As filed with the Securities and Exchange Commission on July 11, 2002
Registration No. 333-89378
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2 to
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
_______________________
PUBLIC STORAGE, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-3551121 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial Classification
Code Number)
HARVEY LENKIN
701 Western Avenue Public Storage, Inc.
Glendale, California 91201-2397 701 Western Avenue
(818) 244-8080 Glendale, California 91201-2397
(Address, including zip code, and (818) 244-8080
telephone number, including area code, (Name, address, including zip code, and telephone
of registrant's principal executive offices) Number, including area code, of agent for service)
_______________________
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
_______________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
_______________________
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________________
CALCULATION OF REGISTRATION FEE
=============================================================================================================
Proposed Proposed
Amount Offering Maximum Maximum
Title Of Each Class Of Securities To Be Price Aggregate Amount Of
To Be Registered Registered Per Share Offering Price Registration Fee
-------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value per share 1,500,000 shares(1) (1) $11,825,780(1) $1,088(1)(2)
=============================================================================================================
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(1) This Registration Statement relates to the proposed acquisition by the
Registrant of all of the 55,302 units of limited partnership
interest ("Units") in PS Partners VI, Ltd., a California Limited
Partnership (the "Partnership") that are not currently owned by
the Registrant. The Registrant's acquisition of the 55,302 Units
will be accomplished through a merger of a subsidiary of the
Registrant into the Partnership and the conversion of the 55,302
Units into either cash or common stock of the Registrant. The
book value of the Units at December 31, 2001 was $213.84 per
Unit. The maximum number of shares of Registrant to be issued in
the merger is 1,500,000. The exact number of shares of common
stock of the Registrant to be issued in the merger cannot be
determined at this time.
(2) Calculated in accordance with rule 457(f)(2) under the Securities Act
of 1933. $1,088 of the registration fee was previously paid in
connection with the Partnership's preliminary information
statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
PS Partners VI, Ltd.,
a California Limited Partnership
701 Western Avenue
Glendale, California 91201-2349
___________, 2002
Dear Limited Partner:
We enclose an information statement, notice of action without a meeting
and prospectus and accompanying cash election form relating to the acquisition
by Public Storage of all of the units of limited partnership interest in the
Partnership not currently owned by Public Storage. Public Storage, a general
partner of the Partnership, indirectly owns 63% of the Partnership units. Public
Storage is acquiring the units through a merger in which each of your units will
be converted into the right to receive a value of $546 in Public Storage common
stock or, at your election, in cash.
Following the merger, the Partnership will remain in existence, and
Public Storage and B. Wayne Hughes will continue as general partners of the
Partnership.
The Partnership is not asking you to approve the merger or related
amendment to the partnership agreement. Public Storage, the holder of a majority
of the Partnership units, has executed a written consent approving the merger
and the related amendment to the partnership agreement.
We are not asking you for a proxy and you are requested not to send us
a proxy. If you want to receive cash in this transaction, you must make a cash
election by _________, 2002, as described in the accompanying cash election
form.
If you have any questions, please contact Public Storage's Investor
Services Department at (800) 421-2856 or (818) 244-8080.
Very truly yours,
PUBLIC STORAGE, INC.
General Partner
By: Harvey Lenkin
President
Public Storage, Inc.
PS Partners VI, Ltd.,
a California Limited Partnership
INFORMATION STATEMENT, NOTICE OF ACTION WITHOUT A MEETING AND PROSPECTUS
We are furnishing this information statement, notice of action without a
meeting and prospectus to limited partners of PS Partners VI, Ltd., a California
Limited Partnership (the "Partnership") in connection with the acquisition by
Public Storage, Inc. of all of the units of limited partnership interest not
currently owned by Public Storage. Public Storage, a general partner of the
Partnership, indirectly owns 63% of the Partnership units. Public Storage is
acquiring the units through a merger in which each unit not currently owned by
Public Storage will be converted into the right to receive a value of $546 in
Public Storage common stock or, at your election, in cash. Following the merger,
the Partnership will remain in existence, and Public Storage and B. Wayne Hughes
will continue as general partners of the Partnership.
See "Risk Factors" beginning on page __ for certain factors that you should
consider, including the following:
. Public Storage owns sufficient Partnership units to approve the merger
without your vote and has done so.
. Public Storage and the Partnership have not (1) negotiated the merger
at arm's length, (2) hired independent persons to negotiate the terms
of the merger for you or (3) asked any person to make an offer to buy
the Partnership's assets.
. The merger will be taxable for most of you. This means that original
taxable limited partners who receive either cash or stock will
recognize a substantial taxable gain.
. After the merger, if you do not elect cash you will own an investment
in an ongoing fully-integrated real estate company instead of an
interest in a specified portfolio of properties for a fixed period.
. If you receive Public Storage common stock, your level of
distributions may be lower after the merger than the amount you
received as a limited partner of the Partnership.
. The Partnership's assets might be worth more later. Public Storage
will realize the benefit of any increase in value.
. You will not be entitled to dissenters' rights of appraisal under
California law in the merger.
. Public Storage, which controls the Partnership, has significant
conflicts of interest in connection with, and will benefit from, the
merger. In the absence of these conflicts, the terms of the merger may
have been more favorable to you.
The Public Storage common stock is traded on the New York Stock Exchange
under the symbol "PSA." On _______, 2002, the closing price of the Public
Storage common stock on the NYSE was $____. There is no active market for the
Partnership units.
The Partnership is not asking you to approve the merger or related
amendment to the partnership agreement. Public Storage, the holder of a majority
of the Partnership units, has executed a written consent approving the merger
and the related amendment to the partnership agreement. We are mailing this
statement on or about ________, 2002 to limited partners of record at the close
of business on the date of this statement.
_____________________
We are not asking you for a proxy and you are requested not to send us a
proxy. If you want to receive cash in this transaction, you must make a cash
election by ________, 2002, as described in the accompanying cash election form.
Neither the Securities and Exchange Commission nor any state's securities
regulator has approved the common stock of Public Storage to be issued under
this Information Statement, Notice of Action Without a Meeting and Prospectus or
determined if this Information Statement, Notice of Action Without a Meeting and
Prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense. _______, 2002
TABLE OF CONTENTS
Page
----
Summary ..................................................................................................................... 1
Overview of Merger ..................................................................................................... 1
Summary Risk Factors ................................................................................................... 1
Vote by Public Storage ............................................................................................. 1
No Arm's Length Negotiation or Independent Representatives ......................................................... 1
No Solicitation of Other Offers ....................................................................................
The Merger is Taxable .............................................................................................. 1
Change from Finite Life to Infinite Life ........................................................................... 1
Possible Lower Level of Distributions After the Merger ............................................................. 2
Potential Loss of Future Appreciation .............................................................................. 2
No Dissenters' Rights of Appraisal ................................................................................. 2
Conflicts of Interest .............................................................................................. 2
Control and Influence over Public Storage by the Hughes Family and Public Storage
Ownership Limitations ............................................................................................ 2
Uncertainty Regarding Market Price of Public Storage Common Stock .................................................. 2
Tax Risks of Ownership of Public Storage Common Stock - Failure to Maintain REIT Status ............................ 2
Financing Risks .................................................................................................... 2
Possible Future Dilution ........................................................................................... 2
Merger Payments Based on Appraisal Instead of Arm's Length Negotiation ............................................. 3
Benefits to Insiders ................................................................................................... 3
Potential Benefits of the Merger ....................................................................................... 3
The Partnership ........................................................................................................ 3
Public Storage ......................................................................................................... 4
Address and Phone Number ............................................................................................... 4
Background and Reasons for the Merger .................................................................................. 4
Detriments of the Merger ............................................................................................... 5
Determination of Amounts to be Received by Limited Partners in the Merger .............................................. 5
Federal Income Tax Matters ............................................................................................. 5
Fairness Analysis; Opinion of Financial Advisor ........................................................................ 6
Conditions to Completion of the Merger .................................................................................
Amendment or Termination of the Merger Agreement .......................................................................
Cash Election Procedure ................................................................................................
Amendment to Partnership Agreement .....................................................................................
Comparison of Partnership Units with Public Storage Common Stock ....................................................... 8
Summary Financial Information .......................................................................................... 10
Relationships .......................................................................................................... 12
Risk Factors ................................................................................................................ 13
Public Storage has approved the merger without your vote ............................................................... 13
Public Storage and the Partnership have not hired anyone to represent you .............................................. 13
The merger agreement prohibits the Partnership from soliciting alternative offers
The merger is taxable to you ........................................................................................... 13
The merger will change your investment from finite life to infinite life if you receive stock .......................... 13
Your level of distributions may be lower after the merger if you receive stock ......................................... 13
You will not benefit from any increase in value of the properties ...................................................... 13
You have no dissenters' rights of appraisal ............................................................................ 13
Public Storage has conflicts of interest in the merger ................................................................. 13
The Partnership did not engage Stanger or other third party other than Wilson to perform an independent
appraisal of the Partnership's Properties or Units which appraiser may have concluded a higher valution
The Hughes family could control Public Storage ......................................................................... 14
Provisions in Public Storage's organizational documents may prevent changes in control ................................. 14
ii
Page
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The number of shares of Public Storage common stock to be issued in the merger has not been determined ............ 14
Public Storage would incur adverse tax consequences if it fails to qualify as a REIT .............................. 15
Public Storage would incur a corporate level tax if it sold certain assets ........................................ 15
Public Storage and its shareholders are subject to financing risks ................................................ 15
The merger payments are based on an appraisal instead of arm's length negotiation ................................. 15
Public Storage is subject to real estate operating risks .......................................................... 16
Public Storage has no interest in Canadian mini-warehouses ........................................................ 17
The portable self-storage business has incurred operating losses .................................................. 17
Benefits to Insiders ..................................................................................................... 17
About This Information Statement and Prospectus .......................................................................... 17
Where You Can Find More Information ...................................................................................... 17
Cautionary Statement ..................................................................................................... 19
The Merger ............................................................................................................... 19
General ........................................................................................................... 19
Background and Reasons for the Merger ............................................................................. 20
Fairness Analysis ................................................................................................. 20
Alternatives to the Merger ........................................................................................ 21
Liquidation ................................................................................................... 21
Continued Ownership of the Partnership ........................................................................ 21
Determination of Amounts to be Received by Limited Partners in the Merger ......................................... 22
Potential Benefits of the Merger .................................................................................. 23
Detriments of the Merger .......................................................................................... 24
Fairness Analysis ................................................................................................. 24
Comparison of Consideration to be Received in the Merger to Other Alternatives .................................... 25
Real Estate Portfolio Appraisal by Wilson ......................................................................... 28
Fairness Opinion from Stanger ..................................................................................... 30
The Merger Agreement .............................................................................................. 35
Cash Election Procedure ........................................................................................... 36
Consequences to the Partnership if the Merger is Not Completed .................................................... 37
Costs of the Merger ............................................................................................... 37
Accounting Treatment .............................................................................................. 37
Regulatory Requirements ........................................................................................... 37
Comparison of Partnership Units with Public Storage Common Stock .................................................. 38
Amendment to Partnership Agreement ....................................................................................... 43
Approval of the Merger and Partnership Agreement Amendment ............................................................... 44
General ........................................................................................................... 44
Security Ownership of Certain Beneficial Owners and Management .................................................... 44
Certain Related Transactions ............................................................................................. 48
Description of Partnership's Properties .................................................................................. 49
Description of Public Storage's Properties ............................................................................... 53
Distributions and Price Range of Public Storage Common Stock ............................................................. 55
Distributions and Market Prices of Partnership Units ..................................................................... 56
Description of Public Storage Capital Stock .............................................................................. 59
Common Stock ...................................................................................................... 59
Ownership Limitations ............................................................................................. 59
Class B Common Stock .............................................................................................. 61
Preferred Stock ................................................................................................... 61
Equity Stock ...................................................................................................... 62
Effects of Issuance of Capital Stock .............................................................................. 62
Management's Discussion and Analysis of Financial Condition and Results of Operations of the Partnership ................
Federal Income Tax Considerations ........................................................................................ 63
Opinion of Counsel ................................................................................................ 63
The Merger ........................................................................................................ 64
iii
Page
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Taxation of Public Storage as a REIT .............................................................................. 64
Taxation of U.S. Shareholders ..................................................................................... 74
Taxation of Tax-Exempt Shareholders ............................................................................... 76
U.S. Taxation of Non-U.S. Shareholders ............................................................................ 77
Information Reporting and Backup Withholding Tax Applicable to Shareholders ....................................... 79
State and Local Taxes .................................................................................................... 80
Legal Opinions ........................................................................................................... 80
Experts .................................................................................................................. 80
Partnership Financial Statements ......................................................................................... F-1
Appendix A - Agreement and Plan of Reorganization among Public Storage, PS
Partners VI Merger Co., Inc. and the Partnership dated as of
April 12, 2002.
Appendix B - Real Estate Appraisal Report by Charles R. Wilson & Associates,
Inc. for the Partnership dated April 4, 2002
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated July 11, 2002
iv
SUMMARY
The following summary is qualified by the detailed information
appearing elsewhere in this statement, including the appendices.
Overview of Merger
Public Storage is acquiring the Partnership units Public Storage does
not currently own in the merger under the Agreement and Plan of Reorganization
attached as Appendix A to this statement as follows:
. A wholly owned, second tier subsidiary of Public Storage will be
merged into the Partnership.
. Each Partnership unit (other than units already owned directly or
indirectly by Public Storage) will be converted into the right to
receive a value of $546 in Public Storage common stock or, at
your election, in cash. To be effective you must make a cash
election by _______, 2002, as described in the accompanying cash
election form.
. The Partnership will make a cash distribution to holders of
Partnership units as of _______, 2002, the Effective Date, to
cause the estimated net asset value per unit as of the Effective
Date, to be substantially equivalent to $546 as described under
"- Determination of Amounts to be Received by Limited Partners in
the Merger." This payment is expected to be made on or about the
Effective Date.
. The market value of the Public Storage common stock issued in the
merger will be based on the average of the per share closing
prices of the Public Storage common stock on the NYSE during the
20 consecutive trading days ending on the fifth trading day prior
to the Effective Date.
. Following the merger, Public Storage will own all Partnership
units (through wholly owned entities), the Partnership will
remain in existence, and Public Storage and Mr. Hughes will
continue as general partners of the Partnership.
See "The Merger - Determination of Amounts to be Received by Limited
Partners in the Merger." For a description of the terms of the merger, see "The
Merger - The Merger Agreement."
The Public Storage common stock is listed on the NYSE. On
_____________, 2002, the last full trading day prior to the date of this
statement, the reported closing price per share of Public Storage common stock
was $_____. There is no established trading market for the Partnership units.
See "Distributions and Price Range of Public Storage Common Stock" and
"Distributions and Market Prices of Partnership Units."
Summary Risk Factors
The merger involves certain risks and detriments that you should
consider, including the following:
. Vote by Public Storage. Public Storage owns sufficient
Partnership units to approve the merger without your vote and
approved the merger on April 12, 2002.
. No Arm's Length Negotiation or Independent Representatives.
Public Storage and the Partnership have not (1) negotiated the
merger at arm's length or (2) hired independent persons to
negotiate the terms of the merger for you. If independent persons
had been hired, the terms of the merger may have been more
favorable to you.
. No Solicitation of Other Offers. Public Storage and the
Partnership have not asked any person to make an offer to buy the
Partnership's assets. The merger agreement prohibits the
Partnership from soliciting other offers. Other offers could have
generated higher prices.
1
. The Merger Is Taxable. The merger will be a taxable event for a
limited partner who is subject to income taxation, whether that
limited partner receives cash or stock. The actual tax effects
will vary based on each partner's adjusted tax basis in the
Partnership units and the partner's other specific circumstances.
Because the consideration to be paid will significantly exceed
the tax basis of taxable limited partners who acquired their
units when the units were originally issued by the Partnership in
1986, those limited partners can be expected to recognize
substantial taxable gain.
. Change from Finite Life to Infinite Life. After the merger, if
you do not elect cash you will own an investment in an ongoing
integrated real estate company instead of an interest in a
specified portfolio of properties for a fixed period. In the
absence of the merger, the Partnership would terminate when all
of its properties were sold, but not later than December 31,
2038. Public Storage
. changes its portfolio of properties from time to time
without approval of shareholders;
. does not plan to sell its assets within a fixed period of
time; and
. is engaged in all aspects of the mini-warehouse industry,
including property development and management.
If you receive Public Storage common stock in the merger, you will be
able to liquidate your investment only by selling your shares. The market
value of your shares may or may not reflect the full fair market value of
Public Storage's assets and will fluctuate.
. Possible Lower Level of Distributions After the Merger. If you
receive Public Storage common stock, your level of distributions
may be lower after the merger than the amount you received as a
limited partner of the Partnership.
. Potential Loss of Future Appreciation. The Partnership's assets
may be worth more later. Public Storage will realize the benefit
of any increase in value.
. No Dissenters' Rights of Appraisal. You will not be entitled to
dissenters' rights of appraisal under California law in the
merger.
. Conflicts of Interest. Public Storage, which controls the
Partnership, has conflicts of interest in, and will benefit from,
the merger. Public Storage has an interest in acquiring
Partnership units at the lowest possible price, while you have an
interest in selling your units at the highest possible price. In
the absence of these conflicts, the terms of the merger may have
been more favorable to you. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The
principal conflicts involve the competition of the Properties
with other mini-warehouses owned by Public Storage.
. Control and Influence over Public Storage by the Hughes Family
and Public Storage Ownership Limitations. The public shareholders
of Public Storage are substantially limited in their ability to
control Public Storage. The Hughes family owns approximately 34%
of the Public Storage common stock (approximately 38% upon
conversion of the Public Storage class B common stock). Also,
Public Storage's charter documents restrict the number of Public
Storage shares that may be owned by . any other person. These
ownership factors should prevent any takeover of Public Storage
not approved by Mr. Hughes.
. Uncertainty Regarding Market Price of Public Storage Common
Stock. The market price of Public Storage common stock may
fluctuate after the date that the number of shares to be issued
to you is determined, but before those shares actually are
issued. In addition, the market price could decrease because of
sales of shares issued in this merger and for other reasons.
2
. Tax Risks of Ownership of Public Storage Common Stock - Failure
to Maintain REIT Status. Public Storage is subject to tax risks,
including risks as to Public Storage's continued qualification
for income tax purposes as a "Real Estate Investment Trust" or
"REIT."
. Financing Risks. Public Storage, unlike the Partnership, borrows
money ($128.1 million at March 31, 2002), which increases the
risk of loss.
. Possible Future Dilution. The issuance of additional stock by
Public Storage can reduce the interest of Public Storage
shareholders. Public Storage has outstanding preferred stock
($1.8 billion at March 31, 2002) and intends to issue additional
preferred stock that prevents payment of distributions on Public
Storage common stock unless distributions are paid quarterly on
the preferred stock.
. Merger Payments Based on Appraisal Instead of Arm's Length
Negotiation. The amount you receive in the merger is based on a
third party appraisal of the Partnership's Properties. However,
appraisals are opinions as of the date specified and are subject
to certain assumptions. The true worth or realizable value of
these properties may be higher or lower than the appraised value.
Benefits to Insiders
The merger involves certain benefits to Public Storage, including the
following:
. Own All Partnership Units. As a result of the merger, Public
Storage will own all of the Partnership units without taxable
gain to Public Storage.
. Cost Efficiencies. The merger will eliminate almost all
Partnership administrative expenses, much of which has been borne
by Public Storage as owner of 63% of the Partnership units.
. Issue Capital Stock. The merger will enable Public Storage, which
is seeking to expand its capital base, to issue up to 1,500,000
shares of common stock.
. Eliminate Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the competition of the
Partnership's properties with other mini-warehouses owned by
Public Storage.
Potential Benefits of the Merger
The following are the principal potential benefits of the merger to
you:
(1) If you elect to receive cash, you will liquidate your investment at an
amount substantially higher than the prices in the limited secondary
transactions involving Partnership units. Also, you will simplify your
tax reporting for years after 2002.
(2) If you receive Public Storage common stock, the principal potential
benefits to you are:
. Ownership Interest in a Diversified Real Estate Company. Because
the Partnership is not authorized to issue new securities or to
reinvest sale or financing proceeds, the Partnership is less able
to take advantage of new real estate investment opportunities. In
contrast, Public Storage has a substantially larger, more
diversified investment portfolio that reduces the risks
associated with any particular assets or group of assets and
increases Public Storage's ability to access capital markets for
new capital investments.
. Increased Liquidity. There is no active market for the
Partnership units. In comparison, Public Storage has
approximately 115.8 million shares of common stock listed on the
NYSE with an average daily trading volume during the 12 months
ended March 31, 2002 of approximately 188,200 shares. Given
3
Public Storage's market capitalization and trading volume, you
are likely to enjoy a more active trading market and increased
liquidity for the Public Storage common stock you receive.
. Simplified Tax Reporting. The merger will simplify your tax
reporting for years after 2002.
The Partnership
The Partnership owns two mini-warehouses directly and interests in 30
mini-warehouses jointly with Public Storage (collectively, the "Properties").
The Partnership also owns a 2% interest in PS Business Parks, L.P. ("PSBP")
jointly with Public Storage. Public Storage has a significant interest in PSBP,
which owns and operates commercial properties. See "Description of Partnership's
Properties."
The general partners of the Partnership are Public Storage and Mr.
Hughes. Public Storage manages and operates the Properties under the "Public
Storage" name. See "Description of Partnership Properties." There is no active
market for the Partnership units. See "Distributions and Market Prices of
Partnership Units."
Public Storage
Public Storage is a fully integrated, self-administered and
self-managed REIT that acquires, develops, owns and operates mini-warehouses.
Public Storage is the largest owner and operator of mini-warehouses in the
United States. At March 31, 2002, Public Storage had equity interests (through
direct ownership, as well as general and limited partnership interests) in 1,392
storage facilities located in 37 states. Public Storage also has an interest in
PSBP.
Address and Phone Number
The principal executive offices of the Partnership and Public Storage
are located at 701 Western Avenue, Glendale, California 91201-2349. The
telephone number is (818) 244-8080.
Background and Reasons for the Merger
Public Storage and the Partnership have not negotiated the merger at
arm's length. Public Storage has structured the merger. Public Storage controls
the Partnership and has significant conflicts of interest in connection with,
and will benefit from, the merger. Public Storage and Mr. Hughes, the general
partners of the Partnership, believe that the merger is fair to you. This is
based in significant part on a third party appraisal of the Properties and on
the opinion of a financial advisor, in which the general partners concur.
The general partners organized the Partnership in 1986 to acquire
properties jointly with Public Storage and alone. The Partnership is well beyond
its original anticipated term. The Partnership originally anticipated selling
the Properties and liquidating from five to eight years after acquisition, i.e.,
between 1991 and 1994.
Public Storage was organized in 1980 and has increased its asset and
capital base substantially since that time. Much of Public Storage's growth has
resulted from increasing its interest in affiliated entities, like the
Partnership.
After the merger, Public Storage will own all of the Partnership units,
and the merger will eliminate almost all Partnership administrative expenses,
including the cost of operating as a public entity.
The consideration you receive in the merger is based on the appraised
value of the Properties as determined by a third party appraiser, Charles R.
Wilson & Associates, Inc. ("Wilson"), as of February 28, 2002. The general
partners believe that the merger is fair to you. This is based in significant
part on the Wilson appraisal of the Properties and on the opinion of a financial
advisor, Robert A. Stanger & Co., Inc. ("Stanger"), in which the general
partners concur.
4
The general partners considered liquidation and continued ownership by
limited and general partners as alternatives to the merger. The general partners
believe that the consideration to be received by you, in the merger compares
favorably with other alternatives. The general partners did not ask any person
to buy the Partnership's assets.
In comparing the merger to other alternatives, the general partners
noted the following:
Liquidation. In a liquidation the proceeds available for distribution
to limited partners would be reduced by expenses of sale. However, if the
Partnership liquidated its assets through asset sales to unaffiliated third
parties, you would not need to rely upon a real estate portfolio appraisal to
estimate the fair market value of the Properties and you could use the cash
received in the liquidation to purchase shares of Public Storage common stock in
the public market.
Continued Ownership. The Partnership is operating profitably. Continued
ownership by the limited and general partners should provide you with continued
distributions of net operating cash flow and participation in any future
potential appreciation of the Properties and would avoid many of the risks
described under "Risk Factors." However, continued ownership by the limited and
general partners would fail to provide you with liquidity through receipt of
Public Storage common stock or, at your election, a cash payment for your
Partnership units and would fail to provide Public Storage with the benefits
described under "Benefits to Insiders."
Detriments of the Merger
For a summary of certain risks and detriments of the merger, refer to
"- Summary Risk Factors" beginning on page 1.
Determination of Amounts to be Received by Limited Partners in the Merger
In connection with the merger, you will receive a value of $546 per
Partnership unit in cash or Public Storage common stock. In addition, as noted
in note (7) below, you will also receive a final distribution in cash equal to
the amount by which the value of a unit on the Effective Date exceeds $546. The
general partners have determined the amount to be received by you in the merger
based on the estimated net asset value per unit computed as follows:
Estimated value of Partnership's interest in the Properties (1) $ 58,177,000
Plus:
Market value of Partnership's interest in PSBP (2) 21,558,000
Partnership's interest in other tangible net assets and liabilities (3) 2,989,000
------------
Net proceeds available for distribution 82,724,000
Distributions to general partners (4) (827,000)
------------
Distributions to limited partners $ 81,897,000
============
Amount per Partnership unit (5)(6)(7)(8) $ 546
============
---------------
(1) Reflects appraised value of the Properties determined by Wilson as of
February 28, 2002. Assumes a sale of the Properties at the appraised
value and that the proceeds from the sale of the Properties are
allocated between the Partnership and Public Storage based on their
joint venture agreement. See "Description of Partnership's Properties"
and "The Merger - Real Estate Portfolio Appraisal by Wilson."
(2) Reflects closing price of shares of PS Business Parks, Inc. on The
American Stock Exchange, Inc. ("AMEX") as of February 28, 2002 (the
PSBP partnership interests are exchangeable for those shares on a one
unit for one share basis). Assumes a sale of the units at that price
and an allocation of the proceeds between the Partnership and Public
Storage based on their joint venture agreement. See note (7) below.
5
(3) Reflects the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of February 28,
2002.
(4) Represents subordinated incentive distributions payable to the general
partners and distributions attributable to the general partners' 1%
capital interest in the Partnership. In accordance with the Partnership
Agreement, no subordinated incentive distributions are payable at this
time.
(5) Based on 150,000 Partnership units.
(6) Upon completion of the merger, each Partnership unit would be converted
into Public Storage common stock with a value of $546 or, at the
election of a limited partner, $546 in cash. The number of shares of
Public Storage common stock to be issued in the merger will be
determined by dividing $546 by the average of the closing prices of
Public Storage common stock during the 20 consecutive trading days
ending on the fifth trading day prior to the Effective Date. The market
price of Public Storage common stock may fluctuate after the date that
the number of shares to be issued to limited partners in the merger is
determined and before those shares actually are issued.
(7) On the Effective Date, the value of the Partnership units will be
recomputed. A cash distribution will be made to limited partners as of
the Effective Date in an amount by which the recomputed value exceeds
$546 to cause the estimated net asset value per Partnership unit as of
the Effective Date to be substantially equivalent to $546 per unit. In
computing the estimated net asset value per unit as of the Effective
Date, the estimated value of the Partnership's interest in the
Properties will be based on the February 28, 2002 property appraisal,
the PSBP partnership interests will be valued at the average of the per
share closing price on the AMEX of the shares of PS Business Parks,
Inc. during the 20 consecutive trading days ending on the fifth trading
day prior to the Effective Date and the Partnership's interest in the
tangible net assets and liabilities will be measured as of the last day
of the calendar month preceding the Effective Date.
(8) Original purchase price of a Partnership unit was $500.
Federal Income Tax Matters
The merger will be a taxable event and result in taxable gain or loss
to most of you whether you receive cash or stock. Taxable limited partners will
recognize gain or loss in an amount equal to the difference between the value of
what they receive in the merger (cash or stock) and their adjusted basis in
their Partnership units. It has been estimated that an original limited partner
will realize approximately $294 of taxable gain per Partnership unit as a result
of the merger (assuming that the merger is effective as of the end of the second
quarter of 2002). The merger should not be a taxable event to Public Storage.
See "Federal Income Tax Considerations - The Merger."
Fairness Analysis; Opinion of Financial Advisor
Public Storage and the Partnership have not negotiated the merger at
arm's length. Public Storage has structured the merger. Public Storage controls
the Partnership and has significant conflicts of interest in connection with,
and will benefit from, the merger. The general partners believe that the merger
is fair to you. This is based in significant part on the Wilson appraisal and
the opinion of a financial advisor, in which the general partners concur.
The general partners base their conclusion on the following factors:
. The Wilson appraisal of the Properties.
. Stanger delivered a fairness opinion to the Partnership.
. Although the merger has been structured by Public Storage, the
merger provides you with a choice of converting your investment
into an investment in Public Storage or receiving cash for your
investment.
6
. Based on certain significant assumptions, qualifications and
limitations, the consideration to be received by you compares
favorably with other alternatives.
The general partners believe that the consideration to be received by
you in the merger compares favorably with:
. the prices of the limited secondary sales of Partnership units;
. a range of estimated going-concern values per unit;
. an estimated liquidation value per unit; and
. the book value per unit.
The general partners recognize that these comparisons are subject to
significant assumptions, qualifications and limitations. See "The Merger -
Comparison of Consideration to be Received in the Merger to Other Alternatives."
The Partnership engaged Stanger to deliver a written summary of its
determination as to the fairness of the consideration to be received in the
merger, from a financial point of view, to you. The full text of the opinion is
set forth in Appendix C to this statement and should be read in its entirety.
Subject to the assumptions, qualifications and limitations contained in the
fairness opinion, the fairness opinion concludes that, as of the date of the
fairness opinion, the consideration to be received in the merger is fair to you,
from a financial point of view. In arriving at its opinion, Stanger considered,
among other things
. the independent appraised value of the Properties;
. the estimated liquidation value of the Partnership prepared by
the Partnership, based upon a sale of the Partnership's assets to
a third party for cash;
. financial analyses and projections prepared by the general
partners concerning the going-concern value of the Partnership
under its current business plan; and
. a comparison of limited secondary sales prices of Partnership
units with the consideration being received by you in the merger.
