REALTY, INC.
By: ABKB/LaSalle Securities Limited
Partnership, as Agent
By: /s/ STANLEY J. KRASKA, JR.
----------------------------------
Name: Stanley J. Kraska, Jr.
Title: Managing Director
THE BOARD OF TRUSTEES OF THE LELAND
STANFORD JUNIOR UNIVERSITY
By: /s/ LARRY S. OWEN
----------------------------------
Name: Larry S. Owen
Title: Director of Real Estate Investments
(Signatures continue on next page)
21
<PAGE>
STATE OF MICHIGAN RETIREMENT SYSTEMS
By: /s/ PHILLIP L. VAN SYCKLE
---------------------------------------
Name: Phillip L. Van Syckle
Title: Administrator
"FIDELITY ENTITIES" THE FIDELITY REIT COLLECTIVE POOL
By: Fidelity Management Trust Company,
as Trustee of the Fidelity Group Trust
for Employee Benefits Plans
By: /s/ BARRY A. GREENFIELD
-----------------------------------
Name: Barry A. Greenfield
Title: Senior Vice President
STATE EMPLOYEES' RETIREMENT FUND
OF THE STATE OF DELAWARE
By: Fidelity Management Trust Company,
as Investment Manager and Not Individually
By: /s/ BARRY A. GREENFIELD
-----------------------------------
Name: Barry A. Greenfield
Title: Senior Vice President
J.W. MCCONNELL FAMILY FOUNDATION
By: Fidelity Management Trust Company,
as Investment Manager and Not Individually
By: /s/ BARRY A. GREENFIELD
-----------------------------------
Name: Barry A. Greenfield
Title: Senior Vice President
(Signatures continue on following page)
22
<PAGE>
FIDELITY REAL ESTATE INVESTMENT
PORTFOLIO
By: /s/ BARRY A. GREENFIELD
------------------------
Name: Barry A. Greenfield
Title: Senior Vice President
Representative Capacity.
- -----------------------
Fidelity Real Estate Investment Portfolio (the "Fund") hereby gives notice
to the parties to this Agreement (the "Parties") that the Fund is a portfolio of
the Fidelity Devonshire Trust (the "Trust"), which is a Massachusetts business
trust, and that a copy of the Trust's Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts. Each of the Parties hereto
acknowledges and agrees that this Agreement is not executed on behalf of the
trustees of the Trust as individuals, and the obligations of the Fund under this
Agreement are not binding upon any of the trustees, officers or shareholders of
the Trust individually or upon any portfolio or assets of the Trust except the
assets and property of the Fund.
23
<PAGE>
EXHIBIT A
TO
REGISTRATION RIGHTS AGREEMENT
Registration Rights Granted
---------------------------
24
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 (No. 333- ) and the related Proxy
Statement and Prospectus of Public Storage Properties XI, Inc. and to the use of
our report dated February 18, 1997 with respect to the financial statements and
schedules of Public Storage Properties XI, Inc., to the use of our report dated
December 19, 1997 with respect to the consolidated financial statements of
American Office Park Properties, Inc., to the use of our report dated August 19,
1997 on the combined statements of revenues and certain operating expenses of
the Acquired Properties, to the use of our report dated August 19, 1997 on the
combined statements of revenues and certain operating expenses of the PSI
Exchange Properties, to the use of our report dated October 9, 1997 on the
statement of revenues and certain operating expenses of the Largo Property, to
the use of our report dated November 10, 1997 on the statement of revenues and
certain operating expenses of the Gunston Property, to the use of our report
dated December 19, 1997 on the combined statement of revenues and certain
operating expenses of the Proposed Acquisition Properties, to the use of our
report dated January 28, 1998 on the statement of revenues and certain
operating expenses of the Northpointe Property, and to the use of our report
dated January 28, 1998 on the statement of revenues and certain operating
expenses of the Ammendale Property, all included in the Registration Statement
and related Proxy Statement and Prospectus.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 2, 1998
<PAGE>
Exhibit 23.2
CONSENT OF COOPERS & LYBRAND L.L.P.
We consent to the inclusion in this Registration Statement on Form S-4
(File No. 333- ) of our report, dated February 26, 1997, except as to the
information presented in the first paragraph of Note 1, for which the date is
October 3, 1997, on our audit of the Statement of Revenues and Certain Operating
Expenses of the Baldon Properties for the year ended December 31, 1996. We also
consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Philadelphia, PA
February 2, 1998
<PAGE>
Exhibit 23.3
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 (No. 333- ) and the related Proxy
Statement and Prospectus of Public Storage Properties XI, Inc. and to the use of
our report dated February 14, 1997 with respect to the combined statement of
revenues and certain operating expenses of the Acquiport Properties included in
the Registration Statement and related Proxy Statement and Prospectus.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 2, 1998
<PAGE>
Exhibit 23.6
CONSENT OF THE NICHOLSON GROUP, LTD.
We hereby consent to the references to our firm under "Proposal One - The
Merger - Real Estate Portfolio Appraisal by TNG" in the Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
/s/ THE NICHOLSON GROUP, LTD.
February 2, 1998
Hartland, Wisconsin
<PAGE>
Exhibit 23.7
CONSENT OF CHARLES R. WILSON & ASSOCIATES, INC.
We hereby consent to the references to our firm under "Proposal One - The
Merger - Real Estate Portfolio Appraisal by Wilson" in the Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
/s/ CHARLES R. WILSON & ASSOCIATES, INC.
February 2, 1998
Pasadena, California
<PAGE>
Exhibit 23.8
CONSENT OF JEFFERIES & COMPANY, INC.
We hereby consent to the references to our firm under "Proposal One - The
Merger - Fairness Opinion from Jefferies" in the Proxy Statement and Prospectus
which is a part of this Registration Statement and to the other references to
our firm therein.
/s/ JEFFERIES & COMPANY, INC.
February 2, 1998
Los Angeles, California
<PAGE>
Exhibit 99.1
PUBLIC STORAGE PROPERTIES XI, INC.
701 Western Avenue
Glendale, California 91201-2397
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints B. Wayne Hughes and Harvey Lenkin, or
either of them, with power of substitution, as Proxies, to appear and vote, as
designated below, all the shares of Common Stock Series A of Public Storage
Properties XI, Inc. ("PSP11") held of record by the undersigned on January 22,
1998, at the Annual Meeting of Shareholders to be held on __________, 1998, and
any adjournments thereof.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED.
IN THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED IN FAVOR OF ITEMS 1,
2, 3, 4, 5 AND 6 AND FOR THE ELECTION OF ALL NOMINEES LISTED IN ITEM 7. THE
APPROVAL OF THE MERGER IS A CONDITION TO THE ADOPTION OF EACH OF THE AMENDMENTS
AND THE 1997 STOCK OPTION AND INCENTIVE PLAN AND THE ELECTION OF THE NOMINEES
LISTED IN ITEM 7, THE APPROVAL OF THE MERGER AND THE AMENDMENT SET FORTH IN ITEM
5 ARE CONDITIONS TO THE ELECTION OF THE NOMINEES LISTED IN ITEM 7, AND THE
APPROVAL OF ALL OF THE AMENDMENTS AND THE 1997 STOCK OPTION AND INCENTIVE PLAN
AND THE ELECTION OF THE NOMINEES LISTED IN ITEM 7 ARE CONDITIONS TO APPROVAL OF
THE MERGER.
[X] Please mark votes as in this example.
1. PROPOSED MERGER. To consider and vote upon an Agreement and Plan of
Reorganization among PSP11, American Office Park Properties, Inc. ("AOPP")
and Public Storage, Inc. described in the accompanying Proxy Statement and
Prospectus.
[_] FOR [_] AGAINST [_] ABSTAIN
2. PROPOSED AMENDMENT TO ARTICLES OF INCORPORATION - INCREASED CAPITALIZATION.
To consider and vote upon an amendment to Article III of PSP11's articles of
incorporation in the form of Appendix E-1 to the accompanying Proxy
Statement and Prospectus to authorize additional shares of common stock and
new preferred stock and equity stock (and eliminate references to the PSP11
common stock series B and C and reclassify the PSP11 common stock series A
as common stock).
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSED AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS - INFINITE LIFE
ENTITY. To consider and vote upon (i) amendments to PSP11's articles of
incorporation to (a) eliminate the fixed term of PSP11 and (b) eliminate the
provision allowing officers and directors of PSP11 to compete with PSP11 for
investment opportunities and (ii) amendments to PSP11's bylaws to (a)
eliminate the requirement for shareholder approval for disposition of assets
or issuance of securities, except as required by California law, (b) allow
transactions with affiliates if approved by the independent directors upon
receipt of independent appraisals or fairness opinions, (c) modify the
proposal for disposition of PSP11's assets if the Merger is approved, (d)
eliminate the restrictions on PSP11's investment objectives, (e) eliminate
provisions that are inapplicable upon conversion of the PSP11 common stock
series B and C into PSP11 common stock series A and (f) delete or modify
certain definitions.
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
4. PROPOSED AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS - OWNERSHIP
LIMITATION. To consider and vote upon (i) an amendment adding Article IV to
PSP11's articles of incorporation in the form included in Appendix E-3 to
the accompanying Proxy Statement and Prospectus to create certain ownership
limitations with respect to all classes of PSP11's capital stock and (ii)
amendments to PSP11's bylaws to eliminate the ownership limitation contained
in the bylaws.