The Partnership did not ask Stanger to
. select the method of determining the consideration being received
by you in the merger;
. make any recommendation to you whether to select cash or Public
Storage common stock in the merger;
. express any opinion as to the business decision regarding the
merger or its alternatives or tax factors resulting from the
merger or relating to Public Storage's qualification as a REIT;
or
. conduct an independent appraisal of the Properties or the value
of the Partnership units.
Stanger's opinion is based on business, economic, real estate and
securities markets and other conditions as of the date of its analysis. See "The
Merger - Fairness Opinion from Stanger."
The general partners believe that hiring Wilson to appraise the
Properties and Stanger to deliver a fairness opinion helped the general partners
fulfill their duties to you. However, the Partnership is paying Wilson and
7
Stanger for their services and Public Storage is expected to pay them for other
assignments. See "The Merger - Real Estate Portfolio Appraisal by Wilson" and "-
Fairness Opinion from Stanger."
Conditions to Completion of the Merger
Completion of the merger is subject to satisfaction of the following
conditions:
. the Commission has declared effective the Registration Statement;
. Public Storage has received all other authorizations necessary to
issue Public Storage common stock in exchange for Partnership
units and to complete the merger;
. holders of a majority of the Partnership units have approved the
merger (this condition has been satisfied by Public Storage's
vote of its units in favor of the Merger);
. the NYSE has approved the shares of Public Storage common stock
issued to limited partners;
. Stanger has issued a fairness opinion to the Partnership (this
opinion has been received);
. no legal action challenging the merger is pending;
. the average of the per share closing prices on the NYSE of Public
Storage common stock during the 20 consecutive trading days
ending on the fifth trading day prior to the Effective Date is
not less than $34 (Public Storage does not intend to postpone the
merger if this condition is not satisfied in this time frame, and
if this condition is not satisfied or waived by Public Storage,
Public Storage intends to promptly notify the limited partners in
writing);
. the Partnership Agreement is amended as described under
"Amendment of Partnership Agreement"; and
. Public Storage in its sole discretion, is satisfied as to title
to, and the results of an environmental audit of the Properties.
Amendment or Termination of the Merger Agreement
The merger agreement may be amended by a written agreement authorized
by the board of directors of Public Storage and the general partners. The merger
may be abandoned at any time before or after shareholder approval by mutual
written consent and may be abandoned by either party if, among other things, the
closing of the merger has not occurred on or before December 31, 2002.
Cash Election Procedure
Each holder of record of Partnership units may make a cash election to
have his or her Partnership units converted into the right to receive cash in
the merger. All cash elections are to be made on a cash election form. A cash
election form is being sent to all holders of record of Partnership units on the
date of this statement. A duplicate cash election form may be obtained by
calling the exchange agent, EquiServe Trust Company, N.A., at the telephone
number listed below. To be effective, a cash election form must be properly
completed and signed in accordance with the instructions which accompany the
cash election form and must be received by the exchange agent, no later than
5:00 p.m. New York City time on ________, 2002 (the "Election Deadline") at one
of the following addresses:
8
By Mail By Hand By Overnight Courier For Assistance For information
----------------------------------------------------------------------------------------------------------------------------
EquiServe Trust Company, N.A. Securities EquiServe Trust Company, EquiServe Trust Company, Public Storage, Inc.
P.O. Box 43014 Transfer & N.A. N.A. Investor Services
Providence, RI 02940-3014 Reporting Services Corporate Actions Shareholder Services Dept.
100 William Street 150 Royall Street (781)575-3120 701 Western Avenue
Galleria Mail Stop 45-02-80 Glendale, CA
New York, NY 10038 Canton, MA 02021 91201-2349
(800) 421-2856
(818) 244-8080
Holders of record of units who hold units as nominees, trustees or in other
representative capacities may submit multiple cash election forms, provided that
such representative certifies that each such cash election form covers all the
units held by such representative for a particular beneficial owner. An election
may be revoked by the person or persons making such election by a written notice
signed and dated by such person or persons and received by the exchange agent at
one of the addresses listed above prior to the Election Deadline, identifying
the name of the registered holder of the units subject to such election and the
total number of units owned by the beneficial owner. In addition, all cash
election forms will automatically be revoked if the exchange agent is notified
in writing that the merger has been abandoned. The exchange agent may determine
whether or not elections to receive cash have been properly made or revoked, and
any such determination shall be conclusive and binding.
Amendment to Partnership Agreement
While the general partners do not believe that the partnership
agreement prohibits the merger, the partnership agreement is being amended to
expressly authorize the merger.
9
Comparison of Partnership Units with Public Storage Common Stock
The information below summarizes certain principal differences between
the Partnership units and the Public Storage common stock. The effect of the
merger if you receive Public Storage common stock is set forth in italics below
each comparison. For an expanded discussion of these and other comparisons and
effects, see "The Merger - Comparison of Partnership Units with Public Storage
Common Stock."
Investment Objectives and Policies
Partnership
To provide (1) quarterly cash distributions from operations and (2) long-term
capital gains through appreciation in the value of the Properties.
To maximize funds from operations, or FFO, allocable to holders of Public
Storage common stock and to increase shareholder value through internal growth
and acquisitions. FFO is a supplemental performance measure for equity REITs
used by industry analysts. FFO does not take into consideration principal
payments on debt, capital improvements, distributions and other obligations of
Public Storage. Accordingly, FFO is not a substitute for Public Storage's net
cash provided by operating activities or net income as a measure of Public
Storage's liquidity or operating performance. An increase in Public Storage's
FFO will not necessarily correspond with an increase in distributions to holders
of Public Storage common stock. See "- Liquidity, Marketability and
Distributions."
Public Storage
If you receive Public Storage common stock in the merger, you will
change your investment from "finite life" to "infinite life" and realize the
value of your investment only by selling your Public Storage common stock. If
Public Storage issues additional securities, including securities that would
have priority over Public Storage common stock as to cash flow, distributions
and liquidation proceeds, it will dilute the interest of Public Storage
shareholders. Public Storage intends to issue additional securities under a
currently effective registration statement. See "Risk Factors - The number of
shares of Public Storage common stock to be issued in the merger has not been
determined" and "- Public Storage and its shareholders are subject to financing
risks."
Borrowing Policies
No outstanding borrowings.
Permitted to borrow in furtherance of its investment objectives, subject to
certain limitations.
Public Storage has outstanding debt and reinvests proceeds from
borrowings. Incurring debt increases the risk of loss of investment. Public
Storage does not plan to finance the Properties.
Transactions with Affiliates
Limited partner approval required for a variety of business transactions with
affiliates, including purchases, sales, leases and loans. See "Amendment to
Partnership Agreement."
Restricted from acquiring properties from its affiliates or from selling
properties to them unless the transaction is approved by a majority of Public
Storage's independent directors and is fair to Public Storage based on an
independent appraisal.
10
Partnership
Public Storage
Given Public Storage's control of all Partnership voting decisions, both
Public Storage and the Partnership can enter into transactions with affiliates
without the need for approval of either the public shareholders or public
limited partners. In the case of Public Storage, however, these transactions
require approval of Public Storage's independent directors.
Properties (As of March 31, 2002)
Direct and indirect equity interests in 32 mini-warehouses in nine states. Also
owns an interest in PSBP.
Direct and indirect equity interests in 1,392 storage facilities in 37 states.
Also owns a larger interest in PSBP.
Because Public Storage owns substantially more property interests in more
states than the Partnership, the operations of a single property have less
effect on Public Storage's results of operations than in the case of the
Partnership. Also, it would be more difficult to liquidate Public Storage than
the Partnership within a reasonable period of time.
Liquidity, Marketability and Distributions
No active trading market for Partnership units. The Partnership may not issue
securities having priority over Partnership units.
Public Storage common stock is traded on the NYSE. During the 12 months ended
March 31, 2002, the average daily trading volume of Public Storage common stock
was approximately 188,200 shares. Public Storage has issued, and may in the
future issue, securities that have priority over Public Storage common stock as
to cash flow, distributions and liquidation proceeds.
The Partnership pays distributions to limited partners from cash available
for distribution. Tax laws require Public Storage to distribute at least 90% of
its ordinary REIT taxable income in order to maintain its qualification as a
REIT. Since Public Storage distributes less than its cash available for
distribution (recently distributing amounts approximately equal to its taxable
income), it is able to retain funds for additional investment and debt
reduction.
If you receive Public Storage common stock in the merger, the market for
your investment will be broader and more active than the market for Partnership
units. Distributions on Public Storage common stock may be lower than the
distributions on the Partnership units. Distributions on Public Storage common
stock also are subject to priority of preferred stock.
Additional Issuances of Securities and Anti-Takeover Provisions
The partnership agreement does not provide for the issuance of additional
Partnership units.
Subject to the rules of the NYSE and applicable provisions of California law,
Public Storage can issue authorized capital stock without shareholder approval.
Both the Partnership and Public Storage can deter attempts to obtain
control in transactions not approved by management. In the case of the
Partnership, Public Storage owns a majority of the Partnership units. In the
case of Public Storage, the Hughes family effectively controls Public Storage
and Public Storage has the flexibility to issue capital stock, including senior
securities with special voting rights and priority over Public Storage common
stock.
11
Summary Financial Information
The financial data in this section should be read in conjunction with the
financial statements included in this statement and in the documents to which
limited partners have been referred.
Public Storage
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------------------------------- -------------------------
1997/(1)/ 1998/(1)/ 1999/(1)/ 2000/(1)/ 2001/(1)/ 2001 2002
----------- ----------- ----------- ----------- ----------- ----------- -----------
($ In thousands, except per share data)
Operating Data:
Total revenues $ 469,051 $ 581,085 $ 676,734 $ 757,310 $ 834,645 $ 197,839 $ 216,975
Depreciation and amortization 92,750 111,799 137,719 148,967 168,061 39,622 43,997
Interest expense 6,792 4,507 7,971 3,293 3,227 971 1,102
Minority interest in income 11,684 20,290 16,006 38,356 46,015 11,698 11,342
Net income $ 178,649 $ 227,019 $ 287,885 $ 297,088 $ 324,208 $ 74,635 $87,455
Balance Sheet Data (at end
of period):
Total cash and cash
equivalents $ 41,455 $ 51,225 $ 55,125 $ 89,467 $ 49,347 $ 40,477 $ 192,281
Total assets 3,311,645 3,403,904 4,214,385 4,513,941 4,625,879 4,488,092 4,893,247
Total debt 103,558 81,426 167,338 156,003 168,552 180,263 128,076
Minority interest 288,479 139,325 186,600 532,918 454,601 528,828 468,077
Shareholders' equity $ 2,848,960 $ 3,119,340 $ 3,689,100 $ 3,724,117 $ 3,909,583 $ 3,701,216 $ 4,197,641
Per Share of Common Stock:
Net income-basic (2) $ .92 $ 1.30 $ 1.53 $ 1.41 $ 1.53 $ .34 $ .38
Net income-diluted (2) .91 1.30 1.52 1.41 1.51 .34 .37
Distributions (3) .88 .88 1.52 1.48 1.69 .22 .45
Book value (at end of $ 17.19 $ 18.30 $ 18.95 $ 18.84 $ 18.12 $ 18.48 $ 17.99
period)(4)
Weighted average-diluted
shares of common stock (in
thousands) 98,961 114,357 126,669 131,657 123,577 128,699 124,065
____________________
(1) Public Storage has completed several significant business combinations,
property acquisitions, and equity transactions and has developed a
significant number of real estate facilities in the five years ended
December 31, 2001. See Notes 3 and 9 to Public Storage's financial
statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December 31, 2001,
included in Public Storage's December 31, 2001 Form 10-K for further
discussion.
(2) Net income per common share is computed in accordance with Statement of
Financial Accounting Standard No. 128 (SFAS 128) - "Earnings per Share" and
is presented on the diluted basis using the weighted average shares of
Public Storage common stock outstanding-diluted. The diluted net income per
common share is computed using the weighted average common shares
outstanding (adjusted for stock options). Beginning in 2000, 6,790,000 of
the 7,000,000 shares of class B common stock are included in the
determination of net income per common share.
(3) For federal income tax purposes, distributions for all periods were
characterized as ordinary income. All distributions for generally accepted
accounting principles ("GAAP") were from investment income.
(4) Book value per share computed based on the number of shares of Public
Storage common stock and Public Storage class B common stock outstanding.
12
Partnership
Three Months Ended
Years Ended December 31, March 31,
------------------------------------------------------------ --------------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- -------
(In thousands, except per unit data)
Operating Data:
Total revenues $ 3,186 $ 3,527 $ 3,586 $ 4,182 $ 4,653 $ 1,084 $ 1,245
Depreciation and amortization 130 134 146 153 146 36 35
Net income 2,680 2,985 3,030 3,558 4,102 956 1,093
Allocation of net income:
Limited partners' share 2,158 2,558 2,445 3,127 3,447 847 963
General partners' share 522 427 585 431 655 109 130
Balance Sheet Data (at end of
period)
Cash and cash equivalents 1,144 2,388 2,092 3,198 2,393 3,408 2,530
Total debt - - - - - - -
Total assets 38,715 37,702 35,177 34,725 32,717 34,637 32,472
Limited Partners' per Unit
Data (5)
Net income $ 14.39 $ 17.05 $ 16.30 $ 20.85 $ 22.98 $ 5.65 $ 6.42
Cash distributions (6) 29.74 23.80 33.30 23.80 36.84 5.95 7.13
Book value (limited partners' 254.40 247.65 230.65 227.70 213.84 227.39 213.13
equity)
Public Storage - Pro Forma per Partnership Unit
Per equivalent Partnership Unit (7):
Net income-diluted $ 21.90 $ 5.37
Distributions paid on common stock 24.50 6.53
Book value (at March 31, 2002) $260.86
_______________
(5) Limited partners' per unit data is based on the weighted average
number of Partnership units (150,000) outstanding during the year.
(6) In 1997, distributions included a portion of the operating reserve
estimated at $5.94 per Unit. In 1999, distributions included an
additional portion of the operating reserve estimated at $9.50 per
Unit. In 2001, distributions included a special distribution of $9.50
per Unit.
(7) Presents pro forma amounts of Public Storage per equivalent
Partnership unit. Net income, cash distributions and book value data
are calculated by multiplying Public Storage's historical results
(before impact of the merger, which is not expected to have a material
impact on Public Storage's per share amounts) by an assumed exchange
ratio of approximately 14.5 (the Partnership's merger value of $546
divided by an assumed issue price of Public Storage common stock of
$37.65).
Due to the immateriality of the transaction to Public Storage
(depending on the level of cash elections, the number of shares of
Public Storage common stock being issued in the transaction ranges
from 0.0% to 0.7% of Public Storage's outstanding shares), the pro
forma results are the same for both scenarios (maximum cash elections
and all Public Storage common stock). Accordingly, only one set of pro
forma results has been presented.
13
Relationships
The following charts show the relationships among Mr. Hughes, Public
Storage and the Partnership both before and after the merger. As reflected in
the charts below, Mr. Hughes, Public Storage's chairman of the board and chief
executive officer, effectively controls Public Storage. Public Storage and Mr.
Hughes are the general partners of the Partnership. Public Storage and the
Partnership jointly own 30 of the 32 Properties, all of which are managed by
Public Storage.
[CHART]
Percentage of ownership of the Partnership by Public Storage represents
percentage of units of limited partnership interest owned by Public Storage.
Both before and after the merger, Public Storage's general and limited partner
interests are owned indirectly through wholly owned entities. Percentage of
stock ownership of Public Storage by Mr. Hughes represents percentage of
outstanding shares of Public Storage common stock owned by Mr. Hughes and
members of his immediate family. Mr. Hughes has no ownership interest in the
Partnership (other than through his share ownership in Public Storage) either
before or after the merger. As described in "Certain Related Transactions -
Joint Venture Interest", the Partnership manages the joint venture, although
Public Storage may compel the sale of the joint venture's properties and the
Partnership and Public Storage have a right of first refusal to acquire the
other's interest in the event of a proposed sale of the joint venture's
properties. The joint venture owns 30 of the Properties. Under the joint venture
agreement, the Partnership's interest in each of the joint venture's properties
ranges from 50% to 76% and Public Storage's interest ranges from 24% to 50%. See
"Descriptions of Partnership's Properties." Public Storage manages the
Properties for a fee of 6% of gross revenues. After the merger (assuming no cash
elections) the public limited partners of the Partnership would own
approximately 0.7% of Public Storage.
14
RISK FACTORS
The merger involves certain risks and detriments that you should
consider, including the following:
Public Storage has approved the merger without your vote.
Public Storage, as owner of 63% of the Partnership units, owns
sufficient units to approve the merger without your vote and voted its units in
favor of the merger on April 12, 2002. Accordingly, if the conditions to the
merger are satisfied or waived, the merger will be completed even if opposed by
all of the public limited partners.
Public Storage and the Partnership have not hired anyone to represent you.
Public Storage and the Partnership have not (1) negotiated the merger
at arm's length or (2) hired independent persons to negotiate the terms of the
merger for you. If independent persons had been hired, the terms of the merger
may have been more favorable to you.
The merger agreement prohibits the Partnership from soliciting alternative
offers.
Public Storage and the Partnership have not asked any person to buy the
Partnership's assets. The merger agreement prohibits the Partnership from
soliciting other offers. Other offers might have resulted in higher payments to
the limited partners.
The merger is taxable to you.
The merger will be a taxable event for limited partners who are subject
to income taxation, whether they receive cash or stock. The actual tax effects
will vary based on each partner's adjusted tax basis in the units and the
partner's other specific circumstances. Because the consideration to be paid
will significantly exceed the tax basis of taxable limited partners who acquired
their units when the units were originally issued by the Partnership in 1986,
those limited partners can be expected to recognize substantial taxable gain.
The merger will change your investment from finite life to infinite life if you
receive stock.
The Partnership is a limited partnership organized to hold interests in
properties for a fixed period. In the absence of the merger, the Partnership
would terminate when all of its properties were sold, but not later than
December 31, 2038. In contrast, Public Storage, which is engaged in all aspects
of the mini-warehouse industry, including property development and management,
intends to operate for an indefinite period. Therefore, if you receive Public
Storage common stock in the merger, you will be able to liquidate your
investment only by selling your shares on the NYSE or in private transactions.
The market value of Public Storage common stock may or may not reflect the full
fair market value of Public Storage's assets and will fluctuate.
Your level of distributions may be lower after the merger if you receive stock.
If you receive Public Storage common stock in the merger, your level of
distributions may be lower after the merger than the amount you received as a
limited partner of the Partnership. Based on a closing price of $37.65 for
Public Storage common stock and the current regular quarterly distribution rate
for Public Storage ($0.45 per share) and the regular and special distributions
for the Partnership during 2001 ($63.84 per unit), your annual distributions
would decrease by approximately 29% if you receive Public Storage common stock
in the merger.
You will not benefit from any increase in value of the properties.
The Partnership's properties may increase in value and might be able to
be sold for higher prices at a later date. Public Storage will realize the
benefit of any increase in value.
15
You have no dissenters' rights of appraisal.
Under California law, you will not be entitled to dissenters' rights of
appraisal in connection with the merger. Accordingly, if the merger is
completed, you will not be entitled to ask for an alternative valuation of your
Partnership units.
Public Storage has conflicts of interest in the merger.
Relationships among the parties create conflicts of interest. Because
of the relationships among Public Storage, the Partnership and Mr. Hughes, there
are significant conflicts of interest in connection with the merger. Public
Storage and Mr. Hughes are the general partners of the Partnership, and Public
Storage owns 63% of the Partnership units. In the absence of these conflicts,
the terms of the merger may have been more favorable to you. See "Summary -
Relationships."
Insiders have structured the merger. Public Storage initiated and
structured the merger. Public Storage and the Partnership did not negotiate the
merger at arm's length. Public Storage has an interest in acquiring the
Partnership units at the lowest possible price, while you have an interest in
selling your units at the highest possible price. Public Storage and the
Partnership did not hire independent persons to negotiate the terms of the
merger for you. If independent persons had been hired, the terms of the merger
might have been more favorable to you.
The merger includes benefits to insiders. The merger involves certain
benefits to Public Storage, including the following:
. Ownership of All Partnership Units. As a result of the merger,
Public Storage will own all of the Partnership units without
taxable gain to Public Storage.
. Cost Efficiencies. The merger will eliminate almost all
Partnership administrative expenses, much of which has been borne
by Public Storage as owner of 63% of the Partnership units.
. Elimination of Conflicts of Interest. The merger will eliminate
the conflicts of interest resulting from the public limited
partners' ownership of a minority interest in the Partnership.
The principal conflicts involve the competition of the Properties
with other mini-warehouses owned by Public Storage.
The Partnership did not engage Stanger or any other third party other than
Wilson to perform an independent appraisal of the Partnership's Properties or
Units which appraiser may have concluded a higher valuation.
In rendering the fairness opinion Stanger was not engaged to and did
not conduct an independent appraisal of the Partnership's portfolio of
properties or the value of the Partnership units. In conducting the reviews in
connection with the fairness opinion, Stanger has relied on the accuracy and
completeness of the portfolio appraisal performed by Wilson and the analyses
provided by the general partners. By not engaging Stanger or any other third
party to perform an independent appraisal of the Partnership's properties or the
value of the Partnership units, limited partners do not have the potential
benefit of any independent appraisals in addition to the Wilson appraisal. Had
additional appraisals been obtained, such appraisals may have concluded a higher
appraisal valuation than Wilson.
The Hughes family could control Public Storage.
The Hughes family owns approximately 34% of the outstanding shares of
Public Storage common stock (approximately 38% upon conversion of the Public
Storage class B common stock). Consequently, the Hughes family could control
matters submitted to a vote of Public Storage shareholders, including electing
directors, amending Public Storage's organizational documents, dissolving and
approving other extraordinary transactions, such as a takeover attempt.
16
Provisions in Public Storage's organizational documents may prevent changes in
control.
Restrictions in Public Storage's organizational documents may further
limit changes in control of Public Storage securities. Unless Public Storage's
board of directors waives these limitations, no Public Storage shareholder may
own more than (A) 2.0% of the outstanding shares of all common stock of Public
Storage or (B) 9.9% of the outstanding shares of each class or series of
preferred or equity stock of Public Storage. The Public Storage organizational
documents in effect provide, however, that the Hughes family may continue to own
the shares of Public Storage common stock held at the time of a 1995
reorganization. These limitations are designed, to the extent possible, to avoid
a concentration of ownership that might jeopardize the ability of Public Storage
to qualify as a REIT. These limitations, however, also make a change of control
significantly more difficult (if not impossible) even if it would be favorable
to the interests of the public shareholders of Public Storage. These provisions
will prevent future takeover attempts not approved by the Public Storage board
of directors even if a majority of the public shareholders of Public Storage
deem it to be in their best interests because they would receive a premium for
their shares over the shares' then market value or for other reasons. See
"Description of Public Storage Capital Stock - Ownership Limitations."
The number of shares of Public Storage common stock to be issued in the merger
has not been determined.
If you receive Public Storage common stock in the merger, the number of
shares will be based on the average market price of Public Storage common stock
for the 20 consecutive trading days ending on the fifth trading day prior to the
Effective Date. Since the market price of Public Storage common stock
fluctuates, the market value of Public Storage common stock that you may receive
in the merger may decrease after the date that the number of shares is
determined, but before those shares actually are issued. In addition, because of
possible increased selling activity following issuance of shares in this merger
and other factors, such as changes in interest rates and market conditions, the
market value of Public Storage common stock that you may receive in the merger
may decrease following the merger.
Public Storage would incur adverse tax consequences if it fails to qualify as a
REIT.
If you receive Public Storage common stock in the merger, you will be
subject to the risk that Public Storage may not qualify as a REIT. As a REIT,
Public Storage must distribute at least 90% of its REIT taxable income to its
shareholders (which include not only holders of Public Storage common stock but
also holders of preferred and equity stock). Failure to meet the extensive
requirements applicable to REITs could jeopardize Public Storage's qualification
as a REIT. See "Federal Income Tax Considerations - Taxation of Public Storage
as a REIT."
For any taxable year that Public Storage fails to qualify as a REIT and
the relief provisions do not apply, Public Storage would be taxed at the regular
corporate rates on all of its taxable income, whether or not it makes any
distributions to its shareholders. Those taxes would reduce the amount of cash
available to Public Storage for distribution to its shareholders or for
reinvestment. As a result, failure of Public Storage to qualify during any
taxable year as a REIT could have a material adverse effect upon Public Storage
and its shareholders. Furthermore, unless certain relief provisions apply,
Public Storage would not be eligible to elect REIT status again until the fifth
taxable year that begins after the first year for which Public Storage fails to
qualify.
Public Storage would incur a corporate level tax if it sold certain assets.
Public Storage will generally be subject to a corporate level tax if it
sells before November 2005 any of the assets (primarily general partnership
interests and management operations relating to mini-warehouses) it acquired in
a November 1995 reorganization. These assets were valued at approximately $550
million in the reorganization. Public Storage has no present intention to sell
any of these assets.
17
Public Storage and its shareholders are subject to financing risks.
Debt increases risk of loss. In making real estate investments, Public
Storage, unlike the Partnership, borrows money, which increases the risk of
loss. At March 31, 2002, Public Storage's debt of $128.1 million was less than
3% of its total assets.
Issuing additional shares reduces the interest of existing shareholders.
Issuing additional securities can dilute the interest of Public Storage
shareholders in Public Storage, including persons who receive shares in the
merger.
Public Storage intends to issue additional securities under a currently
effective registration statement. Issuing additional stock will dilute the
interest of Public Storage shareholders. See "Description of Public Storage
Capital Stock" for a discussion of the terms of the preferred stock, common
stock and equity stock.
If Public Storage is liquidated, holders of the preferred stock will be
entitled to receive, before any distribution of assets to holders of Public
Storage common stock, liquidating distributions (an aggregate of approximately
$1.8 billion with respect to preferred stock outstanding at March 31, 2002),
plus any accrued and unpaid dividends. Holders of preferred stock are entitled
to receive, when declared by the Public Storage board of directors, cash
dividends (an aggregate of approximately $151.7 million per year with respect to
preferred stock outstanding at March 31, 2002), in preference to holders of
Public Storage common stock.
The merger payments are based on an appraisal instead of arm's length
negotiation.
The payment you receive in the merger is based in significant part on a
third party appraised value of the Properties. However, appraisals are opinions
as of the date specified and are subject to certain assumptions and may not
represent the true worth or realizable value of these Properties. There can be
no assurance that if these Properties were sold, they would be sold at the
appraised values; the sales prices might be higher or lower.
Public Storage is subject to real estate operating risks.
Value of Public Storage's investment may be reduced by general risks of
real estate ownership. Like the Partnership, Public Storage is subject to the
risks generally incident to the ownership of real estate-related assets,
including
. lack of demand for rental spaces or units in a locale;
. changes in general economic or local conditions, changes in supply of
or demand for similar or competing facilities in an area;
. potential terrorist attacks;
. the impact of environmental protection laws;
. changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive; and
. changes in tax, real estate and zoning laws.
There is significant competition among mini-warehouses. Like the
Partnership, most of Public Storage's properties are mini-warehouses.
Competition in the market areas in which many of their properties are located is
significant and has affected the occupancy levels, rental rates and operating
expenses of certain of their properties. Any increase in availability of funds
for investment in real estate may accelerate competition. Recent increases in
18
development of mini-warehouses are expected to further intensify competition
among mini-warehouse operators in certain market areas in which Public Storage
operates.
Public Storage may incur significant environmental costs and liabilities.
Under various federal, state and local environmental laws, an owner or operator
of real estate interests may have to clean up spills or other releases of
hazardous or toxic substances on or from a property. Certain environmental laws
impose liability whether or not the owner knew of, or was responsible for, the
presence of the hazardous or toxic substances. In some cases, liability may not
be limited to the value of the property. The presence of such substances, or the
failure to properly remediate any resulting contamination, also may adversely
affect the owner's or operator's ability to sell, lease or operate its property
or to borrow using its property as collateral.
Public Storage has conducted preliminary environmental assessments of most
of its properties (and intends to conduct such assessments in connection with
property acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, such properties. These assessments
generally consist of an investigation of environmental conditions at the subject
property (not including soil or groundwater sampling or analysis), as well as a
review of available information regarding the site and publicly available data
regarding conditions at other sites in the vicinity. In connection with these
recent property assessments, Public Storage's operations and recent property
acquisitions, Public Storage has become aware that prior operations or
activities at certain facilities or from nearby locations have or may have
resulted in contamination to the soil and/or groundwater at such facilities. In
this regard, certain such facilities are or may be the subject of federal or
state environmental investigations or remedial actions. Public Storage has
obtained, with respect to recent acquisitions and intends to obtain with respect
to pending or future acquisitions, appropriate purchase price adjustments or
indemnifications that it believes are sufficient to cover any related potential
liabilities. Although there can be no assurance, based on the recent preliminary
environmental assessments, Public Storage believes it has funds available to
cover any liability from environmental contamination or potential contamination
and Public Storage is not aware of any environmental contamination of its
facilities material to its overall business, financial condition or results of
operation.
Public Storage has no interest in Canadian mini-warehouses.
The Hughes family has ownership interests in, and operates, approximately
38 mini-warehouses in Canada under the name "Public Storage." Public Storage
personnel are engaged, at the expense of the Canadian owners, in the supervision
of the operation of these properties. Public Storage has a right of first
refusal to acquire the stock or assets of the corporation engaged in these
operations if the Hughes family or the corporation agree to sell them. However,
Public Storage has no interest in the operations of this corporation, has no
right to acquire this stock or assets unless the Hughes family decides to sell
and receives no benefit from the profits and increases in value of the Canadian
mini-warehouses. There may be conflicts of interest in allocating the time of
Public Storage personnel between Public Storage's properties and the Canadian
properties.
The portable self-storage business has incurred operating losses.