[_] FOR [_] AGAINST [_] ABSTAIN
5. PROPOSED AMENDMENT TO BYLAWS - INCREASE IN NUMBER OF AUTHORIZED DIRECTORS.
To consider and vote upon an amendment to PSP11's bylaws in the form
included in Appendix E-4 to the accompanying Proxy Statement and Prospectus
to change the authorized number of directors from a range of three to five
to a range of five to nine, with the exact number of directors to be
initially fixed at seven.
[_] FOR [_] AGAINST [_] ABSTAIN
6. PROPOSED ADOPTION OF 1997 STOCK OPTION AND INCENTIVE PLAN. To consider and
vote upon a proposal to assume and adopt the AOPP 1997 Stock Option and
Incentive Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
7. ELECTION OF DIRECTORS
Nominees: Ronald L. Havner, Jr., Harvey Lenkin, Vern O. Curtis, Jack D.
Steele, James H. Kropp, Arthur M. Friedman and Alan K. Pribble
[_] FOR ALL NOMINEES [_] WITHHELD FROM ALL NOMINEES
----------------------------------------------------------------------
For all nominees except as noted above
8. Other matters: In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement and Prospectus dated __________, 1998.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO
AMERICAN STOCK TRANSFER & TRUST COMPANY, 40 WALL STREET, 46TH FLOOR, NEW YORK,
NEW YORK 10005.
Dated: ____________________, 1998
_____________________________________
Signature
_____________________________________
Signature if held jointly
Please sign exactly as your name
appears. Joint owners should each sign.
Trustees and others acting in a
representative capacity should indicate
the capacity in which they sign.
<PAGE>
Exhibit 99.2
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XI, INC.
Please read and follow carefully the instructions set forth below, which
set forth the requirements that need to be complied with in order to make an
effective election. Nominees, trustees or other persons who hold shares of
Public Storage Properties XI, Inc. ("PSP11") Common Stock Series A, par value
$.01 per share ("PSP11 Common Stock"), in a representative capacity are directed
to Instruction F(4).
TO BE EFFECTIVE, THIS CASH ELECTION FORM, PROPERLY COMPLETED AND SIGNED
IN ACCORDANCE WITH THE ACCOMPANYING INSTRUCTIONS, TOGETHER WITH CERTIFICATES FOR
THE PSP11 COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E
BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY AMERICAN STOCK
TRANSFER & TRUST COMPANY (THE "DEPOSITARY") NAMED BELOW, AT THE APPROPRIATE
ADDRESS SET FORTH BELOW, NO LATER THAN THE ELECTION DEADLINE (AS DEFINED IN
INSTRUCTION A). DELIVERIES MADE TO ADDRESSES OTHER THAN THE ADDRESS FOR THE
DEPOSITARY SET FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES AND THE DEPOSITARY
WILL NOT BE RESPONSIBLE THEREFOR.
HOLDERS OF PSP11 COMMON STOCK WHO INTEND TO RETAIN PSP11 COMMON STOCK IN
THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
This Cash Election Form is to be executed and returned to the Depositary
at the following address:
<TABLE>
<CAPTION>
BY MAIL, HAND OR OVERNIGHT COURIER OR
FOR DUPLICATE COPIES OF MATERIAL FOR INFORMATION
<S> <C>
American Stock Transfer & Trust Company Shareholder Communications Corporation
Attn: Reorganization Department (800) 733-8481, extension 407
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
(718) 921-8200
</TABLE>
Delivery of this instrument to an address other than as set forth above
will not constitute a valid delivery. The accompanying instructions should be
read carefully before this Cash Election Form is completed.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
This Cash Election Form is being delivered in connection with the merger
(the "Merger") of American Office Park Properties, Inc. ("AOPP") with and into
PSP11, pursuant to the Amended and Restated Agreement and Plan of Reorganization
dated as of December 17, 1997, among PSP11, AOPP and Public Storage, Inc.
("PSI") (the "Merger Agreement").
The undersigned, subject to the Election and Allocation Procedures (as
defined below) and the other terms and conditions set forth in this Cash
Election Form, including the documents incorporated herein by reference, hereby
(a) surrenders the certificate(s) (the "Certificates") representing the shares
of PSP11 Common Stock listed in Box A (Certificate Information) and (b) elects
(an "Election"), as indicated below, upon consummation of the Merger to have
each of the shares of PSP11 Common Stock represented by the Certificates
converted into the right to receive $20.50 in cash, without interest (a "Cash
Election").