Public Storage organized Public Storage Pickup & Delivery in 1996 to
operate a portable self-storage business. Public Storage owns all of Pickup &
Delivery. Since Pickup & Delivery will operate profitably only if it can succeed
in the relatively new field of portable self-storage, there can be no assurance
as to its profitability. Pickup & Delivery incurred operating losses of
$7,396,000 in 1999, $5,135,000 in 2000, $2,218,000 in 2001 and an operating
profit of $480,000 for the first quarter of 2002 (compared to an operating loss
of $927,000 for the first quarter of 2001).
BENEFITS TO INSIDERS
The merger involves certain benefits to Public Storage, including the
following:
. Ownership of All Partnership Units. As a result of the merger, Public
Storage will own all of the Partnership units without taxable gain to
Public Storage.
19
. Cost Efficiencies. The merger will eliminate almost all Partnership
administrative expenses, much of which has been borne by Public
Storage as owner of 63% of the Partnership units.
. Elimination of Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the public limited partners'
ownership of a minority interest in the Partnership. The principal
conflicts involve the competition of the Properties with other
mini-warehouses owned by Public Storage.
ABOUT THIS INFORMATION STATEMENT AND PROSPECTUS
This statement is part of a registration statement that Public Storage
filed with the Securities and Exchange Commission (the "Commission") relating to
the registration of up to 1,500,000 shares of Public Storage common stock being
issued in connection with the merger. This statement provides you with a general
description of the securities Public Storage will offer. You should read this
statement together with the additional information described under the heading
"Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
Public Storage and the Partnership are subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and
each files reports, proxy statements and other information with the Commission.
You may read and copy any materials Public Storage and the Partnership files
with the Commission at the Commission's Public Reference Room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission also maintains a computer site on
the World Wide Web (http://w.ww.sec.gov) that contains reports, proxies,
information statements, and other information regarding issuers that file
electronically. Public Storage's outstanding common stock is listed on the New
York Stock Exchange ("NYSE") and the Pacific Exchange ("PCX") under the symbol
PSA, and all reports, proxy statements and other information filed by Public
Storage with the NYSE may be inspected at the NYSE's offices at 20 Broad Street,
New York, New York 10005 and all those reports and other information filed by
Public Storage with the PCX may be inspected at the PCX's offices at 301 Pine
Street, San Francisco, California 94104.
Public Storage has filed with the Commission a registration statement on
Form S-4 (together with all amendments and exhibits, the "Registration
Statement") under the Securities Act, with respect to the shares of Public
Storage common stock being offered in the merger. This statement, which
constitutes part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement. Certain parts of the
Registration Statement are omitted from this statement in accordance with the
rules and regulations of the Commission. For further information, please refer
to the Registration Statement. Statements made in this statement concerning the
contents of any documents referred to in this document are not necessarily
complete, and in each case are qualified in all respects by reference to the
copy of such document filed with the Commission.
The Commission allows Public Storage and the Partnership to "incorporate by
reference" the information Public Storage and the Partnership file with the
Commission, which means that Public Storage and the Partnership can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this statement,
and information that Public Storage files later with the Commission will
automatically update and supersede this information.
Public Storage incorporates by reference the documents listed below:
. Public Storage's Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Form 10-K/A dated July 11, 2002;
. Public Storage's Quarterly Report on form 10-Q for the quarter ended
March 31, 2002;
. Public Storage's Current Reports on Form 8-K dated January 15, 2002,
and February 13, 2002; and
20
. The description of Public Storage's common stock contained in Public
Storage's Registration Statement on Form 8-A, effective June 30, 1981,
as supplemented by the description of Public Storage's common stock
contained in this statement.
The Commission has assigned file number 1-8389 to the reports and other
information that Public Storage files with the Commission.
The Partnership incorporates by reference the documents listed below:
. The Partnership's Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Form 10-K/A dated July 11, 2002;
. The Partnership's Quarterly Report on form 10-Q for the quarter ended
March 31, 2002; and
. The Partnership's Current Report on Form 8-K dated April 12, 2002.
The Commission has assigned file number 0-14477 to the reports and other
information that the Partnership files with the Commission.
This statement also incorporates by reference any future filings made by
Public Storage with the Commission under Sections 13(a), 13(c), 14 and 15(d) of
the Exchange Act prior to the date the merger is completed. You should be aware
that any statement contained in this statement or in a document incorporated by
reference may be modified or superseded by a document filed with the Commission
at a later date. Any statement which has been modified or superseded shall not
be considered to constitute a part of this statement.
You may request a copy of each of the filings of Public Storage or the
Partnership, at no cost, by writing or telephoning Public Storage at the
following address, telephone or facsimile number:
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2349
Telephone: (800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
In order to ensure timely delivery of any documents, you must request the
information by ________, 2002.
You may also find more information concerning Public Storage at the
following Internet address: http://www.publicstorage.com.
You should rely only on the information included in this statement or
incorporated in this statement. Public Storage has not authorized anyone else to
provide you with different information. Public Storage is not making an offer of
its shares of common stock in any state where the offer is not permitted. You
should not assume that the information in this statement is accurate as of any
date other than the date on the front of those documents.
CAUTIONARY STATEMENT
Statements contained in this statement that are not based on historical
fact are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "continue" or similar terms, variations of those terms
or the negative of those terms. Cautionary statements set forth in "Risk
Factors" and elsewhere in this statement identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
21
THE MERGER
General
The acquisition of the Partnership units not currently owned by Public
Storage will be accomplished in the merger as follows:
. A wholly-owned, second tier subsidiary of Public Storage will be
merged into the Partnership.
. Each Partnership unit (other than units owned by Public Storage) will
be converted into the right to receive a value of $546 in Public
Storage common stock or, at the election of a limited partner, in
cash. To be effective a cash election must be made by ________, 2002,
in accordance with the accompanying cash election form. For
information on obtaining a cash election form and contact information
see "- Cash Election Procedures."
. Distributions will be made to holders of Partnership units to cause
the estimated net asset value per Partnership unit as of the Effective
Date to be substantially equivalent to $546. In computing the
estimated net asset value per unit as of the Effective Date, the PSBP
partnership interests will be valued at the average of the per share
closing price on the AMEX of the shares of PS Business Parks, Inc.
during the 20 consecutive trading days ending on the fifth trading day
prior to the Effective Date.
. For purposes of the merger, the market value of the Public Storage
common stock will be the average of the per share closing prices on
the NYSE of the Public Storage common stock during the 20 consecutive
trading days ending on the fifth trading day prior to the Effective
Date.
. Following the merger, Public Storage (through a wholly owned entity)
will own all Partnership units, the Partnership will remain in
existence, and Public Storage and Mr. Hughes will continue as general
partners of the Partnership.
It is estimated that the aggregate consideration (cash or Public Storage
common stock or a combination of the two) to be paid by Public Storage to
acquire in the merger the Partnership units owned by the public limited partners
(including costs) will be approximately $30.4 million. See "- Determination of
Amounts to be Received by Limited Partners in the Merger" and "- Costs of the
Merger."
Background and Reasons for the Merger
The merger has not been negotiated at arm's length. The merger has been
structured by Public Storage, which controls the Partnership and has significant
conflicts of interest in connection with, and will benefit from, the merger.
Based in significant part on a third party appraisal of the Properties and on
the opinion of a financial advisor, in which they concur, Public Storage and
Hughes, the general partners of the Partnership, believe that the merger is fair
to the public limited partners.
The Partnership was organized in 1986 and raised $75 million in gross
proceeds in a public offering. All of the proceeds from the offering have been
invested to acquire properties, all but one of which were acquired jointly with
Public Storage. A predecessor of Public Storage sponsored the Partnership. In
the absence of the merger, the Partnership would terminate when all of its
properties were sold, but not later than December 31, 2038.
As indicated in the original prospectus, the Partnership originally
anticipated selling the Properties and liquidating from five to eight years
after acquisition, i.e., between 1991 and 1994. By 1990, significant changes had
taken place in the financial and real estate markets affecting the timing of any
proposed sale of the Properties, including (1) the increased construction of
mini-warehouses from 1984 to 1988, which had increased competition, (2) the
general deterioration of the real estate market (resulting from a variety of
factors, including the 1986 changes
22
in tax laws), which had significantly affected property values and decreased
real estate sales activities, (3) the reduced sources of real estate financing
(resulting from a variety of factors, including adverse developments in the
savings and loan industry) and (4) the glut in the real estate market caused by
overbuilding and sales of properties acquired by financial institutions.
Accordingly, the Properties were not marketed during the originally anticipated
liquidation period.
In view of the events affecting the timing of the sale of the Properties,
Public Storage concluded that the limited partners of the Partnership, as well
as the limited partners of other partnerships sponsored by Public Storage,
should be provided with a more efficient method of realizing the value of their
investment than the secondary market for limited partnership interests.
Accordingly, Public Storage purchased Partnership units from those limited
partners who desired to sell, including through tender offers in 1992, 1995 and
1997. As a result of these purchases, public limited partners now own only 37%
of the units with the balance owned indirectly by Public Storage. Since the
Partnership is beyond its original anticipated term and the public limited
partners own only a minority of the units, the general partners have decided to
eliminate through the merger the ongoing costs of a public structure and the
conflicts of interest resulting from the public limited partners' ownership of a
minority interest in the Partnership. The principal conflicts involve the
competition of the Properties with other mini-warehouses owned by Public
Storage.
Public Storage, which was organized in 1980, has from time to time taken
actions to increase its asset and capital base and increase diversification,
such as by increasing its interest in affiliated entities, like the Partnership.
Public Storage's interests in the Partnership include (1) Public Storage and the
Partnership jointly own 30 of the 32 Properties and the interest in PSBP, (2)
Public Storage (through a wholly-owned entity) and Hughes are general partners
of the Partnership, (3) Public Storage (through a wholly owned entity) owns 63%
of the Partnership units and (4) the Properties are managed by Public Storage.
As a result of the merger, Public Storage will own all of the Partnership units
and almost all Partnership administrative expenses will be eliminated.
The Partnership's reasons for the merger are that the Partnership is well
beyond the anticipated holding period of the Properties and the merger provides
limited partners with the opportunity to elect either (1) to convert their
relatively illiquid investment in the Partnership into a liquid investment in
Public Storage, which like the Partnership primarily owns mini-warehouses, or
(2) to receive a cash payment based on the appraised value of the Properties.
There has been no consideration of the Partnership's reasons for the merger by
any independent persons.
Fairness Analysis
The merger has not been negotiated at arm's length. The merger has been
structured by Public Storage, which controls the Partnership and has significant
conflicts of interest in connection with, and will benefit from, the merger.
However, based in significant part on a third party appraisal of the Properties
and on the opinion of Stanger, in which they concur, the general partners
believe that the merger is fair to public limited partners.
The general partners based their conclusions on the following factors: (1)
the consideration to be received by the limited partners in the merger is based
on the appraised value of the Properties as determined by an independent
appraisal firm; (2) the Partnership has received a fairness opinion from Stanger
relating to the consideration to be received by public limited partners; (3)
although the merger has been structured by Public Storage, the merger provides
public limited partners with a choice of converting their investment into an
investment in Public Storage or receiving cash for their investment; and (4)
based on certain significant assumptions, qualifications and limitations, the
consideration to be received by public limited partners compares favorably with
other alternatives.
The general partners believe that the engagement of Wilson and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements
and may receive fees in the future. See "- Real Estate Portfolio Appraisal by
Wilson" and "- Fairness Opinion from Stanger."
23
Alternatives to the Merger
The general partners considered liquidation and continued ownership by
the limited and general partners as alternatives to the merger. In order to
determine whether the merger or one of its alternatives would be more
advantageous to public limited partners, the general partners compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of the alternatives.
Liquidation
Benefits of Liquidation. An alternative to the merger would be to
liquidate the Partnership's assets, distribute the net liquidation proceeds to
the partners and thereafter dissolve the Partnership. Through such liquidation,
the Partnership would provide for a final disposition of its partners' interests
in the Partnership. Limited partners would receive cash liquidation proceeds (as
they will if they make cash elections) and could use the proceeds to purchase
shares of Public Storage common stock in the public market. If the Partnership
liquidated its assets through asset sales to unaffiliated third parties, limited
partners would not need to rely upon a real estate portfolio appraisal of the
fair market value of the Properties. The Partnership would be valued through
arm's length negotiations between the Partnership and prospective purchasers.
Limited partners 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 the Properties. There can be no assurance
that if the Properties were sold, they would be sold at the appraised value; the
sales price might be higher or lower than the appraised value.
Disadvantages of Liquidation. In contrast to the merger, the
Partnership would incur certain costs in a liquidation, including transfer
taxes, real estate commissions and other closing costs estimated at $3.8
million. If the merger is completed, all costs incurred in connection with the
merger will be paid by Public Storage.
Continued Ownership of the Partnership
Benefits of Continued Ownership. Another alternative to the merger
would be to continue the Partnership, with the Partnership continuing to be
owned by the limited and general partners. The Partnership is operating
profitably.
There has been improvement in the mini-warehouse markets. As the pace
of new mini-warehouse development has slowed somewhat from the peak levels of
1984-88, there has been a corresponding improvement in the financial performance
of existing properties. This improvement is evidenced by the performance of the
Properties. For example, annual realized rents per occupied square foot of the
Properties increased from 1999 to 2001 from $8.16 to $8.88 with average
occupancies of 92% in 1999 and 90% in 2001. Annualized realized rents per
occupied square foot and average occupancy of the Properties for the three
months ended March 31, 2002 are $9.21 and 83%, respectively. Higher realized
rent per occupied square foot was achieved through more aggressive pricing that
was implemented during 2001. Public Storage's more aggressive rental rates and
reductions in the amount of discounts offered, which occurred primarily in the
last nine months of 2001, have resulted in a reduction in the average occupancy
levels during the first quarter of 2002 compared to the prior year. This
reduction continues the trend that started in 2001. Despite significant recent
increases in the development of new mini-warehouses, the general partners
believe that the financial performance of the Properties may continue to
improve, although not necessarily at the rate of improvement experienced in
prior years. Should such improvements continue, the value of the Properties
could be expected to increase. See "Description of Partnership's Properties."
A number of advantages could be expected to arise from the continued
ownership of the Partnership by the limited and general partners. Limited
partners would continue to receive regular quarterly distributions of net cash
flow arising from operations and the sale or refinancing of the Partnership's
assets. Given the currently improving market conditions for mini-warehouses, the
general partners believe that the level of these distributions to limited
partners may increase. Continued ownership of the Partnership by the general and
limited partners affords
24
limited partners with the opportunity to participate in any future appreciation
in the Partnership's assets. In addition, this decision, if elected, would mean
that there would be no change in the nature of the investment of limited
partners. This option avoids whatever disadvantages might be deemed inherent in
the merger. See "Risk Factors" for discussion of various risks associated with
the merger.
Disadvantages of Continued Ownership. The Partnership is well beyond
the anticipated holding period of the Properties. Continued ownership of the
Partnership by the limited and general partners would fail to provide the
partners with liquidity either through the receipt of Public Storage common
stock or, at a limited partner's election, a cash payment for the Partnership
units and would fail to provide the benefits to the general partners that are
highlighted under "Benefits to Insiders." The merger affords limited partners
increased liquidity. In addition, because the Partnership is not authorized to
issue new securities or to reinvest sale or financing proceeds, the Partnership
is less able to take advantage of new real estate investment opportunities. In
contrast, Public Storage has a substantially larger, more diversified,
investment portfolio that reduces the risks associated with any particular
assets or group of assets and increases Public Storage's ability to access
capital markets for new capital investments.
Determination of Amounts to be Received by Limited Partners in the Merger
In connection with the merger, limited partners will receive a value of
$546 per Partnership unit in cash or Public Storage common stock. In addition,
as noted in note (7) below, limited partners will also receive a final
distribution in cash equal to the amount by which the net asset value of
Partnership units on the Effective Date exceeds $546. The general partners have
determined this amount based on the estimated net asset value per unit computed
as follows:
25
Estimated value of Partnership's interest in the
Properties (1) $ 58,177,000
Plus:
Market value of Partnership's
interest in PSBP (2) 21,558,000
Partnership's interest in other tangible
net assets and liabilities (3) 2,989,000
------------
Net proceeds available for distribution 82,724,000
Distributions to general partners (4) (827,000)
------------
Distributions to limited partners $ 81,897,000
============
Amount per Partnership unit (5)(6)(7)(8) $ 546
============
-----------------
(1) Reflects appraised value of the Properties determined by
Wilson as of February 28, 2002. Assumes proceeds from a deemed
sale of the Properties at the appraised value and that the
proceeds from the sale of the Properties are allocated between
the Partnership and Public Storage based on their joint
venture agreement. See "Description of Partnership's
Properties" and "The Merger - Real Estate Portfolio Appraisal
by Wilson."
(2) Reflects closing price of shares of PS Business Parks, Inc. on
the AMEX as of February 28, 2002 (the PSBP partnership
interests are exchangeable for those shares on a one unit for
one share basis). Assumes proceeds from a deemed sale of the
units at that price are allocated between the Partnership and
Public Storage based on the joint venture agreement. See note
(7) below.
(3) Includes the Partnership's interest in cash and other non-real
estate assets offset by the Partnership's interest in prepaid
rents, security deposits, accounts payable and accrued
expenses as of February 28, 2002.
(4) Represents distributions attributable to general partners' 1%
capital interest in the Partnership. In accordance with the
Partnership Agreement, no subordinated incentive distributions
are payable at this time.
(5) Based on 150,000 Partnership units.
(6) Upon completion of the merger, each Partnership unit would be
converted into Public Storage common stock with a value of
$546 or, at the election of a limited partner, $546 in cash.
The number of shares of Public Storage common stock to be
issued in the merger will be determined by dividing $546 by
the average of the closing prices of Public Storage common
stock during the 20 consecutive trading days ending on the
fifth trading day prior to the Effective Date. The market
price of Public Storage common stock may fluctuate after the
date that the number of shares to be issued to limited
partners in the merger is determined and before those shares
actually are issued.
(7) On the Effective Date, the value of the Partnership units will
be recomputed. A cash distribution will be made to limited
partners, as of the Effective Date, in an amount by which the
recomputed value exceeds $546 to cause the estimated net asset
value per Partnership unit as of the Effective Date to be
substantially equivalent to $546 per unit. In computing the
estimated net asset value per unit as of the Effective Date,
the estimated value of the Partnership's interest in the
Properties will be based on the February 28, 2002 property
appraisal, the PSBP partnership interests will be valued at
the average of the per share closing price on the AMEX of the
shares of PS Business Parks, Inc. during the 20 consecutive
trading days ending on the fifth trading day prior to the
Effective Date and the Partnership's interest in the tangible
net assets and liabilities will be measured as of the last day
of the calendar month preceding the Effective Date.
(8) Original purchase price of a Partnership unit was $500.
26
Potential Benefits of the Merger
The general partners believe that the following are the principal
potential benefits to limited partners:
(1) Limited partners who elect to receive cash will have fully
liquidated their investment at an amount substantially higher than the prices in
the limited secondary transactions. Also, they will have simplified their tax
reporting for years after 2002.
(2) For limited partners who receive Public Storage common stock,
the principal potential benefits are:
. Ownership Interest in a Diversified Real Estate Company.
Because the Partnership is not authorized to issue new
securities or to reinvest sale or financing proceeds, the
Partnership is less able to take advantage of new real estate
investment opportunities. In contrast, Public Storage has a
substantially larger, more diversified, investment portfolio
that reduces the risks associated with any particular assets
or group of assets and increases Public Storage's ability to
access capital markets for new capital investments.
. Increased Liquidity. There is no active market for the
Partnership units. In comparison, Public Storage has
approximately 115.8 million shares of Public Storage common
stock listed on the NYSE with an average daily trading volume
during the 12 months ended March 31, 2002 of approximately
188,200 shares. Given Public Storage's market capitalization
and trading volume, limited partners who receive Public
Storage common stock are likely to enjoy a more active trading
market and increased liquidity for the Public Storage
securities they receive.
. Simplified Tax Reporting. The merger also will simplify tax
reporting for years after 2002 for limited partners who
receive Public Storage common stock. Public Storage
shareholders will receive Form 1099-DIV to report their
dividends from Public Storage. Form 1099-DIV is substantially
easier to understand than the Schedule K-1 prepared for the
reporting of the financial results of the Partnership.
Detriments of the Merger
For a discussion of certain risks and detriments of the merger, see
"Risk Factors" beginning on page __.
Fairness Analysis
Conclusions. Based upon an analysis of the merger, the general partners
have concluded that (1) the terms of the merger are fair to public limited
partners and (2) after comparing the potential benefits and detriments of the
merger with alternatives, the merger is more advantageous to public limited
partners than such alternatives.
Although the general partners reasonably believe the terms of the
merger are fair to public limited partners, the general partners have
significant conflicts of interest with respect to the merger. The merger has
been initiated and structured by Public Storage, one of the general partners.
See "Summary - Relationships" and "Risk Factors - Public Storage has conflicts
of interest in the merger."
Material Factors Underlying Conclusions of General Partners. The
following is a discussion of the material factors underlying the conclusions of
the general partners. The general partners have not quantified the relative
importance of these factors.
1. Consideration Offered. The general partners believe that (A)
basing the consideration to be paid to public limited partners in the merger on
the value of the Partnership's assets is reasonable and consistent with the
partnership agreement, (B) the Partnership's net asset value represents a fair
estimate of the value of its assets, net of liabilities, and constitutes a
reasonable basis for determining the consideration to be received by public
limited
27
partners, (C) the allocation of the appraised value of the Properties between
the Partnership and Public Storage is fair because it reflects the amount each
would receive upon the Partnership's liquidation under the joint venture
agreement and (D) the allocation of the Partnership's net asset value between
the limited and general partners is fair because it reflects the amount they
would receive upon the Partnership's liquidation under the partnership
agreement. There was no negotiation regarding the basis for determining the
consideration to be paid to public limited partners in the merger. See "-
Background and Reasons for the Merger."
2. Choice as to Form of Consideration. The merger provides public
limited partners with the choice of either (A) converting their investment into
an investment in Public Storage, which generally owns the same type of
properties as the Partnership and which has acquired, and is expected to
continue to acquire, additional properties or (B) receiving in cash the amounts
they would receive if the Properties were sold at their appraised values and the
Partnership's interest in PSBP were sold at its market value and the Partnership
were liquidated (without any reduction for commissions and other sales
expenses).
3. Independent Portfolio Appraisal and Fairness Opinion. The
conclusions of the general partners are based in significant part upon the
portfolio appraisal prepared by Wilson and Stanger's fairness opinion. The
general partners attributed significant weight to these items, which they
believe support their position, and do not know of any factors that are
reasonably likely to detract from the conclusions in Wilson's portfolio
appraisal and Stanger's fairness opinion. The general partners believe that the
engagement of Wilson and Stanger to provide the portfolio appraisal and the
fairness opinion, respectively, assisted the general partners in the fulfillment
of their duties to public limited partners, notwithstanding that these parties
received fees in connection with their engagements by the Partnership and in
connection with other engagements by Public Storage and its affiliates and may
receive fees in the future. See "- Real Estate Portfolio Appraisal by Wilson"
and "- Fairness Opinion from Stanger."
4. Comparison of Payments to be Received in the Merger to Other
Alternatives. The payments to be received in the merger of $546 per Partnership
unit generally compares favorably with (A) the prices at which limited secondary
sales of units have been effectuated during 2000 and 2001 ($297 - $368), (B) a
range of estimated going-concern value per unit ($495 to $515), (C) an estimated
liquidation value per unit ($526) and (D) the book value per unit as of March
31, 2002 ($213). The general partners recognize that this comparison is subject
to significant assumptions, qualifications and limitations. See "- Comparison of
Consideration to be Received in the Merger to Other Alternatives."
5. Possible Lower Level of Distributions to Limited Partners
After the Merger. The level of distributions to limited partners who receive
Public Storage common stock in the merger may be lower after the merger than
before.
6. Conflicts of Interest. The merger has been initiated and
structured by Public Storage, one of the general partners. Independent
representatives were not engaged to negotiate these arrangements on behalf of
public limited partners, and the terms of the merger are not the result of arm's
length negotiations.
The general partners do not believe that the absence of independent
representatives to negotiate the merger undermines the fairness of the merger.
Based upon the use of an independent appraisal firm and the Stanger fairness
opinion, the general partners considered that the engagement of such independent
representatives was not necessary or cost effective.
Comparison of Consideration to be Received in the Merger to Other Alternatives
General. The general partners compared the consideration to be received
in the merger, i.e., a value of $546 per Partnership unit to: (1) the prices at
which limited secondary sales have been effectuated; (2) estimates of the value
of the Partnership on a liquidation basis assuming that its assets were sold at
their appraised fair market value and the net proceeds distributed between the
joint venture partners in accordance with the joint venture agreement and
between the limited and general partners in accordance with the partnership
agreement; and
28
(3) estimates of the value of the Partnership on a going-concern basis assuming
that it were to continue as a stand-alone entity and its assets sold at the end
of a five-year holding period. Due to the uncertainty in establishing these
values, the Partnership established a range of estimated values for certain of
the alternatives, representing a high and low estimated value for the potential
consideration. Since the value of the consideration for alternatives to the
merger is dependent upon varying market conditions, no assurance can be given
that the range of estimated values indicated establishes the highest or lowest
possible values. However, the general partners believe that analyzing the
alternatives in terms of ranges of estimated value, based on currently available
market data and, where appropriate, reasonable assumptions made in good faith,
establishes a reasonable framework for comparing alternatives.
The results of these comparative analyses are summarized in the
following tables. Limited partners should bear in mind that the estimated values
assigned to the alternate forms of consideration are based on a variety of
assumptions that have been made by the Partnership. These assumptions relate,
among other things, to: projections as to the future income, expenses, cash flow
and other significant financial matters of the Partnership; the capitalization
rates that will be used by prospective buyers when the Partnership's assets are
liquidated; and, appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows that may be received with respect
to Partnership units. In addition, these estimates are based upon certain
information available to the Partnership at the time the estimates were
computed, and no assurance can be given that the same conditions analyzed by
them in arriving at the estimates of value would exist at the time of the
merger. The assumptions used have been determined by the Partnership in good
faith, and, where appropriate, are based upon current and historical information
regarding the Partnership and current real estate markets, and have been
highlighted below to the extent critical to the conclusions of the general
partners.
No assurance can be given that such consideration would be realized
through any of the designated alternatives, and limited partners should
carefully consider the following discussions to understand the assumptions,
qualifications and limitations inherent in the presented valuations. The
estimated values presented in the following table are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These estimated values are based upon certain assumptions that relate,
among other things, to (1) the price of Public Storage common stock and common
stock of PS Business Parks, Inc. as of the date of the merger being the same as
during the 20 trading days ending on the fifth trading day prior to the
Effective Date, (2) projections as to the future revenues, expenses, cash flow
and other significant financial matters of the Partnership, (3) the
capitalization rates that will be used by prospective buyers when the
Partnership's assets are liquidated, (4) selling costs, (5) appropriate discount
rates to apply to expected cash flows in computing the present value of the cash
flows and (6) the manner of sale of the Properties. The specific assumptions
used are outlined below in the detailed description of each assumption. Actual
results may vary from those set forth below based on numerous factors, including
interest rate fluctuations, tax law changes, supply and demand for
mini-warehouses, the manner in which the properties are sold and changes in
availability of capital to finance acquisitions of mini-warehouses.
Partnership Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------------
Limited Secondary Estimated Going Concern Estimated Liquidation Value per
Payments in Merger per Market Prices of Value per Partnership Unit at
Partnership unit Partnership Units(2) Partnership Unit(3) Appraised Value (4)
----------------------------------------------------------------------------------------------------------------------
$546(1) $297 $368 $495 $515 $526
----------------------------------------------------------------------------------------------------------------------
---------------
(1) Based on the Partnership's net asset value consisting of the
independently appraised market value of the Properties as of February
28, 2002, the closing price of PS Business Parks, Inc. on the AMEX on
February 28, 2002, the estimated book value of its other net assets as
of February 28, 2002. The market price of Public Storage common stock
may fluctuate following establishment of the number of shares to be
issued to limited partners in the merger and prior to issuance and
could decrease as a result of increased selling activity following
issuance of the shares in the merger and other factors. See "-
Determination of Amounts to be Received by Limited Partners in the
Merger."
29
(2) There is no active market for the Partnership units. Based on the
information available to the Partnership, the prices at which limited
secondary sales have been effectuated from January 1, 2000 through
December 31, 2001. Included in this price range are sales to Public
Storage which all occurred at $351 per unit. See "Distributions and
Market Prices of Partnership Units."
(3) Reflects a range of values based upon a number of assumptions regarding
the future net operating income and distributions of the Partnership and
the date of its liquidation. See "- Going-Concern Value."
(4) Based upon Wilson's real estate appraisal for the Properties, less
estimated expenses of liquidation. See "- Liquidation Values."
Limited Secondary Market Prices of Units. There is no active market for
the Partnership units. Based on the information available to the Partnership,
the prices at which limited secondary sales have been effectuated ranged from
$297 to $368 per unit from January 1, 2000 through February 28, 2002. Although
sales of units on the secondary market do not necessarily reflect the full value
of the Partnership's net assets, the general partners believe that these sales
are relevant because the merger consideration would not likely be fair if
consistently less than the secondary sales prices. Included in this price range
are sales to Public Storage which all occurred at $351 per unit. See
"Distributions and Market Prices of Partnership Units."
Going-Concern Value. The Partnership has estimated the going-concern
value of the Partnership by analyzing projected cash flows and distributions
assuming that the Partnership was operated as an independent stand-alone entity
and its assets sold in a liquidation of the Partnership after a five-year
holding period. The Partnership assumed sale of the Properties at a terminal
value computed by capitalizing the projected net operating income in year six at
a capitalization rate equal to the midpoint of the effective capitalization rate
in the appraisal based on the appraiser's projected first year net operating
income and before deductions for items of deferred maintenance and the
capitalization rate used by the appraiser in the residual value component of the
discounted cash flow analysis (an average capitalization rate of 9.64% for the
Properties) resulting in the Partnership's assumed interest in the Properties
being approximately $68.9 million before reduction for cost of sale. The
Partnership assumed that the Partnership's interest in PSBP was sold at an FFO
multiple of 10.61 less $0.06 per PSBP unit in brokerage commissions. Real estate
selling costs were assumed to be incurred at the same percentage of sale
proceeds (4.3%) as incurred in the liquidation alternative. Distribution and
sale proceeds per Partnership unit were discounted in the projections at rates
ranging from 12% to 13%.
Both scenarios of the going-concern analysis assume that all of the
Properties are sold concurrently at the expiration of the holding period. Should
the assets be liquidated over time, even at prices equal to those projected,
distributions to limited partners out of the Partnership's cash flow from
operations might be reduced because relatively fixed costs, such as general and
administrative expenses, are not proportionately reduced with the liquidation of
assets. However, for simplification purposes, the sales are assumed to occur
concurrently.
The estimated value of the Partnership on a going-concern basis is not
intended to reflect the distributions payable to limited partners if its assets
were to be sold at their current fair market value.
Liquidation Values. Since one of the alternatives available to the
general partners is to proceed with a liquidation of the Partnership, and the
corresponding distribution of the net liquidation proceeds between the joint
venture partners and, within the Partnership, to the limited partners and the
general partners, the Partnership has estimated the liquidation value of the
Partnership assuming that the Properties are sold at their appraised value based
upon the Wilson real estate portfolio appraisal. This alternative assumes that
the Partnership's interest in PSBP is sold at the February 28, 2002 trading
price (less a commission of $.06 per share), the Partnership incurs real estate
selling costs at the time of liquidation (state and local transfer taxes, real
estate commissions of 3% of sales proceeds and legal and other closing costs) of
approximately $3.8 million, and the remaining net liquidation proceeds,
including the Partnership's interest in other tangible net assets and
liabilities as of February 28, 2002, are distributed between the joint venture
partners in accordance with the joint venture agreement and between the limited
and general partners in accordance with the partnership agreement.
30
The liquidation analysis assumes that all of the Properties are sold
concurrently at their appraised value. Should the assets be liquidated over
time, even at prices equal to those projected, distributions to limited partners
from cash flow from operations might be reduced because the Partnership's
relatively fixed costs, such as general and administrative expenses, are not
proportionately reduced with the liquidation of assets. However, for
simplification purposes, the sales of the Properties are assumed to occur
concurrently.
Applying these procedures, the Partnership arrived at the liquidation
value set forth in the table. The real estate portfolio appraisal sets forth,
subject to the specified assumptions, limitations and qualifications, Wilson's
professional opinion as to the market value of the Properties as of February 28,
2002. While the portfolio appraisal is not necessarily indicative of the price
at which the assets would sell, market value generally seeks to estimate the
price at which the Properties would sell if disposed of in an arm's length
transaction between a willing buyer and a willing seller, each having access to
relevant information regarding the historical revenues and expenses. The real
estate portfolio appraisal assumes that these Properties are disposed of in an
orderly manner and are not sold in forced or distressed sales where sellers
might be expected to dispose of their interests at substantial discounts to
their actual fair market value. See "- Real Estate Portfolio Appraisal by
Wilson."
Distribution Comparison. The general partners have considered the
potential impact of the merger upon distributions that would be made to limited
partners who exchange their Partnership units for Public Storage common stock.
Based on a market price of Public Storage common stock of $37.65, the current
regular quarterly distribution rate for Public Storage ($.45 per share) and the
regular and special distributions for the Partnership during 2001 ($36.84 per
unit), limited partners would receive approximately $10.74 (29.1%) less in
annual distributions per Partnership unit after the merger from Public Storage
than before the merger from the Partnership and approximately $.68 less per unit
in annual distributions for each $1.00 (2.7%) increase in the market price of
Public Storage common stock above $37.65.
In evaluating this estimate, limited partners should bear in mind that
this comparison does not reflect the tax that a limited partner will have to pay
in connection with the merger. The merger will be a taxable event for the public
limited partners resulting in the recognition of gain to most taxable public
limited partners who receive either cash or Public Storage common stock. In
evaluating this estimate, limited partners should also bear in mind that a
number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, if any, capital expenditure levels (in excess of normal
expenditures for ongoing maintenance and repairs) and the corporate policy with
respect to cash distributions. A comparison of the current distribution levels
of Public Storage with those of the Partnership does not show how the merger
might affect a limited partner's distribution level over a number of years.
Real Estate Portfolio Appraisal by Wilson
Wilson was engaged by the Partnership to appraise the Properties and has
delivered a written report of its analysis, based upon the review, analysis,
scope and limitations described therein, as to the market value of the
Properties as of February 28, 2002. The appraisal was limited in that Wilson did
not inspect all of the Properties and its conclusion is primarily based on the
Income Capitalization Approach. The Partnership selected Wilson to provide the
appraisal because of its experience and reputation in appraising
mini-warehouses, including its appraisal of other properties managed by Public
Storage. The consideration to be paid by Public Storage to the limited partners
in the merger is based on the appraisal. The appraisal, which contains a
description of the assumptions and qualifications made, matters considered and
limitations on the review and analysis, is set forth as Appendix B and should be
read in its entirety. Certain of the material assumptions, qualifications and
limitations to the appraisal are described below.
Experience of Wilson. Wilson, formed by Charles R. Wilson in 1976, has
specialized in the appraisal of self-storage 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 also
owns Self-Storage Data Services, Inc., a company which maintains a database
containing operating income and expense data for several hundred self-storage
facilities nationwide.
31
Summary of Methodology. At the request of the Partnership, Wilson
evaluated the Properties. In valuing the Properties, Wilson 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. Wilson did not consider the cost approach to be applicable to the
Properties.
The income capitalization approach estimates a property's capacity to
produce income through an analysis of the rental market, operating expenses and
net operating income. Net operating income may then be processed into a value
estimate through either (or a combination) of two methods: direct capitalization
or yield capitalization, i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of
substitution, i.e., that an informed purchaser would pay no more for a property
than the cost of acquiring an existing property with the same utility. The sales
comparison approach establishes what typical investors in the marketplace are
willing to pay for the subject properties based on amounts paid for similar type
properties.
The cost approach is based on the estimated market value of the site as
if vacant plus the depreciated replacement cost of the existing improvements.
The cost approach was not considered appropriate in the case of the Properties
since (a) today's investors generally do not rely upon the cost approach in
making investment decisions for older properties and (b) the necessity of
estimating total accrued depreciation in buildings of the type and age of the
Properties diminishes the validity of this approach.
While the appraisal was prepared for all of the Properties as a whole,
Wilson analyzed the individual Properties by (a) reviewing each Property's
previous three years' operating statements, (b) reviewing information submitted
to Wilson by on-site managers which included competitive rental surveys, subject
facility descriptions, area trends and other factors and (c) developing
information from a variety of sources about market conditions for each
individual property that included population, employment and housing trends
within the market. Wilson verified the competitive property rental rates and
occupancies, where available via telephone. Wilson also verified the market
conditions and Properties' physical condition (including necessary reserves for
deferred maintenance) by visiting and inspecting a representative sample of the
Properties and discussing maintenance requirements with property management.
Wilson also reviewed evaluations for each property and interviewed
management personnel responsible for the Properties to ascertain competitive
conditions, area economic trends affecting the properties, historical operating
revenues and expenses and items of deferred maintenance.
Wilson then estimated the value of each of the Properties relying heavily
upon the income approach. To define the occupancy and rental rates and expense
escalators to be used in developing cash flow projections, Wilson in part
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, Wilson reviewed other published information
concerning acquisition criteria in use by property investors. Further, Wilson
gathered and reviewed sales of mini-warehouses located nationwide 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. Wilson also reviewed information compiled by
management identifying sales and acquisitions of mini-warehouses.
In applying a discounted cash flow analysis, projections of cash flow
from each property (assuming no indebtedness) were developed for a 10-year
period ending in the year 2011 with a residual value computed at the end of year
10. The first year's scheduled gross income was estimated taking into
consideration each property's current rent structure and the rental rates of
competitive facilities. Also included in the income estimate were trends in
ancillary income from late fees and rental concessions. Wilson then made an
analysis of each subject's occupancy history and took into account local market
conditions to estimate a stabilized occupancy level for each of the Properties.
32
Estimated expenses were based primarily upon each of the Properties'
actual operating history. Expenses were also tested for reasonableness (and
adjusted where deemed necessary) based upon a comparison of the expense levels
to market norms. Expenses were deducted from effective gross income to derive a
net operating income for each property. Consideration was given, and adjustments
made, to reflect replacement reserves and scheduled capital repairs. 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 used annual revenue growth rates from -0.3% to 5.4% over the
twelve months ending December 31, 2001 for the initial year of its cash flow
projection and annual growth rates ranging from 3% to 3.5% thereafter. Expense
growth rates for the Properties ranged between -2.4% and 16% over the twelve
months ending December 31, 2001 for the first year and between 3% and 3.5% per
annum thereafter except for real estate taxes in California that increased 2.0%
per annum. Wilson then used terminal capitalization rates of 9.50% to 10.00% to
capitalize each of the Properties' 11th year net income into a residual value at
the end of a 10-year holding period, and assumed a normal cost of disposing of
the Properties. The 10 yearly cash flows were then discounted to present worth
using discount rates ranging from 11.50% to 12.50%. In addition, Wilson valued
each of the Properties using the direct capitalization method by applying
capitalization rates ranging from 9.00% to 10.0% to projected net operating
income for the next 12 months.
The indicated value for the Properties based upon the discounted cash
flow analysis is approximately $89,320,000 and based upon the direct
capitalization method is approximately $88,910,000. Wilson then deducted from
the value of each property the present value of the costs associated with items
of deferred maintenance.
The indicated value for the Properties after the above adjustment based
upon the discounted cash flow analysis is $87,420,000 and based upon the direct
capitalization technique is $87,010,000.
In applying the sales comparison approach to the Properties, Wilson
analyzed approximately 142 mini-warehouse properties that were sold during 1999
through 2001. Using a regression analysis, a strong correlation was derived
between the comparable property's net income and its sales price per square
foot.
In addition, Wilson reviewed capitalization rates and purchase prices
paid in recent transactions of properties similar to the Properties involving
Public Storage and others and has concluded that the Properties are reasonably
and appropriately valued relative to these other transactions.
Conclusions as to Value. Wilson gave primary emphasis to the income
capitalization approach, an emphasis deemed appropriate based on acquisition
criteria currently employed in the mini-warehouse market. Wilson validated the
value from the income capitalization approach with the direct comparison
approach.
Based on the valuation methodology described above, Wilson assigned a
market value to the Properties as of February 28, 2002 of $87,250,000. The
resulting effective implied capitalization rate for the Properties based on
reported property operations (before non-recurring items and after certain
property tax adjustments) during the 12 months ended February 28, 2002 averaged
approximately 9.1%. For the 30 stabilized properties, the resulting effective
implied capitalization rate based on reported property operations (before
non-recurring items and after certain property tax adjustments) during the 12
months ended February 28, 2002 averaged approximately 9.3%.
Wilson's conclusion as to value relates to 100% of the Properties, which
includes the joint venture interests of both the Partnership and Public Storage.
Wilson did not separately value the interest of the Partnership in the
Properties.
Assumptions, Limitations and Qualifications of the Appraisal. The
appraisal reflects Wilson's valuation of the Properties as of February 28, 2002
in the context of the information available on such date. Events occurring after
February 28, 2002 and before the closing of the merger could affect the
properties or assumptions used in preparing the appraisal. Wilson has no
obligation to update the appraisal on the basis of subsequent events; however,
Wilson has informed the Partnership that, as of the date of this statement,
Wilson is not aware of any event
33
or change in conditions since February 28, 2002 that may have caused a material
change in the value of the Properties since that date.
The appraisal is subject to certain general and specific assumptions and
limiting conditions and is in conformity with the Departure Provision of Uniform
Standards of Professional Appraisal Practice. Among other limitations, the
appraisal (1) did not consider the effect of easements, restrictions, structural
repairs and other similar items on the value of the Properties, (2) assumed that
the properties comply with local building codes and zoning ordinances, (3)
assumed that there are no new or planned facilities except as noted in the
appraisal and (4) did not involve the physical inspections of all of the subject
or competing properties. See Appendix B for a discussion of the specific
assumptions, limitations and qualifications of the appraisal.
Compensation and Material Relationships. Wilson is being paid an aggregate
fee of $54,600 for preparation of the appraisal, which fee includes
reimbursement for all of Wilson's related out-of-pocket expenses. Wilson is also
entitled to indemnification against certain liabilities. The fee was negotiated
with Wilson and payment is not dependent upon completion of the merger. As a
leading appraiser of mini-warehouses, Wilson (and its predecessor) have prepared
appraisals for Public Storage and its affiliates, including appraisals of the
properties of prior partnership and REITs in connection with their mergers with
Public Storage, and Wilson is expected to continue to prepare appraisals for
Public Storage. From January 1, 1999 to the present, Wilson (and its
predecessor) have received compensation aggregating approximately $131,000 for
these services (exclusive of amounts received in connection with the merger).
Fairness Opinion from Stanger
Stanger was engaged by the Partnership to deliver a written opinion of its
determination as to the fairness of the consideration to be received in the
merger, from a financial point of view, to the public limited partners. The full
text of the opinion, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
opinion, is set forth in Appendix C to this statement and should be read in its
entirety. The material assumptions, qualifications and limitations to the
fairness opinion are set forth below. The summary set forth below does not
purport to be a complete description of the analyses used by Stanger in
rendering the fairness opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description.
In rendering the fairness opinion, Stanger did not conduct an independent
appraisal of the Partnership's portfolio of properties or the value of the
Partnership units. In conducting the reviews in connection with the fairness
opinion, Stanger has relied on the accuracy and completeness of the portfolio
appraisal performed by Wilson and the analyses provided by the general partners.
Except for the assumptions, described more fully below, which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
with respect to the methods and procedures to be followed in rendering the
fairness opinion. The Partnership has agreed to indemnify Stanger against
certain liabilities arising out of its engagement to prepare and deliver the
fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided information,
research, investment banking and consulting services to clients throughout the
United States, including major NYSE firms and insurance companies and over 70
companies engaged in the management and operation of partnerships and REITs. The
investment banking activities of Stanger include financial advisory services,
asset and securities valuations, equity and debt placements, industry and
company research and analysis, litigation support and expert witness services,
and due diligence investigations in connection with both publicly registered and
privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, reorganizations and for estate, tax, corporate and other purposes.
In particular, Stanger's valuation practice principally involves partnerships,
partnership securities and the
34
assets typically owned through partnerships including, but not limited to, oil
and gas reserves, real estate, cable television systems and equipment leasing
assets.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the merger, Stanger: (1) reviewed a draft of this
statement in substantially the form intended to be filed with the Securities and
Exchange Commission (the "SEC") and provided to limited partners; (2) reviewed
the financial statements contained in Form 10-K filed with the SEC for Public
Storage and the Partnership for the three fiscal years ending December 31, 1999,
2000 and 2001 and the financial statements contained in Form 10-Q filed with the
SEC for Public Storage and the Partnership for the three months ended March 31,
2002; (3) reviewed the MAI certified appraised value of the portfolio prepared
by Wilson; (4) reviewed information regarding purchases and sales of
self-storage properties by Public Storage or any affiliated entities over the
past three years, and other information available relating to acquisition
criteria for self-storage properties; (5) reviewed estimates prepared by the
Partnership, and based in part on the appraisal, of the current net liquidation
value per Partnership unit of the Partnership's assets and projections of cash
flow from operations, cash distributions and going-concern values per
Partnership unit for the Partnership, and the calculation of the allocation of
such values between the joint venture partners and between the limited and
general partners; (6) discussed with certain members of management of Public
Storage and the Partnership conditions in self-storage property markets,
conditions in the market for sales/acquisitions of properties similar to those
owned by the Partnership, current and expected operations and performance, and
the financial condition and future prospects of Public Storage and the
Partnership; (7) reviewed historical market prices, trading volume and dividends
for Public Storage common stock and historical secondary market transactions for
Partnership units; and (8) conducted other studies, analyses, inquiries and
investigations as Stanger deemed appropriate.
Summary of Analysis. The following is a summary of certain financial
and comparative analyses reviewed by Stanger in connection with and in support
of its fairness opinion. The summary of the opinion and analysis of Stanger set
forth in this statement is qualified in its entirety by reference to the full
text of such opinion.
Review of Appraised Value. In preparing its opinion, Stanger relied
upon the appraisal of the Properties which was prepared as of February 28, 2002
by Wilson, an independent appraiser. Stanger reviewed the appraisal, the
methodology employed by Wilson and the appraised value rendered by Wilson and
discussed with Wilson its experience and qualifications and the appraisal
conclusions.
Stanger observed that the appraisal was certified by a Member of the
Appraisal Institute and was conducted on a limited scope basis utilizing
primarily the income approach to valuation, applying the direct capitalization
and discounted cash flow methods to establish a value for each individual
property, and the sales comparison approach.
Stanger observed that the effective capitalization rate utilized in the
appraisal based upon the Properties' net operating income generated for the 12
months ended February 28, 2002 and before the reduction in value for deferred
maintenance items was approximately 9.2% and approximately 9.1% after certain
property tax adjustments to such net operating income. Stanger also observed
that the effective capitalization rate utilized in the appraisal for the 30
properties with stabilized net operating income for the 12 months ended February
28, 2002 and before the reduction in value for deferred maintenance items was
approximately 9.4% and approximately 9.3% after certain property tax
adjustments. Lower capitalization rates generally reflect higher sales prices
for income-producing properties.
Stanger concluded that the valuation approaches and methods used by the
appraiser are consistent with standard real estate appraisal practices for
limited scope appraisals and therefore support Wilson's conclusion of value and,
since the merger consideration is based primarily upon the Wilson appraisal, the
fairness of the consideration to be paid in the merger.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared
by the Partnership of the estimated value of the Partnership based upon
liquidation of its portfolio utilizing the same assumptions and estimates
prepared
35
by the Partnership as described under "- Comparison of Consideration to be
Received in the Merger to Other Alternatives - Liquidation." and information
provided by Wilson.
The liquidation analysis assumes that all of the properties are sold
concurrently at the appraised value as reported in the appraisal to an
independent third-party buyer or buyers. Costs of such property sales by the
Partnership to independent third-parties were estimated by the Partnership to
total approximately $3.8 million and were comprised of estimates of $294,000 in
state and local transfer taxes, $2,618,000 in commissions and $873,000 in legal
and other closing costs. Such amounts were based on prevailing transfer tax
rates in the locale of each property and on estimates of the Partnership based
on knowledge of real estate transactions. Stanger observed that the estimated
net proceeds from such liquidation, the sale of the Partnership's interest in
PSBP (less $0.06 per PSBP unit in brokerage commissions) and the associated
dissolution of the Partnership and distribution of all remaining assets was $526
per Partnership unit, versus the consideration offered in the merger of $546
cash per unit, or the equivalent of $546 of Public Storage common stock per
unit, based on the average closing price of Public Storage common stock on the
NYSE during the 20 consecutive trading days ending on the fifth trading day
prior to the Effective Date.
Stanger concluded that the liquidation analysis indicates that the
consideration to be received by the limited partners in the merger exceeds the
expected proceeds that could be received by the limited partners from
liquidation of the Partnership's assets and dissolution of the Partnership.
Stanger concluded that this analysis supports the fairness of the consideration
to be paid in the merger.
Stanger also reviewed information on multi-property purchases and sales of
self-storage properties transacted by Public Storage, Public Storage Management
or affiliates. Stanger observed that Public Storage, Public Storage Management
or affiliated entities have acquired only one third-party bulk portfolio since
1996. Stanger observed that the stabilized capitalization rate for that
portfolio, which was purchased in the fourth quarter of 2000, averaged
approximately 10.3%. However, Stanger deemed that portfolio not comparable to
the Partnership's portfolio in that it was comprised of four recently developed
and unstabilized properties (with a weighted average occupancy of approximately
27% at the time of purchase). During 1996, Public Storage, Public Storage
Management and affiliated entities completed 11 bulk purchases of property
portfolios, excluding the properties associated with the mergers of affiliated
REITs with Public Storage. These transactions involved affiliated and
unaffiliated entities with an interest in 73 properties with an aggregate
acquisition cost of approximately $209 million. Capitalization rates ranged from
approximately 9.0% to 11.6% and averaged 9.6%.
Stanger also reviewed information regarding the merger between Public
Storage and Storage Trust Realty ("Storage Trust") which was closed in March
1999. Stanger noted that in the merger Public Storage acquired a portfolio of
215 self-storage properties and certain other assets for aggregate consideration
of approximately $600 million, based on the price of Public Storage common stock
as of November 6, 1998. Stanger also noted that in the context of rendering a
fairness opinion, the financial advisor to Storage Trust performed a net asset
valuation of Storage Trust based on a real estate valuation utilizing property
specific financial projections for 1999 and a direct capitalization method. The
capitalization rates utilized in this analysis ranged from 9.5% to 10.5%.
Based on the total transaction value of the Storage Trust merger and other
information cited in the proxy statement relating to the merger, the implied
trailing and forward capitalization rates of the Storage Trust portfolio in the
merger were estimated by Stanger to be approximately 8.7% and 9.3%,
respectively. This capitalization rate does not reflect certain options and
benefits to be received by Public Storage as a result of the merger, including a
reduction in consolidated general and administrative expenses from the
elimination of certain duplicative administrative costs following the merger,
estimated at over $2 million on a pro forma basis for the nine months ending
September 30, 1998.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and
projections prepared by the Partnership concerning estimated cash flows and
distributions from the Partnership's continued operation as an independent
stand-alone entity and estimated sales proceeds from the liquidation of the
Properties. The analyses incorporated the same assumptions and estimates of
revenues and operating expenses for the Properties, capital
36
expenditures (including deferred maintenance items), entity-level general and
administrative costs and interest income, and cash flow distributions and
proceeds from sale of the Properties during a projection period of five years as
described under "- Comparison of Consideration to be Received in the Merger to
Other Alternatives - Going Concern Value." The analyses and projections assumed,
among other things, that (1) net operating cash flow for the Partnership
including projected distributions with respect to the Partnership's holdings in
PS Business Parks, Inc. would grow at a compound annual rate of approximately
5.5% over the five-year projection period; and (2) the sale of the Properties
would occur at the terminal value projected by capitalizing the estimated net
operating income in year six at a capitalization rate equal to the midpoint of
the effective capitalization rate in the appraisal based on the appraiser's
initial year cash flow projection and the capitalization rate used by the
appraiser in the residual value component of the discounted cash flow analysis
(an average capitalization rate of approximately 9.64%). Real estate selling
costs were assumed to be incurred at the same percentage of sale proceeds (4.3%)
as incurred in the liquidation alternative.
The projections evaluated the Partnership's going-concern value by
analyzing projected cash flow and distributions assuming that the Partnership
was operated as an independent stand-alone entity and its assets sold in a
liquidation of the Partnership after a five-year holding period. The projections
also assume that the Partnership's interest in PSBP is sold at an FFO multiple
of 10.61 (reduced by a commission of $.06 per share). Distributions and sale
proceeds per Partnership unit were discounted in the projections at rates
ranging from 12% to 13%.
Stanger observed that the estimated values per Partnership unit on a
going-concern basis resulting from the above analysis were $495 and $515,
compared with the consideration in the merger of $546 per Partnership unit.
Stanger concluded that the range of going-concern values per Partnership
unit indicates that the consideration to be received by the limited partners in
the merger exceeds the expected present value of the returns that could be
received by the limited partners from the alternative of continuing the
Partnership in existence. Stanger concluded that the going-concern analysis
supports the fairness of the consideration paid in the merger.
The estimated values assigned to the alternative forms of consideration
are based on a variety of assumptions that have been made by the Partnership.
While the Partnership has advised Stanger that it believes that it has a
reasonable basis for these assumptions, these assumptions may not reflect the
Partnership's actual experience and such differences could be material. See "-
Comparison of Consideration to be Received in the Merger to Other Alternatives."
Review of Secondary Market Prices. Stanger observed that Partnership units
have been purchased in recent months on the informal secondary market for
partnership securities.
Stanger observed that, based on prices reported to Stanger by various
firms active in the informal secondary market for partnership interests, the
highest selling price reported for Partnership units in the informal secondary
market between January 1, 2000 and February 28, 2002 was $368 per unit compared
with the consideration in the merger of $546 per unit.
Stanger also observed that the Partnership units had been the subject of
informal secondary market purchases by Public Storage in 2000, 2001 and 2002 at
$351 per unit.
Stanger believes sales of partnership units on the informal secondary
market do not necessarily reflect the full value of a partnership's net assets.
Therefore, Stanger would expect secondary market sales prices generally to be
below the estimated fair market value of a partnership's net assets. Although
Stanger believes reviewing secondary market prices is advisable for the purpose
of investigating whether or not the estimated fair market value of a
partnership's net assets has been understated, Stanger did not place primary
reliance on such secondary market prices as indicators of the fairness of the
merger.
Distribution/FFO Analysis. Stanger reviewed distributions per Partnership
unit and FFO per Partnership unit on an equivalent per unit basis. Stanger noted
that based on a closing price of $37.65 for Public Storage
37
common stock and the resulting exchange ratio of Partnership units for Public
Storage common stock, the current regular quarter distribution rate for Public
Storage ($0.45 per share) and the regular and special distributions (which are
not necessarily recurring and which does not reflect potential future
expenditures for deferred maintenance) for the Partnership during 2001 ($36.84
per unit), annual distributions per share would decrease by approximately $10.74
(29.1%) for limited partners receiving Public Storage common stock.
Stanger observed that, at a closing price of $37.65 for Public Storage
common stock and based on operating results for the Partnership and Public
Storage during the 12 months ending December 31, 2001, FFO per Partnership unit
on a fully diluted basis on the equivalent per share basis earned by limited
partners would decrease by approximately 7%. Stanger noted, however, that Public
Storage maintained extraordinary cash balances during the period, reflecting
uninvested proceeds from issuance of fixed income securities. Adjusting for this
factor and for certain acquisitions consummated during the fourth quarter 2001,
annualized FFO per Partnership unit on a fully diluted basis on an equivalent
per share basis earned by limited partners would decrease by approximately 4%.
Stanger further observed that in making this comparison of FFO, Public Storage's
FFO was not adjusted upward for the dilutive effect of its development
activities during the 12 months ending December 31, 2001.
Stanger concluded that the limited partners choosing to receive Public
Storage common shares in the merger would have, on an historical pro forma
basis, lower dividends and lower FFO attributable to their Partnership units
after the merger. Stanger observed that Public Storage's FFO and level of
distributions reflects in part development and reinvestment activities intended
to enhance shareholder value, whereas the Partnership, a finite life entity,
does not pursue development or reinvestment opportunities. Stanger concluded
that the reduction of FFO and distributions attributable to limited partners on
an historical pro forma basis after the merger does not adversely impact its
determination as to the fairness of the consideration to be paid in the merger
since the merger consideration is based on the net asset value attributable to
the units and the limited partners have the option of receiving cash instead of
shares of Public Storage common stock.
Conclusions. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and the qualifications and limitations cited in
its opinion, as of the date of the fairness opinion, the consideration to be
received in the merger is fair to the public limited partners, from a financial
point of view.
Assumptions. In evaluating the merger, Stanger relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in this statement or that was furnished or
otherwise communicated to Stanger. Stanger did not perform an independent
appraisal of the assets and liabilities of Public Storage, the Partnership or
any joint ventures and relied upon and assumed the accuracy of the restricted
appraisal and adjustments included therein, including but not limited to the
amount and timing of deferred maintenance items. Stanger also relied on the
assurances of Public Storage and the Partnership that any projections, budgets,
estimates of deferred maintenance or value estimates contained in this statement
or otherwise provided to Stanger, were reasonably prepared on bases consistent
with actual historical experience and reflect the best currently available
estimates and good faith judgments; that the property values and the
Partnership's net asset value have been allocated between the joint venture
partners and between the limited and general partners in accordance with the
provisions of the joint venture and Partnership agreements in the same manner
they would be allocated upon the joint ventures' and Partnership's liquidation;
that no material changes have occurred in the appraised value of the Properties
or the information reviewed between the date of the appraisal or the date of the
other information provided and the date of the opinion; and that Public Storage
and the Partnership are not aware of any information or facts that would cause
the information supplied to Stanger to be incomplete or misleading in any
material respect.
In connection with preparing the fairness opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Appendix C. Stanger does not intend to deliver any additional written summary of
the analysis.
Limitations and Qualifications. Stanger was not requested to, and
therefore did not: (1) select the method of determining the consideration being
paid in the merger; (2) make any recommendation to the public
38
limited partners with respect to whether to approve or reject the merger or
whether to select the cash or Public Storage common stock option in the merger;
or (3) express any opinion as to the business decision to effect the merger,
alternatives to the merger or tax factors resulting from the merger, or relating
to Public Storage's continued qualification as a REIT. Stanger's opinion is
based on business, economic, real estate and securities markets, and other
conditions as of the date of its analysis. Events occurring after that date may
materially affect the assumptions used in preparing the opinion.
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of 18 affiliated REITs with Public
Storage and in connection with the merger of five similar Partnerships with
Public Storage, its expertise in real estate transactions and the fee quoted by
Stanger. No party other than Stanger was contacted to render an opinion as to
the fairness of the merger to public limited partners, and the Partnership has
neither requested nor received any views, preliminary or otherwise, from any
party other than Stanger regarding the fairness of the merger to the public
limited partners.
Compensation and Material Relationships. For preparing the fairness
opinion and related services in connection with the merger, Stanger is being
paid a fee of $70,000. In addition, Stanger will be reimbursed for certain
out-of-pocket expenses, including legal fees, up to a maximum of $9,000 and will
be indemnified against all liabilities arising under any applicable federal or
state law or otherwise related to or arising out of Stanger's engagement or
performance of its services to the Partnership other than liabilities resulting
from Stanger's gross negligence or willful misconduct. The fee was negotiated
with Stanger. Payment of the fee to Stanger is not dependent upon completion of
the merger. Stanger has rendered consulting and related services and provided
products to Public Storage and its affiliates, including fairness opinion to the
public shareholders of 18 REITs and six public limited partnerships in
connection with their mergers with Public Storage, and may be engaged in the
future. From January 1, 1999 to the present, Stanger has received compensation
aggregating approximately $330,000 for these services and products (exclusive of
amounts received in connection with the merger).