If the Depositary has not received your properly completed Cash Election
Form, accompanied by your stock Certificates, by the Election Deadline (as
defined in Instruction A) (unless Box E (Guaranty of Delivery) has been properly
completed and such Certificates are received by the Depositary by the Guaranteed
Delivery Deadline), you will retain your PSP11 Common Stock in the Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PSP11 Common Stock registered in the name of the undersigned and
either (i) beneficially owned by the undersigned, or (ii) owned by the
undersigned in a representative or fiduciary capacity for a particular
beneficial owner or for one or more beneficial owners, except as otherwise
permitted pursuant to Instruction F(4). A PSP11 Shareholder may not make a cash
election as to less than all of the shares of PSP11 Common Stock beneficially
owned by such shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Proxy Statement and Prospectus, dated _______________,
1998 (the "Proxy Statement and Prospectus"), furnished to shareholders of PSP11,
in connection with the Merger, all of which are incorporated herein by
reference. Receipt of the Proxy Statement and Prospectus, including the Merger
Agreement attached as Appendix A thereto, is hereby acknowledged. Copies of the
Proxy Statement and Prospectus are available from the Depositary upon request
(see Instruction G(10)).
It is understood that because pursuant to the Merger Agreement the number
of shares of PSP11 Common Stock to be converted into the right to receive cash
in the Merger are subject to limitations, no assurance can be given that an
Election by any given shareholder, including this Election by the undersigned,
can be accommodated. Rather, the Election by each holder of PSP11 Common Stock,
including this Election by the undersigned, will be subject to the results of
the election and allocation procedures set forth in the Merger Agreement and
described in the Proxy Statement and Prospectus (the "Election and Allocation
Procedures").
1
<PAGE>
INSTRUCTIONS
The Execution Section of this Cash Election Form should be properly
filled in, dated and signed, torn off and delivered, together with all stock
Certificates representing PSP11 Common Stock currently held by you (unless
delivery is guaranteed in Box E in accordance with Instruction A), to the
Depositary at the appropriate address set forth on the front of this Cash
Election Form. Please read and follow carefully the instructions regarding
completion of this Cash Election Form set forth below. If you have any
questions concerning this Cash Election Form or require any information or
assistance, see Instruction G(1).
HOLDERS OF PSP11 COMMON STOCK WHO INTEND TO RETAIN PSP11 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 Depositary must receive a
properly completed Cash Election Form, accompanied by all stock Certificates
representing PSP11 Common Stock currently held by you, NO LATER THAN 5:00 P.M.,
NEW YORK CITY TIME, ON THE LAST BUSINESS DAY BEFORE THE DAY OF THE MEETING OF
SHAREHOLDERS OF PSP11 (the "Election Deadline"). If all other conditions set
forth in the Merger Agreement have been met or, if permissible, waived, the
effective time of the Merger (the "Effective Time") could occur on the same day
approval of the Merger by shareholders of PSP11 is obtained. THUS, SHAREHOLDERS
ARE URGED TO DELIVER A PROPERLY COMPLETED CASH ELECTION FORM, ACCOMPANIED BY
STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY, AS DESCRIBED BELOW), NO
LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON _______________, 1998, IN ORDER TO
ASSURE THAT THEIR CASH ELECTION FORM WILL BE RECEIVED BY THE ELECTION DEADLINE.
As soon as the date on which the effective time of the Merger is anticipated to
occur is determined, PSP11 will publicly announce such date, although no
assurance can be given that the Effective Time will occur on such date. Persons
whose stock Certificates are not immediately available may also make an Election
by completing this Cash Election Form and having Box E (Guaranty of Delivery)
properly completed and duly executed by a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (subject to the condition that the Certificates, the delivery of
which is thereby guaranteed, are in fact delivered to the Depositary no later
than 5:00 p.m., New York City Time, on the third business day after the Election
Deadline (the "Guaranteed Delivery Deadline")).
IF THE DEPOSITARY HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH ELECTION
FORM, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE ELECTION DEADLINE (UNLESS
BOX E (GUARANTY OF DELIVERY) HAS BEEN PROPERLY COMPLETED AND SUCH CERTIFICATES
ARE RECEIVED BY THE DEPOSITARY BY THE GUARANTEED DELIVERY DEADLINE), YOU WILL
RETAIN PSP11 COMMON STOCK IN THE MERGER.
For instructions regarding changes or revocations of Elections and the
time in which such changes or revocations can be made, see Instructions F(1) and
F(2) below.