The Merger Agreement
If the conditions to the merger are satisfied or waived, the merger
will be consummated pursuant to the merger agreement which is set forth in
Appendix A to, and is incorporated by reference into, this statement. As a
result of the merger, all of the Partnership units will be held by a subsidiary
of Public Storage. The merger agreement contains representations and warranties
of Public Storage and the Partnership and certain other provisions relating to
the merger. The representations and warranties are extinguished by, and do not
survive, the merger.
Representations and Warranties of Public Storage. Public Storage is
representing and warranting to the Partnership that (1) the merger agreement has
been duly authorized, (2) Public Storage has been duly organized, (3) Public
Storage's outstanding shares and the shares to be issued in the merger have or
will be validly issued, (4) the merger agreement does not conflict with Public
Storage's organizational documents or material agreements (5) there is no
material litigation pending against Public Storage, (6) since January 1, 1999,
Public Storage has filed all required reports with the Commission, (7) Public
Storage's financial statements present fairly Public Storage's financial
position, (8) since January 1, 2002, there has not been any material adverse
change in Public Storage's business, (9) the information statement does not
include any misleading statement of material fact, (10) all of Public Storage's
material insurance is in effect and (11) Public Storage's representations and
warranties in the merger agreement do not include any misleading statement of
material fact.
Representations and Warranties of the Partnership. The Partnership is
representing and warranting to Public Storage that (1) the merger agreement has
been duly authorized, (2) the Partnership has been duly organized, (3) the
Partnership's outstanding units have been validly issued, (4) the merger
agreement does not conflict with the Partnership's organizational documents or
material agreements, (5) there is no material litigation pending against the
Partnership, (6) since January 1, 1999, the Partnership has filed all required
reports with the Commission, (7) the Partnership's financial statements present
fairly the Partnership's financial position, (8) since January 1, 2002, there
has not been any material adverse change in the Partnership's business, (9) the
information statement does not include any misleading statement of material
fact, (10) all of the Partnership's material insurance is in effect and (11)
39
the Partnership's representations and warranties in the merger agreement do not
include any misleading statement of material fact.
Conditions to Consummation of the Merger. Consummation of the merger is
contingent upon standard conditions, including the following: (1) the
Registration Statement shall have been declared effective by the Commission and
Public Storage shall have received all other authorizations necessary to issue
Public Storage common stock in exchange for Partnership units and to consummate
the merger; (2) the merger agreement and the merger shall have been approved and
adopted by the requisite vote of the limited partners (which condition has been
satisfied by Public Storage's vote of its Partnership units in favor of the
merger); (3) the shares of Public Storage common stock issued to limited
partners shall be listed on the NYSE; (4) the Partnership shall have received a
fairness opinion from Stanger (which opinion will be delivered on or about the
date of this statement); (5) no legal action challenging the merger shall be
pending; and (6) in the case of Public Storage, the average of the per share
closing prices on the NYSE of Public Storage common stock during the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Date is not less than $34. Public Storage does not intend to postpone the merger
if condition (6) is not satisfied in this time frame. If condition (6) is not
satisfied or waived, Public Storage intends to promptly notify the limited
partner in writing. The obligation of Public Storage to effect the merger is
also subject to Public Storage, in its sole discretion, being satisfied as to
title to, and the results of an environmental audit of, the Properties. The
merger is also conditioned on the amendment of the Partnership agreement.
Amendment or Termination. The merger agreement provides for amendment
or modification thereof with respect to the merger by written agreement
authorized by the board of directors of Public Storage and the general partners.
The merger may be abandoned at any time before or after shareholder approval by
mutual written consent and may be abandoned by either party if, among other
things, the closing of the merger has not occurred on or before December 31,
2002.
Consummation. It is contemplated that the merger will be consummated by
filing a certificate of merger with the California Secretary of State.
Certificates for Public Storage Common Stock. After the merger, holders
of Partnership units that were converted into shares of Public Storage common
stock, without any further action, will be entitled to receive certificates
representing the number of whole shares of Public Storage common stock into
which Partnership units will have been converted and cash payment in lieu of
fractional share interests, if applicable. As soon as practicable after the
merger, the exchange agent, EquiServe Trust Company, N.A., will send the
certificates for the Public Storage common stock to each holder of Partnership
units whose Partnership units have been converted into shares of Public Storage
common stock. HOLDERS OF PARTNERSHIP UNITS WHO INTEND TO RECEIVE PUBLIC STORAGE
COMMON STOCK IN THE MERGER DO NOT NEED TO TAKE ANY ACTION TO RECEIVE THEIR
RESPECTIVE CERTIFICATES REPRESENTING THE PUBLIC STORAGE COMMON STOCK. IT IS
IMPORTANT THAT YOU MAKE SURE YOU RECEIVE YOUR CERTIFICATE FOR THE PUBLIC STORAGE
COMMON STOCK MAILED TO YOU BY EQUISERVE TRUST COMPANY, N.A. IF YOU DO NOT
RECEIVE YOUR PUBLIC STORAGE COMMON STOCK CERTIFICATE BY ______, 2002, CALL
EQUISERVE TRUST COMPANY, N.A. AT (781) 575-3120 SO THAT AN AFFIDAVIT OF
NON-RECEIPT CAN BE SENT TO YOU AND A CERTIFICATE REISSUED AT NO COST TO YOU. ANY
SHAREHOLDER WHO CONTACTS EQUISERVE TRUST COMPANY, N.A. AFTER ____________, 2002
REQUESTING THAT A CERTIFICATE BE REISSUED MAY NEED TO EXECUTE AN AFFIDAVIT OF
LOSS AND PAY THE COST OF A BOND OF INDEMNITY BEFORE A CERTIFICATE CAN BE
REPLACED.
After the merger, there will be no further registration of transfers of
Partnership units on the Partnership's records.
Fractional Shares. No fractional shares of Public Storage common stock
will be issued in the merger. In lieu of any fractional share interests, each
holder of Partnership units who would otherwise be entitled to a fractional
share of Public Storage common stock will, upon surrender of the certificate
representing Public Storage common stock, receive a whole share of Public
Storage common stock if such fractional share to which such holder would
40
otherwise have been entitled is .5 of a share or more, and such fractional share
shall be disregarded if it represents less than .5 of a share; provided that
such fractional share shall not be disregarded if it represents .5 of 1% or more
of the total number of shares of Public Storage common stock such holder is
entitled to receive in the merger. In such event, the holder will be paid an
amount in cash (without interest), rounded to the nearest $.01, determined by
multiplying (1) the per share closing price on the NYSE of the Public Storage
common stock at the time of effectiveness of the merger by (2) the fractional
interest.
Restrictions on Other Acquisitions. The Partnership has agreed not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a merger, consolidation, securities
exchange or similar transaction involving it, or any purchase of all or any
significant portion of its assets, or any equity interest in it, other than the
transactions contemplated by the merger agreement, or engage in any negotiations
concerning, or provide any confidential information or data to, or have
discussions with, any person relating to such a proposal, provided that the
general partners may furnish or cause to be furnished information and may
participate in such discussions and negotiations through its representatives
with persons who have sought the same if the failure to provide such information
or participation in the negotiations and discussions might cause the Partnership
to breach its fiduciary duty to limited partners under applicable law as advised
by counsel. The Partnership has agreed to notify Public Storage immediately if
inquiries or proposals are received by, any such information is requested from,
or negotiations or discussions are sought to be initiated or continued with it,
and to keep Public Storage informed of the status and terms of any such
proposals and any such negotiations or discussions.
Distributions. Pending the merger, the Partnership is precluded from
declaring or paying any distributions to the limited partners other than (1)
regular distributions at a quarterly rate not in excess of $7.13 per Partnership
unit and (2) distributions to the limited partners immediately prior to the
effectiveness of the merger equal to the amount by which the Partnership's
estimated net asset value allocable to limited partners as of the date of the
merger exceeds $546 per Partnership unit. See "- Determination of Payments to be
Received by Limited Partners in the Merger."
Cash Election Procedure
Each holder of record of Partnership units may make a cash election to
have his or her Partnership units converted into the right to receive cash in
the merger. All cash elections are to be made on a cash election form. A cash
election form is being sent to all holders of record of Partnership units on the
date of this statement. A duplicate cash election form may be obtained by
calling the exchange agent, EquiServe Trust Company, N.A., at the telephone
number listed below. To be effective, a cash election form must be properly
completed and signed in accordance with the instructions which accompany the
cash election form and must be received by the exchange agent, no later than
5:00 p.m. New York City time on ________, 2002 (the "Election Deadline") at one
of the following addresses:
By Mail By Hand By Overnight Courier For Assistance For information
----------------------------------------------------------------------------------------------------------------------------
EquiServe Trust Company, N.A. Securities EquiServe Trust Company, EquiServe Trust Company, Public Storage, Inc.
P.O. Box 430114 Transfer & N.A. N.A. Investor Services
Providence, RI 02940-3014 Reporting Services Corporate Actions Shareholder Services Dept.
100 William Street 150 Royall Street (781)575-3120. 701 Western Avenue
Galleria Mail Stop 45-02-80 Glendale, CA
New York, NY 10038 Canton, MA 02021 91201-2349
(800) 421-2856
(818) 244-8080
Holders of record of units who hold units as nominees, trustees or in other
representative capacities may submit multiple cash election forms, provided that
such representative certifies that each such cash election form covers all the
units held by such representative for a particular beneficial owner. An election
may be revoked by the person or persons making such election by a written notice
signed and dated by such person or persons and received by the exchange agent at
one of the addresses listed above prior to the Election Deadline, identifying
the name of the registered holder of the units subject to such election and the
total number of units owned by the beneficial owner. In addition, all cash
election forms will automatically be revoked if the exchange agent is notified
in writing that the merger has been abandoned. The exchange agent may determine
whether or not elections to receive cash have been properly made or revoked, and
any such determination shall be conclusive and binding.
41
A holder of Partnership units may not make a cash election as to less
than all of the units owned by such holder. Any holder of units who does not
submit a properly completed and signed cash election form which is received by
the exchange agent prior to 5:00 p.m., New York City time, on ________, 2002
will receive Public Storage common stock in the merger. If Public Storage or the
exchange agent determines that any purported cash election was not properly
made, such purported cash election will be deemed to be of no force and effect
and the holder of units making such purported cash election will, for purposes
hereof, receive Public Storage common stock in the merger. None of Public
Storage, the Partnership or the exchange agent will be under any obligation to
notify any person of any defect in a cash election form.
The tax consequences of receiving cash or Public Storage common stock
are described under "Federal Income Tax Considerations - The Merger."
Consequences to the Partnership if the Merger is Not Completed
If the merger is not completed, the Partnership will remain as a
separate legal entity and will continue to operate its properties.
Costs of the Merger
It is estimated that the total consideration (cash and Public Storage
common stock) to be paid by Public Storage to acquire all of Partnership units
owned by the public limited partners in the merger and to pay related costs and
expenses would be approximately $30.4 million. These amounts will be paid from
Public Storage's working capital or with funds borrowed under credit facilities
with a group of banks for which Wells Fargo Bank, National Association acts as
agent. These credit facilities aggregate $200,000,000 and bear interest at LIBOR
plus .45% to 1.50%. Public Storage intends to repay amounts borrowed under these
facilities from the public or private placement of securities or from Public
Storage's undistributed cash flow. There are no current borrowings under Public
Storage's credit facilities and Public Storage expects that the units will be
acquired with funds from its working capital.
If the merger is completed, all costs incurred by Public Storage and
the Partnership in connection with the merger will be paid by Public Storage. If
the merger is not completed, all costs incurred in connection with the merger
will be paid by the party incurring such costs, except that Public Storage will
pay one-half of the cost of any expenses incurred in connection with the
printing of this statement and related registration statement, the appraisal,
environmental and structural audits and filing fees and the Partnership will pay
the other one-half of such costs. The Partnership's share of such costs would be
paid from its working capital.
The following is a statement of certain fees and expenses estimated to
be incurred in connection with the merger (exclusive of amounts paid as a result
of cash elections).
Printing and mailing $ 20,000
Legal 15,000
Real estate appraisal and fairness opinion 132,000
Registration, listing and filing fees 10,000
Accounting 5,000
Other 15,000
----------
TOTAL $ 197,000
==========
Accounting Treatment
For accounting purposes, the merger will be treated as a purchase.
Accordingly, the cost of the assets and liabilities of the Partnership will be
allocated based on fair value.
42
Regulatory Requirements
The merger is subject to compliance with federal and state securities law
requirements.
Comparison of Partnership Units with Public Storage Common Stock
The information below compares certain attributes of Public Storage Common
Stock with the Partnership units. The effect of the merger on limited partners
who receive Public Storage common stock in the merger is set forth in italics
below each caption.
Investment Objectives and Policies
Partnership
The principal investment objectives are to provide (1) quarterly cash
distributions from its operations and (2) long-term capital gains through
appreciation in the value of properties.
Under its organizational documents, the Partnership is not permitted to raise
new capital or to reinvest operating cash flow or sale or financing proceeds.
The Partnership will terminate on December 31, 2038, unless earlier dissolved.
The Partnership anticipated selling or financing its properties within five to
eight years from acquisition (i.e., between approximately 1991 and 1994).
Public Storage
The investment objectives of Public Storage are to maximize FFO allocable to
holders of Public Storage common stock and to increase shareholder value through
internal growth and acquisitions. FFO is a supplemental performance measure for
equity REITs used by industry analysts. FFO does not take into consideration
principal payments on debt, capital improvements, distributions and other
obligations of Public Storage. Accordingly, FFO is not a substitute for Public
Storage's net cash provided by operating activities or net income as a measure
of Public Storage's liquidity or operating performance. An increase in Public
Storage's FFO will not necessarily correspond with an increase in distributions
to holders of Public Storage common stock. See "- Liquidity, Marketability and
Distributions."
Public Storage intends to continue its operations for an indefinite period of
time and is not precluded from raising new capital, including senior securities
that would have priority over Public Storage common stock (including Public
Storage common stock issued in the merger) as to cash flow, distributions and
liquidation proceeds, or from reinvesting cash flow or sale or financing
proceeds in new properties, except to the extent such reinvestment precludes
Public Storage from satisfying the REIT distribution requirements. Therefore,
Public Storage shareholders should expect to be able to liquidate their
investment only by selling their shares in the market, and the market value of
the Public Storage common stock may not necessarily equal or exceed the market
value of Public Storage's assets or the net proceeds which might be available
for distribution upon liquidation if Public Storage were to liquidate. Public
Storage has grown, and intends to continue to grow, as new investments are made.
43
Limited partners who receive Public Storage common stock in the merger will
be changing their investment from "finite life" to "infinite life"; they will be
able to realize the value of their investment only by selling the Public Storage
common stock. The interest of Public Storage shareholders can be diluted through
the issuance of additional securities, including securities that would have
priority over Public Storage common stock as to cash flow, distributions and
liquidation proceeds. Public Storage has an effective registration statement for
preferred stock, common stock, equity stock and warrants and intends to issue
additional securities under this registration statement. There is no assurance
that any such securities will be issued. See "Risk Factors - The number of
shares of Public Storage common stock to be issued in the merger has not been
determined" and "- Public Storage and its shareholders are subject to financing
risks."
Public Storage has no plans with respect to a sale or financing of any of
the Properties.
Borrowing Policies
The Partnership has no outstanding borrowings. It is fully invested and would
distribute the proceeds from a financing of properties.
Subject to certain limitations in Public Storage's bylaws, Public Storage has
broad powers to borrow in furtherance of its investment objectives. While Public
Storage presently intends to finance its growth with preferred, equity and
common stock, Public Storage has incurred in the past, and may incur in the
future, both short-term and long-term debt to increase its funds available for
investment in real estate, capital expenditures and distributions. As of March
31, 2002, Public Storage's ratio of "Debt" (liabilities other than "accrued and
other liabilities" and "minority interest" that should, in accordance with GAAP,
be reflected on Public Storage's balance sheet) to "Assets" (Public Storage's
total assets that should, in accordance with GAAP, be reflected on Public
Storage's balance sheet) was less than 3%.
Public Storage has outstanding debt and reinvests proceeds from borrowings.
The incurrence of debt increases the risk of loss of investment.
Transactions with Affiliates
The partnership agreement generally prohibits the Partnership from (1)
purchasing properties from or selling Properties to the general partners, (2)
leasing properties from or to the general partners and (3) loaning funds to the
general partners. The partnership agreement may be amended by a majority vote of
limited partners. See "Amendment to Partnership Agreement."
Public Storage's bylaws restrict Public Storage from acquiring properties from
its affiliates or from selling properties to them unless the transaction (1) is
approved by a majority of Public Storage's independent directors and (2) is fair
to Public Storage based on an independent appraisal.
Given Public Storage's control of all voting decisions with respect to
the Partnership, both Public Storage and the Partnership can enter into
transactions with affiliates without the need for approval of the public
shareholders and public limited partners, respectively. In the case of Public
Storage, however, these transactions require approval of Public Storage's
independent directors.
44
Properties (As of March 31, 2002)
The Partnership owns direct and indirect equity interests in 32 mini-warehouses
in nine states. Also owns an interest in PSBP. For the 12 months ended December
31, 2001, the weighted average occupancy level and realized annual rent per
square foot of the Properties were 90% and $8.88, respectively. See "Description
of Partnership's Properties."
Public Storage owns equity interests (directly, as well as through general and
limited partnership interests) in 1,392 storage facilities in 37 states,
including 806 wholly owned properties. Also owns an interest in PSBP. See
"Description of Public Storage's Properties."
Because Public Storage owns substantially more property interests in more
states than the Partnership, Public Storage's results of operations are less
affected by the profitability or lack of profitability of a single property than
are those of the Partnership and it would be more difficult to liquidate Public
Storage than the Partnership within a reasonable period of time.
Liquidity, Marketability and Distributions
There is no active trading market for Partnership units. The Partnership has not
issued any securities that have priority over its Partnership units.
Public Storage common stock is traded on the NYSE.During the 12 months ended
March 31, 2002, the average daily trading volume of Public Storage common stock
was approximately 188,200 shares. Public Storage has issued, and may in the
future issue, securities that have priority over Public Storage common stock as
to cash flow, distributions and liquidation proceeds.
Distributions are paid to limited partners from cash available for
distribution. Public Storage is required to distribute at least 90% of its
ordinary REIT taxable income in order to maintain its qualification as a REIT.
Public Storage distributes less than its cash available for distribution
(recently distributing amounts approximately equal to its taxable income),
permitting it to retain funds for additional investment and debt reduction.
A limited partner who receives Public Storage common stock in the merger
will have an investment for which the market is broader and more active than the
market for Partnership units. Distributions on Public Storage common stock are
lower than the distributions on the Partnership units. Distributions on Public
Storage common stock also are subject to priority of preferred stock. See
"Distributions and Price Range of Public Storage Common Stock" and
"Distributions and Market Prices of Partnership Units" for information on market
prices of Partnership units and Public Storage Common Stock.
Taxation
Income or loss earned by the Partnership is not taxed at the partnership level.
Limited partners are required to report their allocable share of Partnership
income and loss on their respective tax returns. Income and loss from the
Partnership generally constitute "passive" income and loss, which can generally
offset "passive" income and loss from other investments. Due to depreciation and
other noncash items, cash distributions are not generally equivalent to the
income and loss allocated to limited partners. During operations, cash
distributions have been partially sheltered. After the end of each fiscal year,
limited partners receive annual schedule K-1 forms showing their allocable share
of Partnership income and loss for inclusion on their federal income tax
returns. Limited partners are also required to file state income tax returns
and/or pay state income taxes in California and in certain other states in which
the Properties are located.
Public Storage was organized to qualify for taxation as a REIT and intends to
continue to so qualify. REITs generally are permitted to deduct distributions to
their shareholders, which, to the extent of such deductions, effectively
eliminates the "double taxation" (at the corporate and shareholder levels) that
typically results when a corporation earns income and distributes that income to
shareholders in the form of dividends. Distributions received by Public Storage
shareholders generally constitute portfolio income, which cannot be offset by
45
"passive" losses from other investments. Losses and credits generated within
Public Storage do not pass through to shareholders. After the end of Public
Storage's calendar year, shareholders receive the less complicated Form 1099-DIV
used by corporations to report their dividend income. See "Federal Income Tax
Considerations."
The Partnership is a pass-through entity, whose income and loss is not
taxed at the entity level but instead allocated directly to the limited and
general partners. Limited partners are taxed on income or loss allocated to
them, whether or not cash distributions are made to them. In contrast, Public
Storage qualifies as a REIT, allowing it to deduct dividends paid to its
shareholders. To the extent Public Storage has net income (after taking into
account the dividends paid deduction), such income will be taxed at the
corporate level at the standard corporate tax rates. Dividends paid to Public
Storage shareholders will constitute portfolio income and not passive income.
Voting Rights
Limited partners by a majority vote may, without the concurrence of the general
partners, amend the partnership agreement, dissolve the partnership, remove
and/or elect a general partner, and approve or disapprove the sale of all or
substantially all of the Partnership's assets. As owner of more than 50% of the
Partnership units, Public Storage controls all voting decisions with respect to
the Partnership.
Public Storage holds 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
(1) the removal of directors, (2) the dissolution of the company, (3) the
amendment of certain provisions of the organizational documents and (4) the sale
of all or substantially all of the company's assets. The public shareholders of
Public Storage are substantially limited in their ability to control Public
Storage in view of the significant ownership of Public Storage Common Stock by
the Hughes family.
Shareholders have different voting rights, including the right to elect
directors annually, than the voting rights afforded to limited partners.
Management and Duties
As a matter of state law, the general partners have liability for the payment of
Partnership obligations and debts, unless limitations upon such liability are
expressly stated in the obligation. The partnership agreement provides that the
general partners are not liable to the Partnership or the limited partners for
any act or omission performed in good faith pursuant to authority granted by the
partnership agreement, and in a manner reasonably believed to be within the
scope of authority granted and in the best interests of the Partnership,
provided that such act or omission did not constitute fraud, misconduct, bad
faith or negligence. In addition, the partnership agreement indemnifies the
general partners for liability, loss, damage, costs and expenses, including
attorneys' fees, incurred by them in conducting the Partnership's business,
except in the case of fraud, misconduct, bad faith or negligence.
Public Storage is managed by its board of directors and executive officers. A
majority of the directors of Public Storage are independent directors. 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 Public Storage and the Partnership is limited
under the provisions of California law and their
46
organizational documents, which limit a director's liability for monetary
damages to the respective corporation or its shareholders for breach of the
director's duty of care, where a director fails to exercise sufficient care in
carrying out the responsibilities of office. Those provisions would not protect
a director who knowingly did something wrong, or otherwise acted in bad faith,
nor would they foreclose any other remedy which might be available to the
respective corporation or its shareholders, such as the availability of
non-monetary relief. In addition, Public Storage's organizational documents
provide Public Storage with the authority to indemnify its "agents" under
certain circumstances for expenses or liability incurred as a result of
litigation. Under California law, "agents" are defined to include directors,
officers and certain other individuals acting on a corporation's behalf. Public
Storage has taken advantage of those provisions and has entered into agreements
with the respective corporation's directors and executive officers, indemnifying
them to the fullest extent permitted by California law. To the extent that the
foregoing provisions concerning indemnification apply to actions arising under
the Securities Act, Public Storage has been advised that, in the opinion of the
Commission, such provisions are contrary to public policy and therefore are not
enforceable.
The general partners have, under most circumstances, no liability to the
Partnership for acts or omissions it undertakes when performed in good faith, in
a manner reasonably believed to be within the scope of their authority and in
the best interests of the Partnership. The general partners also have, under
specified circumstances, a right to be reimbursed by the Partnership for
liability, loss, damage, costs and expenses they incur by virtue of serving as
general partners. Although the standards are expressed somewhat differently,
there are similar protections from liability available to directors and officers
of Public Storage when acting on behalf of Public Storage and rights of
directors and officers to seek indemnification from Public Storage. Public
Storage believes that the scope of the liability and indemnification provisions
in Public Storage's governing documents provides protection against claims for
personal liability against Public Storage's directors and officers which is
comparable to, though not identical with, the protections afforded to the
general partners under the partnership agreement.
Additional Issuances of Securities and Anti-Takeover Provisions
The Partnership Agreement does not provide for the issuance of additional
Partnership units.
Subject to the rules of the NYSE and applicable provisions of California law,
Public Storage has issued and intends to continue to issue authorized capital
stock without shareholder approval.
Given the ownership level of Public Storage common stock by the Hughes
family and Public Storage's flexibility to issue capital stock, including senior
securities with special voting rights and priority over Public Storage common
stock, and control of all Partnership voting decisions by Public Storage, both
Public Storage and the Partnership are in a position to deter attempts to obtain
control in transactions not approved by management.
47
Limited Liability of Investors
Under the partnership agreement and California law, the liability of limited
partners for the Partnership debts and obligations is limited to the amount of
their investments in the Partnership, together with an interest inundistributed
fully paid and nonassessable.
Under California law, shareholders are not generally liable for corporate debts
or obligations. The Public Storage common stock is nonassessable. income, if
any. The Partnership units are
The limitation on personal liability of Public Storage shareholders is
substantially the same as that of the limited partners.
Review of Investor Lists
A limited partner is entitled to request copies of investor lists showing the
names and addresses of all limited partners. The right to receive such investor
lists is conditioned upon payment of the cost of duplication and mailing.
Under applicable law, a Public Storage 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.
Limited Partners and shareholders are entitled to access to investor lists
and to share records, respectively, subject to certain requirements.
AMENDMENT TO PARTNERSHIP AGREEMENT
The partnership agreement is being amended to expressly authorize the
merger by adding a new section 13.5 to the partnership agreement that would read
in its entirety as follows:
13.5 Merger. Notwithstanding anything in the Agreement to the contrary,
the Partnership may merge with PSI or a subsidiary, provided that
such merger is approved by a Majority Vote.
"Majority Vote" means the vote of limited partners owning more than 50% of
the Partnership units.
While the partnership agreement does not prohibit mergers with the general
partners, it does prohibit the Partnership from selling properties to the
general partners. To ensure that the merger is legally authorized under the
partnership agreement, the new section is being added to expressly
authorize the merger. In the absence of this amendment the merger might be
challenged as a violation of the partnership agreement.
48
APPROVAL OF THE MERGER AND PARTNERSHIP AGREEMENT AMENDMENT
General
This statement is first being mailed on or about __________, 2002 to
limited partners in connection with the merger and the amendment to the
partnership agreement. The general partners are not soliciting proxies in
connection with these matters.
Holders of record at the close of business on the date of this
statement will be entitled to receive notice of the merger and the amendment to
the partnership agreement. On such date, there were outstanding 150,000
Partnership units. As of the record date, Public Storage beneficially owned
94,698 units (approximately 63% of the units).
The affirmative vote of a majority of the Partnership units is required
to approve the merger and the amendment. As indicated above, the general
partners are not soliciting proxies from the limited partners in connection with
these matters. Public Storage owns sufficient units to approve the merger and
the amendment without the vote of any other limited partner and has approved
these matters by written consent in accordance with California law and the
partnership agreement. The merger and the amendment will become effective upon
the signing of the amendment and the filing of a certificate of merger with the
California Secretary of State, which pursuant to Rule 14c-2 under the Exchange
Act will not take place until at least 20 business days following the date on
which this statement is mailed to limited partners.
Security Ownership of Certain Beneficial Owners and Management
Partnership. The Partnership is not aware of any beneficial owner of
more than 5% of the Partnership units other than Public Storage which indirectly
owns 94,698 units (63% of the units).
Public Storage. The following table sets forth information as of the
dates indicated with respect to persons known to the Company to be the
beneficial owners of more than 5% of the outstanding shares of Public Storage
common stock or ("Common Shares") or the Depositary Shares representing
interests in equity stock of Public Storage ("Depositary Shares"):
Depositary Shares Each
Representing 1/1,000 of a
Shares of Common Stock Share of Equity Stock,
Beneficially Owned Series A Beneficially Owned
----------------------- ---------------------------
Number Percent Number Percent
Name and Address of Shares of Class of Shares of Class
----------------- ----------- -------- --------- -------
B. Wayne Hughes (1) 20,646,824 17.7% 54,313 .6%
B. Wayne Hughes, Jr. (1) 1,179,907 1.0% 34,808 .4%
Tamara Hughes Gustavson (1) 17,434,260 15.0% 1,192,923 13.6%
B. Wayne Hughes and
Tamara Hughes Gustavson (1) 11,348 -- 43 --
---------- ---- --------- -----
Total 39,270,339 33.7% 1,282,097 14.6%
701 Western Avenue
Glendale, California 91201
Cohen Steers Capital (3) (3) 877,300 10.0%
Management, Inc.
757 Third Avenue
New York, New York 10017 (2)
_____________
49
This information is as of May 31, 2002. B. Wayne Hughes, B. Wayne
Hughes, Jr. and Tamara Hughes Gustavson have filed joint Schedule 13Ds
reporting their collective ownership of Common Shares and Depositary
Shares and may constitute a "group" within the meaning of section
13(d)(3) of the Securities Act of 1934, although each of these persons
disclaims beneficial ownership of the shares owned by the others. 11,348
Common Shares and 43 depositary Shares are held jointly with Ms. Hughes
Gustavson
The above table does not include 7,000,000 shares of the Company's Class
B Common Stock which are owned by B. Wayne Hughes, Jr. and Tamara Hughes
Gustavson. The Class B Common Stock is convertible into Common Stock on
a share-for-share basis upon satisfaction of certain conditions, but in
no event earlier than January 1, 2003.
(2) This information is as of December 31, 2001 (except that the percent
shown is based on the Depositary Shares outstanding at May 31, 2002) and
is based on a Schedule 13G filed by Cohen & Steers Capital Management,
Inc. ("CSCM"), an investment adviser registered under the Investment
Advisers Act of 1940. CSCM has sole voting power of 850,500 Depositary
Shares and sole dispositive power of 877,300 Depositary Shares.
(3) Less than 5%.
The following table sets forth information as of May 31, 2002
concerning the beneficial ownership of the Common Shares and the Depositary
Shares of each director of Public Storage, the chief executive officer of Public
Storage, the four most highly compensated persons who were executive officers of
Public Storage on December 31, 2001 and all directors and executive officers as
a group:
50
Shares of Common Stock: Depositary Shares Each Representing
Beneficially Owned(1) 1/1,000 of a Share of Equity Stock,
Shares Subject to Options(2) Series A Beneficially Owned
------------------------------------ -----------------------------------
Name Number of Shares Percent Number of Shares Percent
--------------- ------------------------ ------- ------------------ -----------
B. Wayne Hughes 20,646,824 17.7% 54,313 .6%
Harvey Lenkin 97,437(3) * 3,303(3) *
215,332(2) .2%
------- --
312,769 .3%
Marvin M. Lotz 77,258 * 5,336 *
170,332(2) .1%
------- --
247,590 .2%
B. Wayne Hughes, Jr. 1,189,255(4) 1.0% 34,861(4) .4%
Robert J. Abernethy 66,568 * 2,108 *
14,999(2) *
------ --
81,567 *
Dann V. Angeloff 78,500(5) * -- --
9,999(2) *
----- --
88,499 *
William C. Baker 20,000 * 455 *
14,999(2) *
------ --
34,999 *
Thomas J. Barrack, Jr. -- -- -- --
17,500(2) *
------ --
17,500 *
Uri P. Harkham 54,774(6) * 555(6) *
7,499(2) *
----- --
62,273 *
Daniel C. Staton 1,458 * 47 *
25,239(2) *
------ --
26,697 *
John Reyes 21,378 * 1,542 *
209,999(2) .2%
------- --
231,377 .2%
W. David Ristig -- * *
83,332(2) .1%
------ --
83,332 .1%
All Directors and Executive 22,293,682(1)(3)(4)(5)(6)(7) 19.1% 104,611(1)(3)(4)(6)(7) 1.2%
Officers as a Group
(17 persons) 1,322,725(2) 1.1%
--------- ----
23,616,407 20.3%
__________________
* Less than 0.1%
51
(1) Common Shares or Depositary Shares, as applicable, beneficially owned as
of May 31, 2002. Except as otherwise indicated and subject to applicable
community property and similar statutes, the persons listed as
beneficial owners of the shares have sole voting and investment power
with respect to such shares. Includes shares credited to the accounts of
the executive officers of the Company that are held in the 401(k) Plan.
(2) Represents vested portion as of May 31, 2002, and portion of which will
be vested within 60 days of May 31, 2002, of Common Shares subject to
options granted to the named individuals or the group under the
Company's stock option and incentive plans.
(3) Includes 3,126 Common Shares held of record or beneficially by Mrs.
Lenkin or a son as to which each has investment power.
Includes 360 Depositary Shares held of record or beneficially by Mrs.
Lenkin or a son as to which each has investment power.
(4) Includes 44,159 Common Shares, held of record or beneficially by Mrs.
Hughes, Jr. or her children as to which Mrs. Hughes, Jr. has investment
power and 11,348 Common Shares held by Mr. Hughes, Jr. and Tamara Hughes
Gustavson - Separate Property.
Includes 1,371 Depositary Shares held of record or beneficially by Mrs.
Hughes, Jr. or her children as to which Mrs. Hughes has investment power
and 43 Depositary Shares held by Mr. Hughes, Jr. and Tamara Hughes
Gustavson - Separate Property.
(5) Includes 2,000 Common Shares held by Mrs. Angeloff as to which she has
investment power.
(6) Includes 4,966 Common Shares owned beneficially by one of Mr. Harkham's
children as to which he has investment power.
Includes 153 Depositary Shares owned beneficially by one of Mr.
Harkham's children as to which he has investment power.
(7) Includes shares held of record or beneficially by members of the
immediate family of executive officers of the Company and shares
credited to the accounts of the executive officers of Public Storage
that are held in the 401(k) Plan.
As of May 31, 2002, B. Wayne Hughes, Jr. owned 3,204,758
shares of Public Storage's Class B Common Stock, representing 45.8% of the
outstanding shares of Class B Common Stock. For information on the Class B
Common Stock, see note (1) to the table in "Security Ownership of Certain
Beneficial Owners and Management -- Public Storage."
Public Storage has outstanding a class of preferred stock,
consisting of various series of non-voting senior preferred stock. As of May 31,
2002, B. Wayne Hughes, Jr. owned 400 shares of preferred stock, as to which he
shared investment power, Robert J. Abernethy owned 225 shares of preferred stock
and the directors and executive officers of Public Storage as a group owned a
total of 625 shares of preferred stock, representing less than 0.1% of the
outstanding shares.
52
CERTAIN RELATED TRANSACTIONS
Since January 1, 1999, there have been no, and there are no proposed,
material contracts, arrangements, understandings, relationships, negotiations or
transactions between the Partnership and Public Storage or its affiliates other
than the merger or as follows:
Joint Venture Interest. The Partnership and Public Storage are partners
in a joint venture (a general partnership that consolidated 14 prior joint
ventures) that owns 30 of the Properties. Under the joint venture agreement, the
Partnership's interest in each of the joint venture's properties ranges from 50%
to 76% and Public Storage's interest ranges from 24% to 50%. For information on
the Partnership's interest in each of the joint venture's properties, refer to
"Description of Partnership's Properties." Under the joint venture agreement,
the Partnership manages the joint venture, although Public Storage may compel
the sale of the joint venture's properties and the Partnership and Public
Storage have a right of first refusal to acquire the other's interest in the
event of a proposed sale of the joint venture's properties. Also, all
depreciation and amortization with respect to each property is allocated solely
to the Partnership until the Partnership receives allocations equal to its
initial capital contribution with respect to that property.
General Partners' Interest. Public Storage and Mr. Hughes are general
partners of the Partnership. Public Storage receives incentive distributions
equal to 10% of the Partnership's cash flow and has a subordinated interest in
proceeds from sales or financings of the Properties (15% of such proceeds so
long as limited partners have received sale or financing distributions equal to
their capital contributions plus any deficiency in a simple 8% annual return).
In 1999, 2000 and 2001, Public Storage received from the Partnership $561,000,
$401,000, and $620,000, respectively, in respect of its incentive distributions.
Public Storage also has a 1% interest in the Partnership in respect of their
capital contributions and participate in Partnership distributions in proportion
to their interest in the Partnership. Mr. Hughes, has no ownership interest in
the Partnership and is not entitled to any compensation, distribution or other
consideration from the Partnership, although as a general partner he shares with
Public Storage the overall management, conduct and operation of the Partnership
and he may be personally liable for Partnership obligations. Mr. Hughes has no
other interest in the Partnership.
Property Management. The Properties are managed by Public Storage under
a management agreement under which Public Storage receives 6% of gross revenues
from operations of the Properties. In 1999, 2000 and 2001, Public Storage
received $756,000, $765,000, and $801,000, respectively, for managing the
Properties.
Limited Partner Interests. Of the 150,000 outstanding Partnership
units, 94,698 units (approximately 63%) are beneficially owned by Public
Storage. Public Storage participates in Partnership distributions on the same
terms as other holders of units in respect of units owned by Public Storage.
PSBP. The Partnership owns a 2% interest in PSBP jointly with Public
Storage. Public Storage has a significant ownership interest in PSBP.
53
DESCRIPTION OF PARTNERSHIP'S PROPERTIES
The Partnership and Public Storage jointly own 30 of the 32 Properties
and the remaining two are owned by the Partnership alone. All of the Properties
are self-storage facilities, which 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 self-storage facilities include rentable uncovered parking areas
for vehicle storage. Leases 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 self-storage facilities both individuals and large
and small businesses. Individuals usually employ this space for storage of,
among other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
The following table sets forth information as of March 31, 2002 about
the Properties.
Net Rentable Number Date of Ownership
Location Square Feet of Spaces Acquisition Percentage
-------------------------- ------------ --------- ----------- ----------
Alabama
Anniston
Whiteside 25,100 234 10-01-86 76.2%
Birmingham
Bessemer - Midfield 19,100 280 10-01-86 76.2
Birmingham
Centerpoint Rd. 41,600 329 10-01-86 76.2
Birmingham
Gadson Highway- 20,800 190 10-01-86 76.2
Roebuck Plaza
Birmingham
Lorna Rd.- Hoover 35,400 320 10-01-86 76.2
Birmingham
Mini-warehouse 53,900 460 10-01-86 76.2
Rd.- Riverchase
Birmingham
Oporto-Eastwood 36,600 257 10-01-86 76.2
Birmingham
Oxmoor Blvd. 39,100 338 10-01-86 76.2
Greensprings
Birmingham
Pebble Creek - Forestdale 30,000 294 10-01-86 76.2
Birmingham
27th Place S. - Highland 19,600 264 10-01-86 76.2
Huntsville
Drake 43,400 362 10-01-86 76.2
Huntsville
Leeman 43,800 395 10-01-86 76.2
54
California
Fremont
Peralta 39,100 415 10-24-86 70.0
Sacramento
Franklin Blvd. 49,600 507 05-29-86 67.6%
West Los Angeles
Purdue Ave. 51,000 637 07-01-86 50.0
Georgia
Jonesboro
Jonesboro Rd. 33,400 274 10-23-86 50.0
Kansas
Kansas City
So. 44th 76,900 583 09-10-86 72.7
Maryland
Capitol Heights
Central Ave. 54,400 632 07-15-86 50.0
Laurel
Ft. Meade Rd. 35,100 475 08-20-86 50.0
Michigan
Pontiac
Dixie Hwy. 60,400 544 07-01-86 70.0
Missouri
St. Louis
Kirkham 30,600 382 04-10-86 57.4
St. Louis
Reavis Barracks 29,100 317 04-10-86 57.4
Texas
Fort Worth
East Loop 36,100 314 04-10-86 100.0
Houston
Fairdale 118,700 1,193 10-01-86 70.0
Houston
Glenvista 59,200 619 10-01-86 70.0
Houston
Gulfton 103,600 882 10-01-86 70.0
Houston
N. Freeway 96,300 874 10-01-86 70.0
Houston
Rogerdale 114,700 1,005 10-01-86 70.0
Houston
S. Gessner 111,100 1,008 10-01-86 70.0
Houston
West Park 52,200 418 10-01-86 70.0
Richland Hills
Baker Blvd. 55,800 408 06-24-86 50.0
55
Utah
West Valley
So. 3600 St. 65,900 526 06-10-86 100.0
The Partnership has no Property interest that involves 10% or more of
the Partnership's total assets or gross revenues.
The weighted average occupancy level for the Properties was 90% for the
12 months ended December 31, 2001 compared to 91% in the same period in 2000.
The annual average realized rent per square foot for the Properties was $8.88 in
the 12 months ended December 31, 2001, compared to $8.35 in the same period in
2000.
The weighted average occupancy level for the Properties was 83% for the
three months ended March 31, 2002 compared to 89% for the same period in 2001.
The annual average realized rent per square foot for the Properties was $9.21
for the three months ended March 31, 2002 compared to $8.62 for the same period
in 2001. Higher realized rent per occupied square foot was achieved through more
aggressive pricing that was implemented during 2001. The more aggressive rental
rates and reductions in the amount of discounts offered, which occurred
primarily in the last nine months of 2001, have resulted in a reduction in the
average occupancy levels during the first quarter of 2002 compared to prior
year. This reduction continues the trend that started in 2001.
As of the date of this statement, each of the Properties is generating
sufficient revenues to cover its operating expenses. None of the Properties is
subject to any material mortgage, lien, or any encumbrance other than liens for
taxes and assessments not yet due or payable, utility easements or other
immaterial liens or encumbrances. Each of the Properties will continue to be
used for its current purpose. At present, the Partnership has no plans for any
material renovation or improvement of its properties. However, the Partnership
budgets for regular maintenance, repair and upgrade to the Properties. The
Partnership believes each of the Properties is adequately covered by insurance.
Competition exists in all of the market areas in which the Properties
are located, and the barriers to entry are relatively low for competitors with
the necessary capital. However, the Partnership believes that the current
overall demand for space in self-storage facilities is strong, and as reflected
in the table below the overall performance of the Properties has generally
improved. The Properties are, and will continue after the merger to be, operated
as part of the "Public Storage" system by Public Storage, the largest operator
of self-storage facilities in the United States.
56
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the Properties for the periods indicated:
Years ended Three Months ended
December 31, March 31
-------------------------- -------------------
1999 2000 2001 2001 2002
---- ---- ---- ---- ----
Weighted average occupancy level 92% 91% 90% 89% 83%
Annual realized rent per occupied
square foot (1) $8.16 $8.35 $8.88 $8.62 $9.21
_______________
(1) Realized rent per occupied square foot represents the actual revenue earned
per occupied square foot. Management believes this is a more relevant
measure than the posted rental rates, since posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
The Partnership also owns a 2% interest in PSBP jointly with Public
Storage.
57
DESCRIPTION OF PUBLIC STORAGE'S PROPERTIES
At March 31, 2002, Public Storage had equity interests (through direct
ownership, as well as general and limited partnership interests in 1,392 storage
facilities (806 of which were wholly-owned) located in 37 states. Public Storage
also has an interest in PS Business Parks, Inc., a REIT that owns and operates
commercial properties. None of Public Storage's properties involves 10% or more
of Public Storage's total assets or gross revenues.
For a general description of self-storage facilities, see "Description of
Partnership's Properties."
The following table reflects the geographic diversification of Public
Storage's self-storage facilities:
At March 31, 2002
------------------------------------------------------
Net Rentable Square Feet
Number of Facilities(1) (in thousands)
----------------------- ------------------------
California:
Northern 139 7,817
Southern 162 10,564
Texas 165 11,190
Florida 141 8,459
Illinois 94 5,816
Georgia 62 3,626
Colorado 51 3,199
New Jersey 40 2,369
Washington 40 2,598
Maryland 40 2,284
Missouri 38 2,172
Virginia 37 2,247
New York 36 2,127
Ohio 31 1,925
Oregon 25 1,171
Tennessee 25 1,494
North Carolina 24 1,266
South Carolina 24 1,082
Kansas 22 1,316
Nevada 22 1,409
Alabama 22 895
Other states (17 states) 152 9,306
----- ------
Totals 1,392 84,332
===== ======
(1) Includes 1,356 facilities owned by Public Storage and entities
controlled by Public Storage. The remaining 36 facilities are owned
by entities in which Public Storage has a non-controlling interest.
As of the date of this statement, each of Public Storage's properties is
generating sufficient revenues to cover its operating expenses other than
properties in the initial lease-up stage. As of March 31, 2002, only 24 of
Public Storage's properties were subject to any material mortgage, lien, or any
encumbrance other than liens for taxes and assessments not yet due or payable,
utility easements or other immaterial liens or encumbrances. These 24 properties
were encumbered by mortgages in the aggregate amount of $23,026,000, bearing
interest at rates ranging from 7.134% to 10.55% per year and maturing between
May 2004 and September 2028. Each of Public Storage's properties will continue
to be used for its current purpose. At present, Public Storage has no plans for
any material renovation or improvement of its properties. However, Public
Storage budgets for regular maintenance, repair and upgrade to its properties.
Public Storage believes each of its properties is adequately covered by
insurance.
58
Competition exists in substantially all of the market areas in which Public
Storage's storage facilities and commercial properties are located, and the
barriers to entry are relatively low for competitors with the necessary capital.
However, Public Storage believes that the current overall demand for
self-storage facilities commercial space is strong, and as reflected in the
table below the overall performance of Public Storage's self-storage facilities
and commercial properties has generally improved. More than 10% of Public
Storage's net rentable square feet of space are located in each of the Southern
California, Texas and Florida market areas. Public Storage's self-storage
facilities are operated as part of the "Public Storage" system. Public Storage
is the largest operator of self-storage facilities in the United States.
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the 1,260 of the 1,392 self-storage facilities in which Public
Storage had an interest at March 31, 2002. These 1,260 facilities reflect a
consistent pool of stabilized properties that have been operated under the
Public Storage name for each of the periods listed below.
Years ended Three Months Ended
December 31, March 31
--------------------------- ------------------
1999 2000 2001 2001 2002
---- ---- ---- ---- ----
Weighted average occupancy level 91% 91% 89.% 88% 84%
Annual realized rent per occupied
square foot (1) $9.99 $10.44 $11.47 $11.12 $11.85
________________
(1) Realized annual rent per square foot is computed by annualizing rental
income including late charges and administrative fees divided by weighted
average occupied square footage for the period.
59
DISTRIBUTIONS AND PRICE RANGE OF PUBLIC STORAGE COMMON STOCK
The Public Storage common stock has been listed on the NYSE since October
19, 1984. The following table sets forth the distributions paid per share on the
Public Storage common stock in the periods indicated below and the reported high
and low sales prices on the NYSE composite tape for the applicable periods.
Distributions
Calendar Periods High Low Paid (1)
-------- --------- -------------
2000:
First quarter $24.81 $20.88 $0.22
Second quarter 24.88 21.25 0.22
Third quarter 26.94 23.19 0.82(2)
Fourth quarter 24.88 21.13 0.22
2001:
First quarter 26.75 24.13 0.22
Second quarter 30.20 26.06 0.22
Third quarter 34.85 29.15 0.80(3)
Fourth quarter 35.15 32.48 0.45
2002:
First quarter 38.40 33.19 0.45
Second quarter (through ____, 2002)
________________
(1) For GAAP purposes, all distributions were from investment income.
(2) Include a special distribution of $0.60 per share.
(3) Include a special distribution of $0.35 per share.
As of March 8, 2002, there were approximately 20,022 record holders of
Public Storage common stock. On ________, 2002, the last full trading day prior
to the date of this statement, the closing price of the Public Storage common
stock was $_____.
Holders of Public Storage common stock are entitled to receive
distributions when, as and if declared by the board of directors out of any
funds legally available for that purpose. Public Storage, as a REIT, is required
to distribute annually at least 90% of its "REIT taxable income," which, as
defined by the relevant tax statutes and regulations, is generally equivalent to
net taxable ordinary income. Under certain circumstances, Public Storage can
rectify a failure to meet this distribution requirement by paying dividends
after the close of a particular taxable year. See "Federal Income Tax
Considerations - Taxation of Public Storage as a REIT."
Public Storage's revolving credit facility with a commercial bank restricts
Public Storage's ability to pay distributions in excess of "Funds from
Operations" for the prior four fiscal quarters less scheduled principal payments
and less capital expenditures. Funds from Operations is defined in the loan
agreement generally as net income before gain on sale of real estate,
extraordinary loss on early retirement of debt and deductions for depreciation,
amortization and non-cash charges. Also, unless full dividends on Public
Storage's preferred stock have been paid for all past dividend periods, no
dividends may be paid on Public Storage common stock, except in certain
instances.
60
DISTRIBUTIONS AND MARKET PRICES OF PARTNERSHIP UNITS
Partnership Distributions. The following table sets forth the distributions
paid per Partnership unit (original purchase price $500) in the periods
indicated below:
Distribution
------------
2000:
First Quarter $ 5.95
Second Quarter 5.95
Third Quarter 5.95
Fourth Quarter 5.95
2001:
First Quarter 5.95
Second Quarter 16.63/(1)/
Third Quarter 7.13
Fourth Quarter 7.13
2002:
First Quarter 7.13
_______________
(1) Includes a special distribution of approximately $9.50 per unit. See
note (5) under "Summary - Summary Financial Information."
Holders of Partnership Units. As of December 31, 2001, there were
approximately 2,356 record holders of Partnership units.
Sales of Partnership Units. The Partnership units are not listed on any
national securities exchange or quoted in the over the counter market, and there
is no established public trading market for the units. Secondary sales activity
for the units has been limited and sporadic. The general partners monitor
transfers of the units (1) because the admission of the transferee as a
substitute limited partner requires the consent of the general partners under
the partnership agreement, (2) in order to track compliance with safe harbor
provisions to avoid treatment as a "publicly traded partnership" for tax
purposes and (3) because Public Storage has purchased units. However, the
general partners do not have information regarding the prices at which all
secondary sales transactions in the units have been effectuated. Various
organizations offer to purchase and sell limited partnership interests (such as
the units) in secondary sales transactions. Various publications such as The
Stanger Report summarize and report information (on a monthly, bimonthly or less
frequent basis) regarding secondary sales transactions in limited partnership
interests (including the units), including the prices at which such secondary
sales transactions are effectuated.
The general partners estimate, based solely on the transfer records of the
Partnership and the Partnership's transfer agent, that the number of Partnership
units transferred in sales transactions (i.e., excluding transactions believed
to be between related parties, family members or the same beneficial owner) was
as follows:
Number of Total Percentage of Number of
Year Units Transferred(1) Units Outstanding Transactions(1)
----------------------- -------------------- ----------------- ---------------
1999 906 (2) .60% 50 (2)
2000 935 (3) .62% 34 (3)
2001 1,588 (4) 1.06% 82 (4)
2002 (through January 1) 642 (5) .43% 33 (5)
61
___________________
(1) Transfers are recorded quarterly on the Partnership's records, as of the
first day following each calendar quarter.
(2) In 1999, Public Storage purchased a total of 351 units in 21 transactions:
20 units at $350 per unit and 331 units at $351 per unit.
(3) In 2000, Public Storage purchased a total of 682 units in 22 transactions
at $351 per unit.
(4) In 2001, Public Storage purchased a total of 1,228 units in 45
transactions at $351 per unit.
(5) In 2002 (through April 1), Public Storage purchased 565 units in 13
transactions at $351 per unit.
All of the purchases of Partnership units described in notes (2), (3) and
(4) above were acquired directly from limited partners or through secondary
firms of the type described below under "Information From The Stanger Report
Regarding Sales Transactions."
Information Regarding certain Sales Transactions. Set forth below is
information obtained by the Partnership regarding certain sales transactions
of Partnership units during 2000:
Per Unit Transaction Price (1)(2)
-------------------------------- Number Number of
High Low of Sales(2) Units Sold(2)
------------- -------- ----------- -------------
2000
First Quarter $344.32 $344.32 1 64
Second Quarter 344.56 344.56 1 100
Third Quarter 340.00 340.00 1 20
Fourth Quarter - - - -
_______________
(1) The original purchase price was $500 per unit.
(2) The Partnership believes that the price information represents the
prices paid by the buyers to the sellers net of commissions.
Information Regarding Sales Transactions. The information set forth below
is extracted from sections of the Spring 1999, Summer 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000, December
31, 2000, March 31, 2001, June 30, 2001, Third Quarter 2001, Fourth Quarter 2001
and First Quarter 2002 issues of a subscription publication available to the
public which includes data concerning limited partnership sales transactions
captioned "Limited Partnership Secondary-Market Prices," summarizing secondary
market prices for public limited partnerships based on actual transactions
during the reporting periods
62
listed on the tables below. Approximately 12 secondary-market firms provided
high and low price data for some or all of the reporting periods.
The information regarding sale transactions in Partnership units is as
follows:
Per Unit Transaction Price(1)
Reporting period High Low No. of Units(2)
----------------------------------- --------------- -------------- ------------------
2000
----
January 1 - March 31 352.00 352.00 100
April 1 - June 30 352.00 297.37 57
July 1 - September 30 343.50 303.00 27
October 1 - December 31 359.00 303.00 10
2001
----
January 1 - March 31 361.50 317.50 240
April 1 - June 30 -- -- --
July 1 - September 30 365.00 365.00 120
October 1 - December 31 -- -- --
2002
----
January 1 - February 28 368.00 290.00 170
________________
(1) The original purchase price was $500 per unit. Public Storage does
not know whether the transaction prices shown are before or after
commissions.
(2) Public Storage does not know the number of transactions.
The information above is provided without verification by Public Storage
and is subject to the following qualifications in the publication: "Limited
partnerships are designed as illiquid, long-term investments. Secondary-market
prices generally do not reflect the current value of partnership assets, nor are
they indicative of total return since prior cash distributions and tax benefits
received by the original investor are not reflected in the price. Transaction
prices are not verified by [the publication]."
63
DESCRIPTION OF PUBLIC STORAGE CAPITAL STOCK
Public Storage is authorized to issue 200,000,000 shares of Public Storage
common stock, par value $.10 per share, 7,000,000 shares of Public Storage class
B common stock, par value $.10 per share, 50,000,000 shares of preferred stock,
par value $.01 per share and 200,000,000 shares of equity stock, par value $.01
per share. At March 31, 2002, Public Storage had outstanding 115,792,541 shares
of Public Storage common stock (excluding shares issuable upon conversion of
convertible securities and shares subject to options), 7,000,000 shares of Class
B Common Stock, 11,168,500 shares of preferred stock (of which 62,500 shares
were represented by 62,500,000 depositary shares) and 4,523,320.338 shares of
equity stock (of which 8,776.102 shares were represented by 8,776,102 depository
shares).
Common Stock
The following description of Public Storage common stock sets forth certain
general terms and provisions of Public Storage common stock. The statements
below describing Public Storage common stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Public Storage's articles of incorporation and bylaws.
Public Storage shareholders will be entitled to receive dividends when, as
and if declared by Public Storage's Board of Directors, out of funds legally
available therefor. Payment and declaration of dividends on Public Storage
common stock and purchases of shares thereof by Public Storage will be subject
to certain restrictions if Public Storage fails to pay dividends on outstanding
preferred stock. See "- Preferred Stock." Upon any liquidation, dissolution or
winding up of Public Storage, holders of Public Storage common stock will be
entitled to share equally and ratably in any assets available for distribution
to them, after payment or provision for payment of the debts and other
liabilities of Public Storage and the preferential amounts owing with respect to
any outstanding preferred stock. Holders of Public Storage common stock have no
preemptive rights, which means they have no right to acquire any additional
shares of Public Storage common stock that may be issued by Public Storage at a
subsequent date.
Each outstanding share of Public Storage common stock entitles the holder
to one vote on all matters presented to Public Storage shareholders for a vote,
with the exception that Public Storage shareholders have cumulative voting
rights with respect to the election of the Board of Directors, in accordance
with California law. Cumulative voting entitles each Public Storage shareholder
to cast as many votes as there are directors to be elected multiplied by the
number of shares registered in his or her name. A Public Storage shareholder may
cumulate the votes for directors by casting all of the votes for one candidate
or by distributing the votes among as many candidates as the Public Storage
shareholder chooses. Public Storage shareholders have no preemptive or other
rights to subscribe for or purchase additional shares of Public Storage common
stock. All outstanding shares of Public Storage common stock are fully paid and
nonassessable.
Ownership Limitations
In a series of transactions among Public Storage Management, Inc. and its
affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger
of PSMI into Storage Equities, Inc., Storage Equities became self-administered
and self-managed, acquired substantially all of PSMI's United States real estate
interests and was renamed "Public Storage, Inc."
For Public Storage to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year. In order to maintain its qualification as a
REIT, Public Storage's articles of incorporation and bylaws provide certain
restrictions on the shares of capital stock that any Public Storage shareholder
may own.
64
Public Storage's articles of incorporation and bylaws provide that, subject
to certain exceptions, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (A) 2.0% of the outstanding shares
of all common stock of Public Storage, or (B) 9.9% of the outstanding shares of
each class or series of shares of preferred stock or equity stock of Public
Storage. The articles of incorporation and bylaws provide, however, that no
person shall be deemed to exceed the ownership limit solely by reason of the
beneficial ownership of shares of any class of stock to the extent that such
shares of stock were beneficially owned by such person (including the Hughes
family) at the time of the PSMI Merger. This ownership limitation was
established in order to assist in preserving Public Storage's REIT status in
view of the Hughes family's substantial ownership interest in Public Storage.
See "Federal Income Tax Considerations - Taxation of Public Storage as a REIT."
Public Storage's Board of Directors, in its sole and absolute discretion,
may grant an exception to the ownership limits to any person so requesting, so
long as (A) the Board of Directors has determined that, after giving effect to
(x) an acquisition by such person of beneficial ownership (within the meaning of
the Code) of the maximum amount of capital stock of Public Storage permitted as
a result of the exception to be granted and (y) assuming that the four other
persons who would be treated as "individuals" for the purposes of Section
542(a)(2) of the Code and who would beneficially own the largest amounts of
stock of Public Storage (determined by value) beneficially own the maximum
amount of capital stock of Public Storage permitted under the ownership limits
(or any waivers of the ownership limits granted with respect to such persons),
Public Storage would not be "closely held" within the meaning of Section 856(h)
of the Code and would not otherwise fail to qualify as a REIT, and (B) such
person provides to Public Storage's Board of Directors such representations and
undertakings as the Board of Directors may require. Notwithstanding any of the
foregoing ownership limits, no holder may own or acquire, either directly,
indirectly or constructively under the applicable attribution rules of the Code,
any shares of any class of Public Storage's capital stock if such ownership or
acquisition (i) would cause more than 50% in value of Public Storage's
outstanding capital stock to be owned, either directly or constructively, under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in Public
Storage's stock being beneficially owned by less than 100 persons (determined
without reference to any rules of attribution), or (iii) would otherwise result
in Public Storage's failing to qualify as a REIT.
Public Storage's articles of incorporation and bylaws provide that, if any
holder of Public Storage's capital stock purports to transfer shares to a person
or there is a change in the capital structure of Public Storage and either the
transfer or the change in capital structure would result in Public Storage
failing to qualify as a REIT, or such transfer or the change in capital
structure would cause the transferee to hold shares in excess of the applicable
ownership limit, then the stock being transferred (or in the case of an event
other than a transfer, the stock beneficially owned) which would cause one or
more of the restrictions on ownership or transfer to be violated shall be
automatically transferred to a trust for the benefit of a designated charitable
beneficiary. The purported transferee of such shares shall have no right to
receive dividends or other distributions with respect to such shares and shall
have no right to vote such shares. Any dividends or other distributions paid to
such purported transferee prior to the discovery by Public Storage that the
shares have been transferred to a trust shall be paid to the trustee of the
trust for the benefit of the charitable beneficiary upon demand. The trustee of
the trust will have all rights to dividends with respect to shares of stock held
in trust, which rights will be exercised for the exclusive benefit of the
charitable beneficiary. Any dividends or distributions paid over to the trustee
will be held in trust for the charitable beneficiary. The trustee shall
designate a transferee of such stock so long as such shares of stock would not
violate the restrictions on ownership or transfer in the Public Storage articles
of incorporation or bylaws in the hands of such designated transferee. Upon the
sale of such shares, the purported transferee shall receive the lesser of (A)(i)
the price per share such purported transferee paid for the stock in the
purported transfer that resulted in the transfer of the shares to the trust, or
(ii) if the transfer or other event that resulted in the transfer of the shares
of the trust was not a transaction in which the purported transferee gave full
value for such shares, a price per share equal to the market price on the date
of the purported transfer or other event that resulted in the transfer of the
shares to the trust and (B) the price per share received by the trustee from the
sale or other disposition of the shares held in the trust.