B. ELECTIONS
This Cash Election Form provides for your Election, subject to the
Election and Allocation Procedures and the other terms and conditions set forth
hereunder and in the documents incorporated herein by reference, upon
consummation of the Merger to have each of the shares of PSP11 Common Stock
covered by this Cash Election Form converted into the right to receive $20.50 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 Proxy
Statement and Prospectus. The Merger Agreement is included as Appendix A to the
Proxy Statement and Prospectus. Copies of the Proxy Statement and Prospectus
may be requested from the Depositary at the address and telephone numbers set
forth on the first page of this Cash Election Form (see Instruction G(10)). The
delivery of this Cash Election Form to the Depositary constitutes
acknowledgement of the receipt of the Proxy Statement and Prospectus. EACH
HOLDER OF PSP11 COMMON STOCK IS STRONGLY ENCOURAGED TO READ THE PROXY STATEMENT
AND PROSPECTUS IN ITS ENTIRETY AND TO DISCUSS THE CONTENTS THEREOF, THE MERGER
AND THIS CASH ELECTION FORM WITH HIS OR HER PERSONAL FINANCIAL AND TAX ADVISORS
PRIOR TO DECIDING WHETHER TO ELECT CASH. THE TAX CONSEQUENCES TO A HOLDER OF
PSP11 COMMON STOCK WILL VARY DEPENDING UPON A NUMBER OF FACTORS. FOR CERTAIN
INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF AN ELECTION, SEE
"FEDERAL INCOME TAX CONSIDERATIONS -- THE MERGER" IN THE PROXY STATEMENT AND
PROSPECTUS.
C. CASH ELECTION
By completing and submitting the Cash Election Form, you are electing,
subject to the Election and Allocation Procedures and the other terms and
conditions set forth in this Cash Election Form, including the documents
incorporated herein by reference, to receive cash for all of the shares of PSP11
Common Stock covered by this Cash Election Form.
D. RETENTION OF PSP11 COMMON STOCK
HOLDERS OF PSP11 COMMON STOCK WHO INTEND TO RETAIN PSP11 COMMON STOCK IN
THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM.
E. FAILURE TO MAKE EFFECTIVE CASH ELECTION
If you have failed to make an effective Cash Election, or if your
Election is deemed by the Depositary or PSP11 to be defective in any way, or if
your Cash Election Form is not accompanied by your Certificates (unless Box E
(Guaranty of Delivery) has been properly completed and such Certificates are
received by the Depositary by the Guaranteed Delivery Deadline), you will retain
PSP11 Common Stock in the Merger.
F. SPECIAL CONDITIONS
(1) REVOCATION OF ELECTION. An election may be revoked by the person or
persons making such election by a written notice signed and dated by such person
or persons and received by the Depositary prior to the Election Deadline,
identifying the name of the registered holder of the PSP11 Common Stock subject
to such Election and the serial numbers shown on the Certificates representing
such PSP11 Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written notice to the Depositary, request
the return of the stock Certificates submitted to the Depositary and such
Certificates will be returned to such person or persons (at the shareholder's
risk) within five business days of receipt of such request.
2
<PAGE>
(2) NULLIFICATION OF ELECTION. All Cash Election Forms will be void and of
no effect if the Merger is not consummated, and Certificates submitted therewith
shall be promptly returned to the persons submitting the same.
(3) ELECTIONS SUBJECT TO ALLOCATION. All Elections are subject to the
Election and Allocation Procedures set forth in the Merger Agreement and
described in the Proxy Statement and Prospectus under the captions "Proposal One
- -- The Merger -- General" and " -- Cash Election Procedure" and to the other
terms and conditions set forth thereunder and hereunder, including the documents
incorporated herein by reference.
(4) SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of
record of shares of PSP11 Common Stock who hold such shares as nominees,
trustees or in other representative or fiduciary capacities (a "Representative")
may submit one or more Cash Election Forms covering the aggregate number of
shares of PSP11 Common Stock held by such Representative for the beneficial
owners for whom the Representative is making an Election, provided, that such
Representative certifies that each such Cash Election Form covers all the shares
of PSP11 Common Stock held by such Representative for a particular beneficial
owner. Any Representative who makes an Election or a Non-Election may be
required to provide the Depositary with such documents and/or additional
certifications, if requested, in order to satisfy the Depositary that such
Representative holds such shares of PSP11 Common Stock for a particular
beneficial owner of such shares. If any shares held by a Representative are not
covered by an effective Cash Election Form, such shares will be retained by such
Representative in the Merger.
G. GENERAL
(1) EXECUTION AND DELIVERY. In order to make an effective Election, you must
correctly fill in the Execution Section of this Cash Election Form. After
dating and signing it, you are responsible for its delivery, accompanied by all
stock Certificates representing PSP11 Common Stock currently held by you or a
proper Guaranty of Delivery of such stock Certificates pursuant to Instruction
A, to the Depositary at the address set forth on the front of this Cash Election
Form by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS CASH
ELECTION FORM; HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF YOU CHOOSE TO
USE THE MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT
REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES. DELIVERY OF
STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH RESPECT TO
SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY RECEIVED
BY THE DEPOSITARY.