65
Class B Common Stock
The Public Storage class B common stock:
(1) Participates in distributions (other than liquidating distributions) at
the rate of 97% of the per share distributions on the Public Storage common
stock, provided that cumulative distributions of at least $.22 per quarter
(beginning with the fourth quarter of 1995) per share have been paid on the
Public Storage common stock;
(2) Does not participate in liquidating distributions;
(3) Is not entitled to vote (except as expressly required by California
law); and
(4) Will automatically convert into Public Storage common stock, on a share
for share basis, upon the later to occur of funds from operations per common
share aggregating $3.00 during any period of four consecutive calendar quarters
or January 1, 2003.
For these purposes:
(1) Funds from operations means net income (loss) (computed in accordance
with GAAP) before (i) gain (loss) on early extinguishment of debt, (ii) minority
interest in income and (iii) gain (loss) on disposition of real estate, adjusted
as follows: (i) plus depreciation and amortization (including Public Storage's
pro-rata share of depreciation and amortization of unconsolidated equity
interests and amortization of assets acquired in the PSMI Merger, including
property management agreements and goodwill), and (ii) less funds from
operations attributable to minority interest. Funds from operations is a
supplemental performance measure for equity REITs as defined by the National
Association of Real Estate Investment Trusts, Inc. This definition does not
specifically address the treatment of minority interest in the determination of
funds from operations or the treatment of the amortization of property
management agreements and goodwill. In the case of Public Storage, funds from
operations represents amounts attributable to its shareholders after deducting
amounts attributable to the minority interests and before deductions for the
amortization of property management agreements and goodwill. Funds from
operations does not take into consideration scheduled principal payments on
debt, capital improvements, distributions and other obligations of Public
Storage. Accordingly, funds from operations is not a substitute for Public
Storage's cash flow or net income as a measure of its liquidity or operating
performance or ability to pay distributions.
(2) Funds from operations per Common Share means funds from operations less
preferred stock dividends (less dividends on the preferred stock and the equity
stock) divided by the outstanding weighted average shares of Public Storage
common stock assuming conversion of all outstanding convertible securities and
the Public Storage class B common stock.
Preferred Stock
Public Storage is authorized to issue 50,000,000 shares of preferred stock,
$.01 par value per share. Public Storage's articles of incorporation provide
that the preferred stock may be issued from time to time in one or more series
and give the Board of Directors broad authority to fix the dividend and
distribution rights, conversion and voting rights, if any, redemption provisions
and liquidation preferences of each series of preferred stock.
At March 31, 2002, Public Storage had 15 series of senior preferred stock
outstanding and had reserved for issuance, upon conversion of preferred units in
an operating partnership, an additional two series. In all respects, each of the
series of senior preferred stock ranks on a parity with each other. Each of the
series of senior preferred stock: (1) has a stated value of $25 per share, (2)
in preference to the holders of shares of the common stock and any other capital
stock ranking junior to the senior preferred stock as to payment of dividends,
provides for cumulative quarterly dividends calculated as a percentage of the
stated value (ranging from 7.625% to 10% per year in the case of the 12 series
of fixed rate senior preferred stock and a rate adjustable quarterly ranging
from 6.75% to 10.75% per year in the case of a series of adjustable rate senior
preferred stock) and (3) is subject to redemption, in whole or in
66
part, at the option of Public Storage at a cash redemption price of $25 per
share, plus accrued and unpaid dividends (on and after June 30, 1999 in the case
of the adjustable rate senior preferred stock and on or after various dates
between August 31, 2002 and October 31, 2006 in the case of the series of fixed
rate senior preferred stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of Public Storage, the holders of each of the series of senior
preferred stock will be entitled to receive out of Public Storage's assets
available for distribution to stockholders, before any distribution of assets is
made to holders of Public Storage common stock or any other shares of capital
stock ranking as to such distributions junior to the senior preferred stock,
liquidating distributions in the amount or equivalent amount of $25 per share,
plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, the holders of the senior preferred stock are not entitled to
vote. The consent of holders of at least 66-2/3% of the outstanding shares of
the senior preferred stock (and any other series of preferred stock ranking on a
parity therewith), voting as a single class, is required to authorize another
class of shares senior to such preferred stock.
Equity Stock
Public Storage is authorized to issue 200,000,000 shares of equity stock,
$.01 par value per share. At March 31, 2002, Public Storage had 4,523,320.338
outstanding shares of equity stock (of which 8,776.102 shares were represented
by 8,776,102 depositary shares). Public Storage's articles of incorporation
provide that the equity stock may be issued from time to time in one or more
series and give the Board of Directors broad authority to fix the dividend and
distribution rights, conversion and voting rights, redemption provisions and
liquidation rights of each series of equity stock. Holders of equity stock have
no preemptive rights. The shares of equity stock will be, when issued, fully
paid and nonassessable.
At March 31, 2002, Public Storage had three series of equity stock
outstanding.
The equity stock, series A is represented by depositary shares (each
depositary share representing 1/1,000 of a shares of equity stock, series A).
The equity stock, series A (1) provides for cash distributions at the rate of
five times the distributions on the common stock per depositary share, but not
more than $2.45 per depositary share per year, (2) may be redeemed on or after
March 31, 2010 at $24.50 per depositary share, (3) on liquidation each
depositary share receives the same amount allocated in respect of a share of
common stock, but not to exceed $24.50 per depositary share, (4) is convertible
into common stock at the rate of one depositary share into .956 shares of common
stock if Public Storage fails to preserve its status as a REIT and (5) votes as
a single class with the common stock at the rate of one-tenth of a vote per
depositary share. At March 31, 2002, there were 8,776.102 outstanding shares of
equity stock, series A (represented by 8,776,102 depositary shares).
The equity stock, series AA (1) provides for cash distributions at the rate
of ten times the distributions on the common stock per share, but not more the
$8.80 per share per year, (2) on liquidation receives ten times the amount
allocated in respect of a share of common stock, but not to exceed $100 per
share and (3) is non-voting, except as required by California law. At March 31,
2002, there were 225,000 outstanding shares of equity stock, series A4.
The equity stock, series AAA (1) provides for cash distributions at the
rate of five times the distributions on the common stock per share, but not more
than $2.15640625 per depositary share per year, (2) on liquidation receives 120%
of the amount allocated in respect of a share of common stock, (3) is
convertible into common stock at the rate of 1.2 shares of common stock for each
share in November 2014 and (4) is non-voting, except as required by California
law. At March 31, 2002, there were 4,289,544.236 outstanding shares of equity
stock, series AAA.
Effects of Issuance of Capital Stock
The issuance of Public Storage common stock and the issuance of preferred
stock or equity stock with special voting rights could be used to deter attempts
by a single shareholder or group of shareholders to obtain
67
control of Public Storage in transactions not approved by Public Storage's Board
of Directors. Public Storage has no intention to issue Public Storage common
stock or the preferred stock or equity stock for such purposes.
68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE PARTNERSHIP
Forward Looking Statements
When used within this document, the words "expects," "believes,"
"anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements." Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors, which may cause the
actual results and performance of the Partnership to be materially different
from those expressed or implied in the forward looking statements. Such factors
include the risk factors outlined in the section "Risk Factors - Public Storage
is subject to real estate operating risks" and the impact of competition from
new and existing real estate facilities which could impact rents and occupancy
levels at the real estate facilities that the Partnership's has an interest in;
the risk of terrorist attacks; the Partnership's ability to effectively compete
in the markets that it does business in; the impact of the regulatory
environment as well as national, state, and local laws and regulations
including, without limitation, those governing Partnerships; and the impact of
general economic conditions upon rental rates and occupancy levels at the real
estate facilities that the Partnership has an interest in.
Critical Accounting Policy - Impairment of Long Lived Assets
Impairment of Long Lived Assets
Substantially all of the Partnership's assets consist of long-lived assets,
primarily real estate. We evaluate our long-lived assets on a quarterly basis
for indicators of impairment. When indicators of impairment are detected, we
evaluate the recoverability of such long-lived assets. To the extent that the
estimated future undiscounted cash flows are less than the respective book
value, an impairment charge is recorded. The Partnership has determined at March
31, 2002 that no such impairments existed and, accordingly, no impairment
charges have been recorded.
Future events could cause us to conclude that our long-lived assets are
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations.
Estimated Useful Lives of Long-Lived Assets
Substantially all of the Partnership's assets consist of depreciable,
long-lived assets. We record depreciation expense with respect to these assets
based upon their estimated useful lives. Any change in the estimated useful
lives of those assets, caused by functional or economic obsolescense or other
factors, could have a material adverse impact on our financial condition or
results of operations.
Results of Operations
Three months ended March 31, 2002 compared to three months ended March 31, 2001:
The Partnership's net income for the three months ended March 31, 2002 was
$1,093,000 compared to $956,000 for the three months ended March 31, 2001,
representing an increase of $137,000, or 14.3%. The increase is primarily due to
the Partnership's share ($120,000) of a gain on disposition of real estate
recorded by PS Business Parks and our share of improved properties operations at
the Mini Warehouse Properties.
Property Operations: Rental income for our wholly-owned mini-warehouse
property was $161,000 compared to $159,000 for the three months ended March 31,
2002 and 2001, respectively, representing an increase of $2,000, or 1.3%. Cost
of operations (including management fees) remained stable at $64,000 for the
three months ended March 31, 2002 and 2001. Accordingly, for our wholly-owned
mini-warehouse property, property net operating income increased by $2,000, or
2.1%, from $95,000 to $97,000 for the three months ended March 31, 2001 and
2002, respectively.
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Equity in Earnings of Real Estate Entities: Equity in earnings of real
estate entities was $1,051,000 in the three months ended March 31, 2002 as
compared to $878,000 during the three months ended March 31, 2001, representing
an increase of $173,000, or 19.7%. The increase is primarily due to the
Partnership's share ($120,000) of a gain on disposition of real estate recorded
by PS Business Parks and our share of improved properties operations at the Mini
Warehouse Properties.
Interest Income: Interest income decreased by $14,000 from $47,000 for the
three months ended March 31, 2001 to $33,000 for the three months ended March
31, 2002, due primarily to lower invested cash balances.
Depreciation and Amortization: Depreciation and amortization decreased
$1,000, or 2.8%, from $36,000 to $35,000 for the three months ended March 31,
2001 and 2002, respectively.
Administrative: Administrative expense increased $25,000, or 89.3%, from
$28,000 for the three months ended March 31, 2001 to $53,000 for the three
months ended March 31, 2002. This increase is primarily due to the timing of
certain state tax expenditures.
Year ended December 31, 2001 compared to year ended December 31, 2000:
The Partnership's net income was $4,102,000 in 2001 compared to $3,558,000
in 2000, representing an increase of $544,000, or 15.3%. The increase is due
primarily to the Partnership's share of an improvement in operations of the
mini-warehouses in which the Partnership has an interest (the "Mini-Warehouse
Properties") and a decrease in depreciation allocated to the Partnership with
respect to the joint venture.
Property Operations: Rental income for the Partnership's wholly-owned
mini-warehouse properties was $659,000 in 2001 compared to $605,000 during 2000,
representing an increase of $54,000, or 8.9%. Cost of operations (including
management fees) decreased $31,000, or 10.7%, to $260,000 in 2001 from $291,000
during 2000. Accordingly, for the Partnership's mini-warehouse operations,
property net operating income increased by $85,000, or 27.1%, from $314,000 in
2000 to $399,000 in 2001.
Equity in earnings of real estate entities: Equity in earnings of real
estate entities was $3,801,000 in 2001 as compared to $3,395,000 during 2000,
representing an increase of $406,000, or 12.0%. The increase is due primarily to
the Partnership's share of an improvement in operations of the Mini-Warehouse
Properties and a decrease in depreciation allocated to the Partnership with
respect to the joint venture.
Depreciation and Amortization: Depreciation and amortization attributable
to the Partnership's wholly-owned mini-warehouse properties decreased $7,000, or
4.6% from $153,000 in 2000 to $146,000 during 2001.
Supplemental Property Data
During 2002, 2001 and 2000, a majority of the Partnership's net income was
from the Partnership's share of the operating results of the Mini-Warehouse
Properties. Therefore, in order to evaluate the Partnership's operating results,
the General Partners analyze the operating performance of the Mini-Warehouse
Properties.
Three months ended March 31, 2002 compared to three months ended March 31,
2001: Rental income for the Mini-Warehouse Properties was $3,211,000 compared to
$3,178,000 for the three months ended March 31, 2002 and 2001, respectively,
representing an increase of $33,000, or 1.0%. The increase in rental income is
primarily attributable to increased rental rates at the Mini-Warehouse
Properties, partially offset by a decrease in average occupancy rates. The
annual average realized rent per square foot for the Mini-Warehouse Properties
was $9.21 compared to $8.62 for the three months ended March 31, 2002 and 2001,
respectively. The weighted average occupancy levels at the Mini-Warehouse
Properties decreased from 89% to 83% for the three months ended March 31, 2001
and 2002, respectively. Cost of operations (including management fees) decreased
$7,000, or 0.6%, to $1,226,000 from $1,233,000 for the three months ended March
31, 2002 and 2001, respectively. This decrease is primarily attributable to
lower advertising expenses offset by higher payroll, and property tax expenses.
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Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $40,000, or 2.1%, from $1,945,000 to $1,985,000 for the three
months ended March 31, 2001 and 2002, respectively.
Year ended December 31, 2001 compared to the year ended December 31, 2000:
Rental income for the Mini-Warehouse Properties was $13,355,000 in 2001 compared
to $12,766,000 during 2000, representing an increase of $589,000, or 4.6%. The
increase in rental income was primarily attributable to increased rental rates.
The annual average realized rent per square foot was $8.88 in 2001 compared to
$8.35 in 2000. The weighted average occupancy levels decreased from 91% in 2000
to 90% in 2001. Cost of operations (including management fees) increased
$13,000, or 0.3%, to $5,197,000 during 2001 from $5,184,000 in 2000. This
increase was primarily attributable to increases in advertising and promotion.
Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $576,000, or 7.6%, from $7,582,000 in 2000 to $8,158,000 during
2001.
Liquidity and Capital Resources
We have adequate sources of cash to finance operations, both on a
short-term and long-term basis, primarily from internally generated cash from
property operations and cash reserves. Cash generated from operations and
distributions from real estate entities ($1,341,000 for the three months ended
March 31, 2002) has been sufficient to meet all our current obligations.
During 2002, we do not anticipate incurring significant costs for capital
improvements for our wholly-owned property. Total capital improvements for the
three months ended March 31, 2002 with respect to this property is $3,000.
Total distributions paid to the General Partners and the Limited Partners
(including per Unit amounts) for 2002 (year to date) and prior years were as
follows:
Total Per Unit
------------------ -------------
2002 (first quarter) $1,201,000 $7.13
2001 6,202,000 36.84
2000 4,005,000 23.80
1999 5,606,000 33.30
1998 4,007,000 23.80
1997 5,007,000 29.74
1996 4,008,000 23.80
1995 4,007,000 23.80
1994 4,007,000 23.80
1993 3,265,000 19.40
1992 3,026,000 17.97
1991 4,041,000 24.00
1990 3,523,000 20.93
1989 3,368,000 20.00
1988 3,629,000 21.55
1987 4,418,000 26.25
1986 3,544,000 24.87
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The Partnership, in prior years, made regular distributions based on
estimated cash available for distribution (cash flow from all sources, less cash
necessary for capital improvement needs and to establish reserves). The General
Partners would periodically make special distributions if cash available for
distribution exceeded its original estimates or if it adjusted the Partnership's
cash reserve levels. The General Partners distributed, concurrent with the
regular distribution for the second quarter of 2001, a special distribution of
$9.50 per Unit. Future distribution levels will be based on the General
Partners' estimate of on-going cash available for distributions (cash flow from
all sources, less cash necessary for capital improvement needs and to establish
reserves). The Partnership does not anticipate any material changes in its
reserve requirements for capital improvements or other items.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations that are generally applicable to the public limited partners as a
result of the merger and as a result of the subsequent ownership and disposition
of shares of Public Storage common stock for limited partners that do not make a
cash election. Because this summary only addresses the federal income tax
consequences that generally apply to all limited partners, it may not contain
all the information that may be important in your specific circumstances. As you
review this discussion, you should keep in mind that:
(1) The tax consequences to you may vary depending on your particular tax
situation;
(2) Special rules that are not discussed below may apply to you if, for
example, you are a tax-exempt organization, a broker-dealer, a
non-U.S. person, a trust, an estate, a regulated investment company, a
financial institution, an insurance company, or otherwise subject to
special tax treatment under the Internal Revenue Code;
(3) This summary does not address state, local or foreign tax
considerations;
(4) This summary concerning Public Storage common shareholders deals only
with those shareholders that hold common shares as "capital assets,"
within the meaning of Section 1221 of the Internal Revenue Code; and
(5) This discussion is not intended to be, and should not be construed as,
tax advice.
You are urged both to review the following discussion and to consult with
your own tax advisor to determine the effect of the merger and acquiring, owning
and disposing of Public Storage common shares in your individual tax situation,
including any state, local or foreign tax consequences.
The information in this section is based on the current Internal Revenue
Code, current, temporary and proposed treasury regulations, the legislative
history of the Internal Revenue Code, current administrative interpretations and
practices of the Internal Revenue Service, including its practices and policies
as reflected in private letter rulings, which are not binding on the Internal
Revenue Service, and existing court decisions. Future legislation, regulations,
administrative interpretations and court decisions could change current law or
adversely affect existing interpretations of current law. Any change could apply
retroactively. Except as described under "--Taxation of Public Storage as a
REIT--Income Tests Applicable to REITs," Public Storage has not obtained any
rulings from the Internal Revenue Service concerning the tax treatment of the
matters discussed below. Thus, it is possible that the Internal Revenue Service
could challenge the statements in this discussion, which do not bind the
Internal Revenue Service or the courts, and that a court could agree with the
Internal Revenue Service.
Opinion of Counsel
A. Timothy Scott, tax counsel and senior vice president of Public Storage,
has reviewed the discussion under the heading "Federal Income Tax
Considerations" and is of the opinion that: (i) the discussion describes the
material federal income tax considerations to the public limited partners as a
result of the merger and as a result of the subsequent
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ownership of Public Storage common stock for limited partners that do not make a
cash election, and (ii) Public Storage has been organized and operated so as to
meet the requirements for qualification as a REIT for each of its three most
recently completed fiscal years (1999, 2000 and 2001) and that its organization
and proposed method of operation should enable it to continue to meet those
requirements. As is noted below, Public Storage's qualification and taxation as
a REIT depends upon both Public Storage's satisfaction in the past, and Public
Storage's ability to meet on a continuing basis in the future, through actual
annual operating and other results, the various requirements under the Code
relating to, among other things, the sources of its gross income, the lack of
"C" corporation earnings and profits, the composition of its assets, the levels
of distributions to shareholders, and the diversity of its stock ownership. Tax
counsel has relied upon representations of management with respect to these
matters and has not reviewed or audited, and will not review or audit,
compliance with these requirements and does not express an opinion about those
representations. Accordingly, no assurance can be given that Public Storage has
satisfied or will satisfy the requirements under the Code for qualification and
taxation as a REIT for any given taxable year. The opinion is not binding upon
the IRS or the courts, and there can be no assurance that the IRS would not seek
to assert a contrary position. Also, there cannot be any assurance that future
legislative, judicial or administrative changes (which could be retroactive in
effect) will not adversely affect the conclusions reached in the opinion or the
discussion set forth below. Finally, the opinion is expressly limited to the
specific conclusions described in the first sentence of this section and does
not purport to address any other federal, state, local or foreign tax
consequences that may result from the merger or any other transaction.
The Merger
The merger will be treated for federal income tax purposes as a taxable
sale of the Partnership Units held by public limited partners, both for limited
partners electing to receive cash and for those electing to receive Public
Storage common stock. Taxable public limited partners will be taxed on the
difference between the adjusted basis of their units and the amount of cash
received or the fair market value of the Public Storage common stock received.
Public Storage estimates that taxable public limited partners who acquired their
units in the original offering will recognize a capital gain of approximately
$294 per unit as a result of the merger (assuming that the merger is effective
as of the end of the second quarter of 2002), a portion of which may be subject
to tax as unrecaptured Section 1250 gain. The particular tax consequences of the
merger for a public limited partner will depend upon a number of factors related
to his or her tax situation, including the tax basis of the limited partner's
units, and the tax impact could be quite different for public limited partners
who acquired their units after the original offering.
To the extent that a taxable public limited partner recognizes a capital
loss as a result of the merger, the loss generally can be applied to offset
capital gain from other sources. Individuals may use capital losses in excess of
capital gains to offset up to $3,000 of ordinary income in any single year
($1,500 for a married individual filing a separate return). Any capital losses
that are not used currently can be carried forward for use in subsequent years.
A corporation's capital losses in excess of current capital gains generally may
be carried back three years, with any remaining unused portion available to be
carried forward for five years.
The merger is not expected to be a taxable event for Public Storage, which
will retain its existing interests in the Partnership and will be treated as
having purchased the interests of the public limited partners.
Taxation of Public Storage as a REIT
General. Public Storage elected to be taxed as a REIT under the Internal
Revenue Code beginning with its taxable year ended December 31, 1981. A REIT
generally is not subject to federal income tax on the income that it distributes
to shareholders if it meets the applicable distribution requirements and other
requirements for REIT qualification.
Public Storage believes that it has been organized and operated, and it
intends to continue to operate, in a manner to qualify as a REIT, but there can
be no assurance that Public Storage has qualified or will qualify or remain
qualified as a REIT. Qualification and taxation as a REIT depend upon Public
Storage's ability to meet, through actual annual (or in some cases quarterly)
operating results, requirements relating to income, asset ownership,
distribution
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levels and diversity of share ownership, and the various other REIT
qualification requirements imposed under the Internal Revenue Code. Given the
complex nature of the REIT qualification requirements, the ongoing importance of
factual determinations and the possibility of future changes in Public Storage's
circumstances, Public Storage cannot provide any assurance that its actual
operating results will satisfy the requirements for taxation as a REIT under the
Internal Revenue Code for any particular taxable year.
So long as Public Storage qualifies for taxation as a REIT, Public Storage
generally will not be subject to federal corporate income tax on its net income
that is distributed currently to its shareholders. This treatment substantially
eliminates the "double taxation" (that is, taxation at both the corporate and
shareholder levels) that generally results from an investment in a regular
corporation. However, Public Storage will be subject to federal income tax as
follows:
(1) Public Storage will be taxed at regular corporate rates on any
undistributed "REIT taxable income." REIT taxable income is the
taxable income of the REIT subject to specified adjustments, including
a deduction for dividends paid.
(2) Under some circumstances, Public Storage may be subject to the
"alternative minimum tax" on its items of tax preference.
(3) If Public Storage has net income from the sale or other disposition of
"foreclosure property" (generally property acquired through
foreclosure after a default on a loan secured by the property or a
lease of the property) that is held primarily for sale to customers in
the ordinary course of business, or other nonqualifying income from
foreclosure property, this income will be subject to tax at the
highest corporate rate.
(4) Public Storage's net income from "prohibited transactions" will be
subject to a 100% tax. In general, prohibited transactions are sales
or other dispositions of property (other than foreclosure property)
held primarily for sale to customers in the ordinary course of
business.
(5) If Public Storage fails to satisfy either the 75% gross income test or
the 95% gross income test discussed below, but still maintains its
qualification as a REIT because other requirements are met, Public
Storage will be subject to a tax equal to the gross income
attributable to the greater of either (1) the amount by which 75% of
its gross income exceeds the amount of its income qualifying under the
75% test for the taxable year or (2) the amount by which 90% of its
gross income exceeds the amount of its income qualifying for the 95%
income test for the taxable year, multiplied by a fraction intended to
reflect Public Storage's profitability.
(6) Public Storage will be subject to a 4% excise tax if Public Storage
fails to distribute during each calendar year at least the sum of:
(a) 85% of its REIT ordinary income for the year;
(b) 95% of its REIT capital gain net income for the year; and
(c) any undistributed taxable income from prior taxable years.
The tax applies to the excess of the required distribution over the
sum of amounts actually distributed and amounts retained for which
federal income tax was paid.
(7) Public Storage will be subject to a 100% penalty tax on some payments
it receives (or on certain expenses deducted by a taxable REIT
subsidiary) if arrangements among Public Storage, its tenants, and its
taxable REIT subsidiaries are not comparable to similar arrangements
among unrelated parties.
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In addition, Public Storage could be liable for specified tax
liabilities inherited from a taxable "C" corporation, if Public Storage acquired
or acquires assets from such a corporation in a carryover basis transaction
(such as in the case of its 1995 merger with Public Storage Management). Public
Storage also has acquired assets in carryover basis merger transactions with a
number of REITs (including its 1999 merger with Storage Trust Realty). If any
such acquired REIT failed to qualify as a REIT at the time of its merger into
Public Storage, it would have been a "C" corporation and Public Storage also
would be liable for tax liabilities inherited from it.
When assets are acquired from a "C" corporation in a carryover basis
transaction, the "C" corporation is generally required to recognize gain with
respect to the assets' "built-in gain." Built-in gain is the amount by which an
asset's fair market value exceeds its adjusted basis. As the successor to these
acquired entities, Public Storage would be liable for any tax owed by them as a
result of the recognition of built-in gain. Applicable treasury regulations,
however, allow an acquiring REIT, such as Public Storage, to make an election to
avoid the recognition of gain and the imposition of corporate level tax on a
built-in gain asset acquired in a carryover basis transaction from a "C"
corporation unless and until the acquiring REIT disposes of that built-in gain
asset during the 10-year period following the asset's acquisition, at which time
the acquiring REIT would recognize, and would be subject to the highest regular
corporate rate of tax on, the built-in gain. Public Storage elected to be
subject to these 10-year built-in gain rules in connection with its merger with
Public Storage Management. Similar rules would apply if in the future Public
Storage acquires assets from a "C" corporation in a carryover basis transaction.
Requirements for Qualification as a REIT. The Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial
interest;
(3) that would be taxable as a domestic corporation, but for
Sections 856 through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance
company subject to applicable provisions of the Internal
Revenue Code;
(5) the beneficial ownership of which is held by 100 or more
persons;
(6) during the last half of each taxable year not more than 50% in
value of the outstanding shares of which is owned directly or
indirectly by five or fewer individuals, as defined in the
Internal Revenue Code to include specified entities;
(7) that makes an election to be taxable as a REIT, or has made
this election for a previous taxable year which has not been
revoked or terminated, and satisfies all relevant filing and
other administrative requirements established by the Internal
Revenue Service that must be met to elect and maintain REIT
status;
(8) that uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Internal
Revenue Code and regulations; and
(9) that meets other applicable tests, including those described
below regarding the nature of its income and assets and the
amount of its distributions.
Conditions (1), (2), (3) and (4) above must be met during the entire
taxable year and condition (5) above must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. For purposes of determining stock ownership under condition
(6) above, a supplemental
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unemployment compensation benefits plan, a private foundation or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. However, a trust that is a qualified
trust under Internal Revenue Code Section 401(a) generally is not considered an
individual, and beneficiaries of a qualified trust are treated as holding shares
of a REIT in proportion to their actuarial interests in the trust for purposes
of condition (6) above.
Public Storage believes that it has issued sufficient shares with
sufficient diversity of ownership to allow it to satisfy conditions (5) and (6)
above. In addition, Public Storage's organizational documents contain
restrictions regarding the transfer of its capital stock that are intended to
assist it in continuing to satisfy the share ownership requirements described in
conditions (5) and (6) above. The ownership restrictions in Public Storage's
articles of incorporation and bylaws generally prohibit the actual or
constructive ownership of more than 2% of the outstanding shares of common stock
(excluding the interest held by the Hughes family) or more than 9.9% of the
outstanding shares of each class or series of shares of preferred stock or
equity stock, unless an exception is established by the board of directors. The
restrictions provide that if, at any time, for any reason, those ownership
limitations are violated or more than 50% in value of Public Storage's
outstanding stock otherwise would be considered owned by five or fewer
individuals, then a number of shares of stock necessary to cure the violation
will automatically and irrevocably be transferred from the person causing the
violation to a designated charitable beneficiary. See "Description of Public
Storage Capital Stock--Ownership Limitations." At the time of the merger with
Public Storage Management, to further assist Public Storage in meeting the
ownership restrictions, the Hughes family entered into an agreement with Public
Storage for the benefit of Public Storage and certain designated charitable
beneficiaries providing that if, at any time, for any reason, more than 50% in
value of Public Storage's outstanding stock otherwise would be considered owned
by five or fewer individuals, then a number of shares of Public Storage's common
stock owned by Wayne Hughes necessary to cure such violation would automatically
and irrevocably be transferred to a designated charitable beneficiary.
The REIT protective provisions of Public Storage's organizational
documents and the agreement with the Hughes family were modeled after certain
arrangements that the Internal Revenue Service ruled in private letter rulings
would 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 Internal Revenue Service might not seek to take a
different position concerning Public Storage (a private letter ruling is legally
binding only as to the taxpayer to whom it was issued and Public Storage will
not seek a private ruling on this or any other issue) or contend that Public
Storage failed to enforce these various arrangements. Accordingly, there can be
no assurance that these arrangements necessarily will preserve Public Storage's
REIT status.
To monitor compliance with condition (6) above, a REIT is required to
send annual letters to its shareholders requesting information regarding the
actual ownership of its shares. For taxable years commencing on or after January
1, 1998, if Public Storage complies with the annual letters requirement and does
not know, or exercising reasonable diligence, would not have known, of a failure
to meet condition (6) above, then Public Storage will be treated as having met
condition (6) above.