(2) SIGNATURES. Except as otherwise permitted below, you must sign this Cash
Election Form exactly the way your name appears on the face of your
Certificates. If the shares are owned by two or more persons, each must sign
exactly as his or her name appears on the face of the Certificates. If shares
of PSP11 Common Stock have been assigned by the registered owner, this Cash
Election Form should be signed in exactly the same way as the name of the
assignee appearing on the Certificates or transfer documents. See Instructions
G(5)(a) and G(5)(b).
(3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. None of PSP11, AOPP, PSI or
the Depositary will be under any obligation to notify you or anyone else that
the Depositary has not received a properly completed Cash Election Form or that
any Cash Election Form submitted is defective in any way.
Any and all disputes with respect to Cash Election Forms or to Elections
made in respect of PSP11 Common Stock (including but not limited to matters
relating to the Election Deadline, time limits, defects or irregularities in the
surrender of any stock Certificate, effectiveness of any Elections and
computations of allocations) will be resolved by PSP11 and its decision will be
conclusive and binding on all concerned. PSP11 may delegate this function to
the Depositary in whole or in part. PSP11 or the Depositary shall have the
absolute right in its sole discretion to reject any and all Cash Election Forms
and surrenders of stock Certificates which are deemed by either of them to be
not in proper form or to waive any immaterial irregularities in any Cash
Election Form or in the surrender of any stock Certificate. Surrenders of stock
Certificates will not be deemed to have been made until all defects or
irregularities that have not been waived have been cured.
(4) ISSUANCE OF PAYMENT CHECK(S). If the Payment Check(s) are to be issued
in the name of the registered holder(s) as inscribed on the surrendered
Certificate(s), no guarantee of the signature on the Cash Election Form is
required. For corrections in name and change in name not involving changes in
ownership, see Instruction G(5)(c).
(5) ISSUANCE OF PAYMENT CHECK(S) IN DIFFERENT NAMES. If the Payment Check(s)
are to be issued in the name of someone other than the registered holder(s) of
the surrendered Certificate(s), you must follow the guidelines below. Note that
in each circumstance listed below, shareholder(s) must have signature(s)
guaranteed in Box C and complete Box F.
(a) ENDORSEMENT AND GUARANTEE. The Certificate(s) surrendered must be
properly endorsed (or accompanied by appropriate stock powers properly
executed) by the registered holder(s) of such Certificate(s) to the person
who is to receive the Payment Check(s). The signature(s) of the registered
holder(s) on the endorsement or stock powers must correspond with the name(s)
written upon the face of the Certificate(s) in every particular and must be
medallion guaranteed by an eligible guarantor institution as defined below.
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally an eligible guarantor institution, as defined in Rule 17Ad-15
of the regulations of the Securities and Exchange Commission, means:
(i) Banks (as that term is defined in Section 3(a) of the Federal
Deposit Insurance Act);
(ii) Brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, and government
securities brokers, as those terms are defined under the Securities
Exchange Act of 1934;
(iii) Credit unions (as that term is defined in Section 19(b)(1)(A) of
the Federal Reserve Act);
(iv) National securities exchanges, registered securities associations,
clearing agencies, as those terms are used under the Securities Exchange
Act of 1934; and
(v) Savings associations (as that term is defined in Section 3(b) of
the Federal Deposit Insurance Act).
(b) TRANSFEREE'S SIGNATURE. The Cash Election Form must be signed by the
transferee or assignee or his or her agent, and should not be signed by the
transferor or assignor. See Box B (Sign Here). The signature of such
transferee or assignee must be medallion guaranteed by an eligible guarantor
institution as provided in Instruction G(5)(a).
3
<PAGE>
(c) CORRECTION OF OR CHANGE IN NAME. For a correction of name or for a
change in name which does not involve a change in ownership, proceed as
follows. For a change in name by marriage, etc., the Cash Election Form
should be signed, e.g., "Mary Doe, now by marriage Mary Jones." For a
correction in name, the Cash Election Form should be signed, e.g., "James E.
Brown, incorrectly inscribed as J.E. Brown." The signature in each case
should be guaranteed in the manner described in Instruction G(5)(a) above and
Box F should be completed.
You should consult your own tax advisor as to any possible tax
consequences resulting from the issuance of Payment Check(s) in a name
different from that of the registered holder(s) of the surrendered
Certificate(s).
(6) SUPPORTING EVIDENCE. In case any Cash Election Form, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or any person in any other fiduciary or
representative capacity, or by an officer of a corporation on behalf of the
corporation, there must be submitted (with the Cash Election Form, surrendered
Certificate(s), and/or stock powers) documentary evidence of appointment and
authority to act in such capacity (including court orders and corporate
resolutions when necessary), as well as evidence of the authority of the person
making such execution to assign, sell or transfer the Certificate(s). Such
documentary evidence of authority must be in form satisfactory to the
Depositary.
(7) SPECIAL MAILING INSTRUCTIONS. The Payment Check(s) will be mailed to the
address of the registered holder(s) as indicated in Box A (Certificate
Information), unless instructions to the contrary are given in Box G (Special
Mailing Instructions).
(8) LOST CERTIFICATES. If you are not able to locate your Certificate(s)
representing PSP11 Common Stock, you should contact American Stock Transfer &
Trust Company, PSP11's transfer agent, at (800) 937-5449 or (718) 921-8200. In
such event, the transfer agent will forward additional documentation which the
shareholder must complete in order to effectively surrender such lost or
destroyed Certificate(s). There will be a cost to replace lost Certificates.
(9) FEDERAL INCOME TAX WITHHOLDING. Under Federal income tax law, the
Depositary is required to file a report with the Internal Revenue Service
disclosing any payments of cash being made to each holder of Certificates
formerly representing shares of PSP11 Common Stock pursuant to the Merger
Agreement. In order to avoid backup withholding of Federal income tax on any
cash received upon the surrender of Certificate(s), a holder thereof must,
unless an exemption applies, provide the Depositary with his or her correct
taxpayer identification number ("TIN") on Substitute Form W-9, which is part of
this Cash Election Form (Box D), and certify, under penalties of perjury, that
such number is correct and that such holder is not otherwise subject to backup
withholding. If the correct TIN and certifications are not provided, a $50
penalty may be imposed by the Internal Revenue Service and payments made for
surrender of Certificate(s) may be subject to backup withholding of 31%. In
addition, if a holder makes a false statement that results in no imposition of
backup withholding, and there was no reasonable basis for making such a
statement, a $500 penalty may also be imposed by the Internal Revenue Service.
Backup withholding is not an additional Federal income tax. Rather, the
Federal income tax liability of a person subject to backup withholding will be
reduced by the amount of such tax withheld. If backup withholding results in an
overpayment of income taxes, a refund may be obtained from the Internal Revenue
Service.
The TIN that must be provided on the Substitute Form W-9 is that of the
registered holder(s) of the Certificate(s) at the effective time of the Merger.
The TIN for an individual is his or her social security number. The box in Part
II of the Substitute Form W-9 may be checked if the person surrendering the
Certificates has not been issued a TIN and has applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part II has been checked, the
person surrendering the Certificate(s) must also complete the Certificate of
Awaiting Taxpayer Identification Number below in order to avoid backup
withholding. Notwithstanding that the box in Part II is checked (and the
Certificate of Awaiting Taxpayer Identification Number is completed), the
Depositary will withhold 31% on all cash payments with respect to surrendered
Certificate(s) made prior to the time it is provided with a properly certified
TIN.
Exempt persons (including, among others, corporations) are not subject
to backup withholding. A foreign individual may qualify as an exempt person by
submitting Form W-8 or a substitute Form W-8, signed under penalties of perjury,
certifying to such person's exempt status. A form of such statement can be
obtained from the Depositary. A Certificate holder should consult his or her tax
advisor as to such holder's qualification for an exemption from backup
withholding and the procedure for obtaining such exemption.
The signature and date provided on the Substitute Form W-9 will serve to
certify that the TIN and withholding information provided in this Cash Election
Form are true, correct and complete.
(10) QUESTIONS AND REQUESTS FOR INFORMATION OR ASSISTANCE. If you have any
questions or need assistance to complete this Cash Election Form, please contact
Shareholder Communications Corporation at (800) 733-8481, extension 407
(individual holders), or (212) 805-7000 (banks and brokers). You may also
obtain additional copies of the Cash Election Form and the Proxy Statement and
Prospectus from the Depositary at the addresses and telephone numbers set forth
on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the Merger becomes effective, the
Depositary will make the allocations of cash to be received by holders of PSP11
Common Stock or their designees in accordance with the Election and Allocation
Procedures. The Depositary will thereafter issue and mail to you a check for any
cash to which you are entitled, provided you have delivered the required
Certificates for your PSP11 Common Stock in accordance with the terms and
conditions hereof, including the documents incorporated herein by reference.
If you do not submit an effective Cash Election Form, you will retain
your PSP11 Common Stock in the Merger.
DO NOT ENCLOSE YOUR PROXY CARD RELATING TO THE ANNUAL MEETING WITH THIS
CASH ELECTION FORM, YOUR PROXY CARD SHOULD BE RETURNED IN THE POSTAGE-PAID
ENVELOPE ENCLOSED WITH THE PROXY STATEMENT AND PROSPECTUS FOR THAT PURPOSE.
4
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XI, INC.
EXECUTION SECTION
BOX A
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<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.)
<S> <C> <C>
Number of Shares
Name and Address of Registered Holder(s) as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- ---------------------------------------------------------------------- ------------------ ----------------
__________________ ________________
__________________ ________________
__________________ ________________
__________________ ________________
Total Shares:
================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATE HOLDER(S) SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Cash Election Form and to
deliver for surrender and cancellation the above-described Certificate(s)
delivered herewith and that the rights represented by the Certificate(s) are
free and clear of all liens, restrictions, charges and encumbrances and are not
subject to any adverse claim. The undersigned will, upon request, execute any
additional documents necessary or desirable to complete the surrender of the
Certificate(s) surrendered herewith. All authority herein conferred shall
survive the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Delivery of the Certificate(s) for
surrender and cancellation may be revoked only in accordance with Instruction
F(2).
BOX B
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<CAPTION>
____________________________________________________________________________________________________________________________________
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this Cash Election Form.
<S> <C>
Signature(s): ___________________________________________________________________________________________________
___________________________________________________________________________________________________
Date: _______________________ Telephone Number: _______________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock Certificate(s) or by person(s) authorized to become
registered holders by documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer of a corporation or in any other fiduciary or representative capacity, please provide the following information. (See
Instruction G(6)).
Name(s): ___________________________________________________________________________________________________
___________________________________________________________________________________________________
Capacity (Full Title): ___________________________________________________________________________________________________
Address: ___________________________________________________________________________________________________
___________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
BOX C
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
SIGNATURE GUARANTEE
<S> <C>
To be completed only if required by Instruction G(5). Your signature must be MEDALLION GUARANTEED by an eligible financial
institution. Note: a notarization by a notary public is not acceptable.
FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW.
____________________________________________________________________________________________________________________________________
</TABLE>
E-1
<PAGE>
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK SERIES A OF
PUBLIC STORAGE PROPERTIES XI, INC.
EXECUTION SECTION (CONTINUED)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF
AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED.
<TABLE>
<CAPTION>
BOX D
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C>
PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SUBSTITUTE SIGNING AND DATING BELOW. _______________________________
_____________________________________________________________________________________________________
Form W-9 PART 2 - Check the box if you are not subject to backup withholding because (1) you have not been
notified that you are subject to backup withholding as a 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
Internal Revenue Service to backup withholding. [ ]
_____________________________________________________________________________________________________
Payer's Request for Taxpayer Certification - Under penalties of perjury, I certify that the PART 3 -
Identification Number (TIN) information provided on this form is true, correct and complete.
Awaiting TIN [ ]
_____________________
Signature: ________________________________ Date: __________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed
or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social
Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of any cash payment made to me will be withheld, but that such
amount will be refunded to me if I then provide a Taxpayer Identification Number within sixty (60) days.
<S> <C>
Signature: ________________________________________________________ Date: __________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
BOX E
____________________________________________________________________________________________________________________________________
GUARANTY OF DELIVERY
To be used only if Certificates are not surrendered herewith. (See instruction A.) The undersigned (check appropriate boxes below)
guarantees to deliver to the Depositary at the appropriate address set forth above the Certificates for shares of PSP11 Common Stock
submitted with this Cash Election Form no later than 5:00 p.m., New York City Time, on the third business day after the Election
Deadline (as defined in Instruction A).
<S> <C> <C>
[ ] A member of a registered national Firm: _____________________________________________________
securities exchange
Authorized Signature: _____________________________________________________
[ ] A member of the National Association Address: _____________________________________________________
of Securities Dealers, Inc. _____________________________________________________
[ ] A commercial bank or trust company Telephone Number: _____________________________________________________
in the United States
____________________________________________________________________________________________________________________________________
</TABLE>
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 PSP11
Common Stock surrendered will be issued in the same name(s) as the
Certificate(s) surrendered and will be mailed to the address of the registered
holder(s) indicated above, unless otherwise indicated in Box F or Box G below.
If Box F is completed, the signature of the undersigned must be guaranteed as
set forth in Instruction G(5).
BOX F
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
SPECIAL PAYMENT INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued in the name(s) of someone other than the registered holder(s) set
forth above. Signature must be guaranteed. (See Instruction G(5).)
<S> <C>
Name: ________________________________________________________________________________________________
Address: ________________________________________________________________________________________________
________________________________________________________________________________________________
Social Security Number or
Employer Identification Number: ________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
BOX G
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
SPECIAL MAILING INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued to the registered holder(s) and mailed to an address other than
that of the registered holder(s) set forth above. (See Instruction G(7).)
<S> <C>
Address: _______________________________________________________________________________________________________________
_______________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
<S> <C>
-- [Graphics for Execution Section Page E-1,
left margin.] [Graphics for Execution Section Page E-2,
right margin.] --
- --------------------------------------------------------------------------------
TEAR HERE AND RETURN EXECUTION SECTION TO THE DEPOSITARY
</TABLE>