To qualify as a REIT, Public Storage cannot have at the end of any
taxable year any undistributed earnings and profits that are attributable to a
non-REIT taxable year. As a result of various transactions, including the 1995
merger with Public Storage Management, the 1999 merger with Storage Trust Realty
and mergers with other affiliated REITs, Public Storage has succeeded to certain
tax attributes of various entities and their predecessors, including any
undistributed earnings and profits. Public Storage does not believe that it has
acquired any undistributed earnings and profits and Public Storage believes that
the REITs with which it has merged qualified as REITs at the time of
acquisition. However, neither these entities nor Public Storage has sought an
opinion of counsel or outside accountants to the effect that Public Storage did
not acquire any earnings and profits. There can be no assurance that the
Internal Revenue Service would not contend otherwise on a subsequent audit.
If the Internal Revenue Service determined that Public Storage
inherited undistributed non-REIT earnings and profits and that Public Storage
did not distribute the non-REIT earnings and profits by the end of that taxable
year, it appears that Public Storage could avoid disqualification as a REIT by
using "deficiency dividend" procedures to distribute the non-REIT earnings and
profits. The deficiency dividend procedures would require Public Storage to
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make a distribution to shareholders, in addition to the regularly required REIT
distributions, within 90 days of the Internal Revenue Service determination. In
addition, Public Storage would have to pay to the Internal Revenue Service
interest on 50% of the non-REIT earnings and profits that were not distributed
prior to the end of the taxable year in which Public Storage inherited the
undistributed non-REIT earnings and profits. If, however, Public Storage were
considered to be a "successor" under the applicable treasury regulations to a
corporation that had failed to qualify as a REIT at the time of its merger with
Public Storage, Public Storage could fail to qualify as a REIT and could be
prevented from reelecting REIT status for up to four years after such failure to
qualify.
Qualified REIT Subsidiaries. If a REIT owns a corporate subsidiary that
is a "qualified REIT subsidiary," the separate existence of that subsidiary will
be disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a "taxable REIT subsidiary" (discussed
below), all of the capital stock of which is owned by the REIT. All assets,
liabilities and items of income, deduction and credit of the qualified REIT
subsidiary will be treated as assets, liabilities and items of income, deduction
and credit of the REIT itself. A qualified REIT subsidiary of Public Storage
will not be subject to federal corporate income taxation, although it may be
subject to state and local taxation in some states.
Taxable REIT Subsidiaries. A "taxable REIT subsidiary" of Public
Storage is a corporation in which Public Storage directly or indirectly owns
stock and that elects, together with Public Storage, to be treated as a taxable
REIT subsidiary under Section 856(l) of the Internal Revenue Code. In addition,
if a taxable REIT subsidiary of Public Storage owns, directly or indirectly,
securities representing 35% or more of the vote or value of a subsidiary
corporation, that subsidiary will also be treated as a taxable REIT subsidiary
of Public Storage. A taxable REIT subsidiary is a corporation subject to federal
income tax, and state and local income tax where applicable, as a regular "C"
corporation.
Generally, a taxable REIT subsidiary can perform some impermissible
tenant services (as described under "-- Income Tests Applicable to REITs")
without causing Public Storage to receive impermissible tenant services income
under the REIT income tests. However, several provisions regarding the
arrangements between a REIT and its taxable REIT subsidiaries are intended to
ensure that a taxable REIT subsidiary will be subject to an appropriate level of
federal income taxation. For example, a taxable REIT subsidiary is limited in
its ability to deduct interest payments made to Public Storage. In addition, a
REIT will be obligated to pay a 100% penalty tax on some payments that it
receives or on certain expenses deducted by the taxable REIT subsidiary if the
economic arrangements between the REIT, the REIT's tenants and the taxable REIT
subsidiary are not comparable to similar arrangements among unrelated parties.
Public Storage and PS Orangeco Holdings, Inc. (and its direct and
indirect subsidiaries, including PS Orangeco, Inc., PS Pickup & Delivery, Inc.
and PS Insurance Co., Ltd), PSCC, Inc. and certain other corporations have made
elections for those corporations to be treated as taxable REIT subsidiaries of
Public Storage. These entities engage in businesses such as selling locks, boxes
and packing materials, renting trucks, the portable self-storage business,
providing moving services, reinsuring policies of insurance obtained by tenants
covering losses to their goods while in storage, etc.
Ownership of Partnership Interests by a REIT. A REIT that is a partner
in a partnership will be deemed to own its proportionate share of the assets of
the partnership and will be deemed to earn its proportionate share of the
partnership's income. The assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. In the mergers with Public
Storage Management and Storage Trust Realty, the formation of PS Business Parks,
L.P., and in other transactions, Public Storage has acquired interests in
various partnerships that own and operate properties. Thus, Public Storage's
proportionate share of the assets and items of income of Storage Trust
Properties, L.P., PS Business Parks, L.P. or other partnerships, including any
such partnerships' shares of assets and items of income of any subsidiaries that
are partnerships or limited liability companies, are treated as assets and items
of income of Public Storage for purposes of applying the REIT asset and income
tests. For these purposes, under current treasury regulations, Public Storage's
interest in each of the partnerships must be determined in accordance with its
"capital interest" in the partnership.
Public Storage believes that Storage Trust Properties, L.P., PS
Business Parks, L.P. and each of the partnerships and limited liability
companies in which Public Storage owns an interest, directly or through another
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partnership or limited liability company, will be treated as partnerships or
disregarded for federal income tax purposes and will not be taxable as
corporations. If any of these entities were treated as a corporation, it would
be subject to an entity level tax on its income and Public Storage could fail to
meet the REIT income and asset tests. See "--Taxation of Public Storage as a
REIT--Income Tests Applicable to REITs" and "--Taxation of Public Storage as a
REIT--Asset Tests Applicable to REITs" below.
Income Tests Applicable to REITs. To qualify as a REIT, Public Storage
must satisfy two gross income tests. First, at least 75% of its gross income for
each taxable year, excluding gross income from prohibited transactions, must be
derived directly or indirectly from investments relating to real property or
mortgages on real property, including "rents from real property," gains on the
disposition of real estate, dividends paid by another REIT and interest on
obligations secured by mortgages on real property or on interests in real
property, or from some types of temporary investments. Second, at least 95% of
its gross income for each taxable year, excluding gross income from prohibited
transactions, must be derived from any combination of income qualifying under
the 75% test and dividends, interest, some payments under hedging instruments
and gain from the sale or disposition of stock or securities and some hedging
instruments.
Rents that Public Storage receives will qualify as rents from real
property in satisfying the gross income tests for a REIT 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. Second, rents received from a "related party tenant" will not qualify
as rents from real property in satisfying the gross income tests unless the
tenant is a taxable REIT subsidiary and at least 90% of the property is leased
to unrelated tenants and the rent paid by the taxable REIT subsidiary is
substantially comparable to the rent paid by the unrelated tenants for
comparable space. A tenant is a related party tenant if the REIT, or an actual
or constructive owner of 10% or more of the REIT, actually or constructively
owns 10% or more of the tenant. Third, if rent attributable to personal property
that is leased in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as rents from real
property.
Generally, for rents to qualify as rents from real property for the
purpose of satisfying the gross income tests, Public Storage is only allowed
directly to provide services that are "usually or customarily rendered" in
connection with the rental of real property and not otherwise considered
"rendered to the occupant." Accordingly, Public Storage may not provide
"impermissible services" to tenants (except through a taxable REIT subsidiary,
or through an independent contractor that bears the expenses of providing the
services and from whom Public Storage derives no revenue) without giving rise to
"impermissible tenant service income," which is nonqualifying income for
purposes of the income tests. For this purpose, the amount that Public Storage
would be deemed to have received for performing any "impermissible services"
will be the greater of the actual amount so received or 150% of the direct cost
to Public Storage of providing those services. If impermissible tenant service
income exceeds 1% of total income from a property, all of the income from that
property will fail to qualify as rents from real property. If the total amount
of impermissible tenant service income from a property does not exceed 1% of
total income from the property, the services will not "taint" the other income
from the property (that is, they will not cause the rent paid by tenants of that
property to fail to qualify itself as rents from real property), but the
impermissible tenant service income will not qualify as rents from real
property.
In light of these requirements, Public Storage does not intend to take
any of the actions listed below, unless Public Storage determines that the
resulting nonqualifying income, taken together with all other nonqualifying
income that Public Storage earns in the taxable year, will not jeopardize its
status as a REIT:
(1) charge rent for any property that is based in whole or in part
on the income or profits of any person (unless based on a
fixed percentage or percentages of receipts or sales, as
permitted and described above);
(2) rent any property to a related party tenant, including a
taxable REIT subsidiary;
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(3) derive rental income attributable to personal property (other
than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the
total rent received under the lease); or
(4) directly perform services considered to be noncustomary or
rendered to the occupant of the property.
In connection with Public Storage's merger with Public Storage
Management, Public Storage and the various other owners of self-storage
facilities and business parks for which Public Storage performed management
activities entered into an agreement with PSCC, Inc. under which PSCC provides
the owners and Public Storage certain administrative and cost-sharing services
in connection with the operation of the properties and the performance of
certain administrative functions. The services include the provision of
corporate office space and certain equipment, personnel required for the
operation and maintenance of the properties, and corporate or partnership
administration. Each of the owners and Public Storage pay PSCC directly for
services rendered by PSCC in connection with the administrative and cost sharing
agreement. That payment is separate from and in addition to the compensation
paid to Public Storage under the management agreements for the management of the
properties owned by the owners. At the time of the merger with Public Storage
Management, Public Storage received a private letter ruling from the Internal
Revenue Service to the effect that the reimbursements and other payments made to
PSCC by the owners would not be treated as Public Storage's revenues for
purposes of the 95% gross income test, and to the effect that Public Storage's
income from self-storage facility rentals generally would qualify as rent from
real property for purposes of the REIT gross income tests. Public Storage
subsequently received a private letter ruling indicating that the truck rental
activities of an affiliated corporation (PS Orangeco, Inc., now a taxable REIT
subsidiary of Public Storage) would not adversely affect the treatment of Public
Storage's income from self-storage facility rentals as rent from real property
for purposes of the REIT gross income tests.
Public Storage owns all of the economic interest in Pickup & Delivery
(the portable self-storage business). The income from that business would be
nonqualifying income to Public Storage and the business is conducted by a
limited partnership between Public Storage and a subsidiary of PS Orangeco, Inc.
The share of gross income of that business attributable to Public Storage's
partnership interest, when combined with its other nonqualifying income, must be
less than 5% of its total gross income. While Public Storage has earned and will
continue to earn some nonqualifying income from this and other sources, Public
Storage anticipates that it will be able to continue to satisfy both the 95% and
75% gross income tests.
The ownership of certain partnership interests creates several issues
regarding Public Storage's satisfaction of the 95% gross income test. First,
Public Storage earns property management fees from these partnerships. Existing
treasury regulations do not address the treatment of management fees derived by
a REIT from a partnership in which the REIT holds a partnership interest, but
the Internal Revenue Service has issued a number of private letter rulings
holding that the portion of the management fee that corresponds to the REIT's
interest in the partnership in effect is disregarded in applying the 95% gross
income test when the REIT holds a "substantial" interest in the partnership.
Public Storage disregards the portion of management fees derived from
partnerships in which Public Storage is a partner that corresponds to its
interest in these partnerships in determining the amount of its nonqualifying
income. There can be no assurance, however, that the Internal Revenue Service
would not take a contrary position with respect to Public Storage, either
rejecting the approach set forth in the private letter rulings mentioned above
or contending that Public Storage's situation is distinguishable from those
addressed in the private letter rulings (for example, arguing that Public
Storage does not have a "substantial" interest in the partnerships).
In addition, Public Storage acquired interests in certain partnerships
that entitle Public Storage to a percentage of profits (either from operations,
or upon a sale, or both) in excess of the percentage of total capital originally
contributed to the partnership with respect to such interest. Existing treasury
regulations do not specifically address how Public Storage's "capital interest"
in partnerships of this type should be determined. This determination is
relevant because it affects both the percentage of the gross rental income of
the partnership that is considered gross rental income (or qualifying income) to
Public Storage and the percentage of the management fees paid to Public Storage
that is disregarded in determining its nonqualifying income. For example, if
Public Storage takes the position that it has a 25% "capital interest" in a
partnership (because Public Storage would receive 25% of the partnership's
assets upon a sale and liquidation) but the Internal Revenue Service determines
Public Storage only has a 1% "capital interest" (because the
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original holder of that interest only contributed 1% of the total capital
contributed to the partnership), Public Storage's share of the qualifying income
from the partnership would be reduced and the portion of the management fee from
the partnership that would be treated as nonqualifying income would be
increased, both of which might adversely affect its ability to satisfy the 95%
gross income test. In determining Public Storage's "capital interest" in the
various partnerships, Public Storage estimates the percentage of the
partnership's assets that would be distributed to Public Storage if those assets
were sold and distributed among the partners in accordance with the applicable
provisions of the partnership agreements. There can be no assurance, however,
that the Internal Revenue Service will agree with this methodology and not
contend that another, perhaps less favorable, method must be used for purposes
of determining Public Storage's "capital interests," which could adversely
affect its ability to satisfy the 95% gross income test.
"Interest" income that depends in whole or in part on the income or
profits of any person generally will be nonqualifying income for purposes of the
75% or 95% gross income tests. However, interest based on a fixed percentage or
percentages of receipts or sales may still qualify under the gross income tests.
Public Storage does not expect to derive significant amounts of interest that
would fail to qualify under the 75% and 95% gross income tests.
Public Storage's share of any dividends received from its corporate
subsidiaries (and from other corporations in which Public Storage owns an
interest) will qualify for purposes of the 95% gross income test but not for
purposes of the 75% gross income test. Public Storage does not anticipate that
it will receive sufficient dividends to cause it to exceed the limit on
nonqualifying income under the 75% gross income test.
If Public Storage fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, Public Storage may still qualify as a REIT
for that year if it is entitled to relief under the Internal Revenue Code. The
relief provisions generally will be available if its failure to meet the tests
is due to reasonable cause and not due to willful neglect, Public Storage
attaches a schedule of the sources of its income to its federal income tax
return and any incorrect information on the schedule is not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances Public Storage would be entitled to the benefit of these relief
provisions. For example, if Public Storage fails to satisfy the gross income
tests because nonqualifying income that Public Storage intentionally receives
exceeds the limits on nonqualifying income, the Internal Revenue Service could
conclude that the failure to satisfy the tests was not due to reasonable cause.
If these relief provisions are inapplicable to a particular set of circumstances
involving Public Storage, Public Storage could fail to qualify as a REIT. As
discussed under "-Taxation of Public Storage as a REIT-General" even if these
relief provisions apply, a tax would be imposed based on the amount of
nonqualifying income.
Any gain that Public Storage realizes on the sale of any property held
as inventory or other property held primarily for sale to customers in the
ordinary course of business, including its share of this type of gain realized
by a partnership in which Public Storage holds an interest, will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances of each particular transaction.
Public Storage intends to hold its properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing,
owning and operating properties, and to make occasional sales of properties as
are consistent with its investment objectives. Public Storage cannot provide any
assurance, however, that the Internal Revenue Service might not contend that one
or more of these sales are subject to the 100% penalty tax.
Asset Tests Applicable to REITs. At the close of each quarter of a
taxable year, Public Storage must satisfy four tests relating to the nature of
its assets:
(1) at least 75% of the value of its total assets must be
represented by real estate assets, cash, cash items and
government securities. Real estate assets include, for this
purpose, Public Storage's allocable share of real estate
assets held by partnerships in which Public Storage has
invested, as well as stock or debt instruments held for less
than one year purchased with the proceeds of an offering of
shares or long-term debt of Public Storage;
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(2) not more than 25% of its total assets may be represented by
securities other than those in the 75% asset class;
(3) except for equity investments in REITs, qualified REIT
subsidiaries, or taxable REIT subsidiaries or other securities
that qualify as "real estate assets" for purposes of the test
described in clause (1):
(a) the value of any one issuer's securities that Public
Storage owns may not exceed 5% of the value of Public
Storage's total assets;
(b) Public Storage may not own more than 10% of any one
issuer's outstanding voting securities; and
(c) Public Storage may not own more than 10% of the value
of the outstanding securities of any one issuer; and
(4) not more than 20% of its total assets may be represented by
securities of one or more taxable REIT subsidiaries.
Securities for purposes of the asset tests may include debt securities.
However, debt of an issuer will not count as a security for purposes of the 10%
value test if the debt securities are "straight debt" as defined in Section 1361
of the Internal Revenue Code and (1) the issuer is an individual, (2) the only
securities of the issuer that the REIT holds are straight debt or (3) if the
issuer is a partnership, the REIT holds at least a 20% profits interest in the
partnership.
Public Storage currently owns approximately 25% of the outstanding
common stock of PS Business Parks, Inc., which has elected to be taxed as a REIT
for federal income tax purposes (as well as a substantial portion of the
outstanding common units of limited partnership interest of PS Business Parks,
L.P., which may be exchangeable for shares of PS Business Parks, Inc.'s common
stock). As a REIT, PS Business Parks, Inc. is subject to the various REIT
qualification requirements. Public Storage believes that PS Business Parks, Inc.
has been organized and has operated in a manner to qualify for taxation as a
REIT for federal income tax purposes and will continue to be organized and
operated in this manner. If PS Business Parks, Inc. were to fail to qualify as a
REIT, Public Storage's stock investment in PS Business Parks, Inc. would cease
to be a qualifying real estate asset for purposes of the 75% gross asset test
and would become subject to the 5% asset test, the 10% voting stock limitation,
and the 10% value limitation generally applicable to a REIT's ownership in
corporations (other than REITs, qualified REIT subsidiaries and taxable REIT
subsidiaries). If PS Business Parks, Inc. failed to qualify as a REIT, Public
Storage would not meet the 10% voting stock limitation and the 10% value
limitation with respect to its interest in PS Business Parks, Inc., and
accordingly, Public Storage also would fail to qualify as a REIT.
Public Storage believes that the aggregate value of its taxable REIT
subsidiaries does not exceed 20% of the aggregate value of its gross assets. As
of each relevant testing date prior to the election to treat each corporate
subsidiary of Public Storage or any other corporation in which Public Storage
owns an interest as a taxable REIT subsidiary, which election first became
available as of January 1, 2001, Public Storage believes Public Storage did not
own more than 10% of the voting securities of any such entity. In addition,
Public Storage believes that as of each relevant testing date prior to the
election to treat each corporate subsidiary of Public Storage or any other
corporation in which Public Storage owns an interest as a taxable REIT
subsidiary of Public Storage, Public Storage's pro rata share of the value of
the securities, including debt, of any such corporation or other issuer did not
exceed 5% of the total value of its assets.
With respect to each issuer in which Public Storage currently owns an
interest that does not qualify as a REIT, a qualified REIT subsidiary or a
taxable REIT subsidiary, Public Storage believes that its pro rata share of the
value of the securities, including debt, of any such issuer does not exceed 5%
of the total value of its assets and that it complies with the 10% voting
securities limitation and 10% value limitation with respect to each such issuer.
In this regard, however, Public Storage cannot provide any assurance that the
Internal Revenue Service might not disagree with its determinations.
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After initially meeting the asset tests at the close of any quarter, Public
Storage will not lose its status as a REIT if it fails to satisfy the 25%, 20%,
and 5% asset tests and the 10% value limitation at the end of a later quarter
solely by reason of changes in the relative values of its assets. If the failure
to satisfy the 25%, 20%, or 5% asset tests or the 10% value limitation results
from an acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient nonqualifying assets within 30
days after the close of that quarter. Public Storage intends to maintain
adequate records of the value of its assets to maintain compliance with the
asset tests and would attempt to take any available actions within 30 days after
the close of any quarter in an effort to cure any noncompliance with the 25%,
20%, or 5% asset tests or 10% value limitation of which Public Storage becomes
aware within that period. If Public Storage failed to cure noncompliance with
the asset tests within this time period, Public Storage would cease to qualify
as a REIT.
Annual Distribution Requirements Applicable to REITs. To qualify as a REIT,
Public Storage is required to distribute dividends, other than capital gain
dividends, to its shareholders each year in an amount at least equal to (1) the
sum of (a) 90% (95% prior to 2001) of its REIT taxable income, computed without
regard to the dividends paid deduction and its net capital gain, and (b) 90%
(95% prior to 2001) of the net income, after tax, from foreclosure property,
minus (2) the sum of certain specified items of noncash income. In addition, if
Public Storage recognizes any built-in gain, Public Storage is required under
the treasury regulations to distribute at least 90% of the built-in gain, after
tax, recognized on the disposition of the applicable asset. See "--Taxation of
Public Storage as a REIT--General" for a discussion of the possible recognition
of built-in gain. These distributions must be paid either in the taxable year to
which they relate, or in the following taxable year if declared before Public
Storage timely files its tax return for the prior year and if paid with or
before the first regular dividend payment date after the declaration is made.
In years prior to 1990, Public Storage made distributions in excess of its
REIT taxable income. During 1990, Public Storage reduced the level of
distributions to its shareholders. As a result, distributions paid by Public
Storage in 1990 were less than 95% of its REIT taxable income for 1990. Public
Storage satisfied the REIT distribution requirements for 1990 through 2000 by
attributing distributions in 1991 through 2001 to the prior year's taxable
income, and Public Storage expects to satisfy the distribution requirement for
2001 by attributing distributions in 2002 to its 2001 taxable income. Public
Storage may be required to continue this pattern of making distributions after
the close of a taxable year that are attributed to the prior year for this
purpose, but shareholders will be treated for federal income tax purposes as
having received such distributions in the taxable years in which they actually
are made. The extent to which Public Storage will be required to attribute
distributions to the prior year will depend on its operating results and the
level of distributions as determined by the board of directors. As noted below,
reliance on subsequent year distributions could cause Public Storage to be
subject to an excise tax, although Public Storage intends to comply with the 85%
current distribution requirement under the excise tax in an effort to avoid or
minimize any effect of that tax.
Public Storage intends to make timely distributions sufficient to satisfy
the annual distribution requirements. Although Public Storage anticipates that
its cash flow will permit it to make those distributions, it is possible that,
from time to time, Public Storage may not have sufficient cash or other liquid
assets to meet these distribution requirements. In this event, Public Storage
may find it necessary to arrange for short-term, or possibly long-term,
borrowings to fund required distributions or to pay dividends in the form of
taxable dividends of Public Storage shares.
Under some circumstances, Public Storage may be able to rectify a failure
to meet the distribution requirement for a year by paying deficiency dividends
to shareholders in a later year, which may be included in Public Storage's
deduction for dividends paid for the earlier year. Thus, Public Storage may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, Public Storage will be required to pay interest to the government based
upon the amount of any deduction taken for deficiency dividends.
To the extent that Public Storage does not distribute all of its net
capital gain or distribute at least 90%, but less than 100%, of its REIT taxable
income, as adjusted, Public Storage is subject to tax on these amounts at
regular corporate tax rates.
A REIT may elect to retain rather than distribute all or a portion of its
net capital gains and pay the tax on the gains. In that case, a REIT may elect
to have its shareholders include their proportionate share of the undistributed
net
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capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT. For purposes of the 4% excise tax
described below, any retained amounts would be treated as having been
distributed.
As mentioned above, Public Storage would be subject to a 4% excise tax if
Public Storage failed to distribute during each calendar year at least the sum
of:
(1) 85% of its REIT ordinary income for the year;
(2) 95% of its REIT capital gain net income for the year; and
(3) any undistributed taxable income from prior taxable years.
This 4% excise tax applies to the excess of such required distribution over
the sum of amounts actually distributed and amounts retained for which federal
income tax was paid.
Record-Keeping Requirements. Public Storage is required to comply with
applicable record-keeping requirements. Failure to comply could result in
monetary fines.
Failure of Public Storage to Qualify as a REIT. If Public Storage failed to
qualify for taxation as a REIT in any taxable year, and if relief provisions do
not apply, Public Storage will be subject to tax, including any applicable
alternative minimum tax, on its taxable income at regular corporate rates. If
Public Storage fails to qualify as a REIT, Public Storage will not be required
to make any distributions to shareholders and any distributions that are made to
shareholders will not be deductible by Public Storage. As a result, Public
Storage's failure to qualify as a REIT would significantly reduce the cash
available for distributions by Public Storage to its shareholders. In addition,
if Public Storage fails to qualify as a REIT, all distributions to shareholders
will be taxable as ordinary income to the extent of Public Storage's current and
accumulated earnings and profits, whether or not attributable to capital gains
of Public Storage, and corporate shareholders may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, Public Storage also would be disqualified from taxation as a REIT
for the four taxable years following the year during which qualification was
lost. There can be no assurance that Public Storage would be entitled to any
statutory relief.
Taxation of U.S. Shareholders
As used in the remainder of this discussion, the term "U.S. shareholder"
means a beneficial owner of a Public Storage common share that is, for United
States federal income tax purposes:
(1) a citizen or resident, as defined in Section 7701(b) of the Internal
Revenue Code, of the United States;
(2) a corporation or partnership, or other entity treated as a corporation
or partnership for federal income tax purposes, created or organized
under the laws of the United States, any state or the District of
Columbia;
(3) an estate the income of which is subject to federal income taxation
regardless of its source; or
(4) in general, a trust subject to the primary supervision of a United
States court and the control of one or more United States persons.
Generally, in the case of a partnership that holds Public Storage common
shares, any partner that would be a U.S. shareholder if it held the Public
Storage common shares directly is also considered a U.S. shareholder. A
"non-U.S. shareholder" is a holder, including any partner in a partnership that
holds Public Storage common shares, that is not considered a U.S. shareholder.
83
Distributions by Public Storage. So long as Public Storage qualifies as a
REIT, distributions to U.S. shareholders out of Public Storage's current or
accumulated earnings and profits that are not designated as capital gain
dividends will be taxable as ordinary income and will not be eligible for the
dividends received deduction generally available for corporations. Distributions
in excess of Public Storage's current and accumulated earnings and profits will
not be taxable to a U.S. shareholder to the extent that the distributions do not
exceed the adjusted tax basis of the shareholder's shares. Rather, the
distributions will reduce the adjusted tax basis of the shares. Distributions
that exceed the U.S. shareholder's adjusted basis in the shares will be taxable
as capital gains. If Public Storage declares a dividend in October, November, or
December of any year with a record date in one of these months and pays the
dividend on or before January 31 of the following year, Public Storage will be
treated as having paid the dividend, and the shareholder will be treated as
having received the dividend, on December 31 of the year in which the dividend
was declared.
Public Storage may elect to designate distributions of its net capital gain
as "capital gain dividends." Capital gain dividends are taxed to shareholders as
gain from the sale or exchange of a capital asset held for more than one year,
without regard to how long the U.S. shareholder has held the shares.
Designations that Public Storage makes only will 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. If Public Storage designates any portion of a dividend as a
capital gain dividend, a U.S. shareholder will receive an Internal Revenue
Service Form 1099-DIV indicating the amount that will be taxable to the
shareholder as capital gain. Corporate shareholders, however, may be required to
treat up to 20% of capital gain dividends as ordinary income.
Instead of paying capital gain dividends, Public Storage may designate all
or part of its net capital gain as "undistributed capital gain." Public Storage
will be subject to tax at regular corporate rates on any undistributed capital
gain. A U.S. shareholder:
(1) will include in its income as long-term capital gains its
proportionate share of such undistributed capital gains and
(2) will be deemed to have paid its proportionate share of the tax paid by
Public Storage on such undistributed capital gains and receive a
credit or refund to the extent that the tax Public Storage paid
exceeds the U.S. shareholder's tax liability on the undistributed
capital gain.
A U.S. shareholder will increase the basis in its common shares by the
difference between the amount of capital gain included in its income and the
amount of tax it is deemed to have paid. Public Storage's earnings and profits
will be adjusted appropriately.
Public Storage will classify portions of any designated capital gain
dividend or undistributed capital gain as either:
(1) a 20% rate gain distribution, which would be taxable to non-corporate
U.S. shareholders at a maximum rate of 20%; or
(2) an "unrecaptured Section 1250 gain" distribution, which would be
taxable to non-corporate U.S. shareholders at a maximum rate of 25%.
Public Storage must determine the maximum amounts that Public Storage may
designate as 20% and 25% rate capital gain dividends by performing the
computation required by the Internal Revenue Code as if Public Storage were an
individual whose ordinary income were subject to a marginal tax rate of at least
28%.
Distributions that Public Storage makes and gain arising from the sale or
exchange by a U.S. shareholder of Public Storage shares will not be treated as
passive activity income, and as a result, U.S. shareholders generally will not
be able to apply any "passive losses" against this income or gain. In addition,
taxable distributions from Public Storage generally will be treated as
investment income for purposes of the investment interest limitations. A U.S.
shareholder may elect to treat capital gain dividends and capital gains from the
disposition of shares as investment income for
84
purposes of the investment interest limitation, in which case the applicable
capital gains will be subject to tax at ordinary income rates. Public Storage
will notify shareholders regarding the portions of distributions for each year
that constitute ordinary income, return of capital, capital gain or represent
tax preference items to be taken into account for purposes of computing the
alternative minimum tax liability of the shareholders. U.S. shareholders may not
include in their individual income tax returns any of Public Storage's net
operating losses or capital losses. Those operating or capital losses may be
carried over by Public Storage for potential offset against future income,
subject to applicable limitations.
Sales of Shares. Upon any taxable sale or other disposition of shares, a
U.S. shareholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between: (1) the amount of cash and the fair
market value of any property received on the sale or other disposition; and (2)
the holder's adjusted tax basis in the shares for tax purposes.
This gain or loss will be a capital gain or loss. The applicable tax rate
will depend on the shareholder's holding period for the asset (generally, if an
asset has been held for more than one year it will produce long-term capital
gain) and the shareholder's tax bracket. The Internal Revenue Service has the
authority to prescribe, but has not yet prescribed, regulations that would apply
a capital gain tax rate of 25% (which is generally higher than the long-term
capital gain tax rates for noncorporate shareholders) to a portion of capital
gain realized by a noncorporate shareholder on the sale of REIT shares that
would correspond to the REIT's "unrecaptured Section 1250 gain." Shareholders
are urged to consult with their tax advisors with respect to their capital gain
tax liability. A corporate U.S. shareholder will be subject to tax at a maximum
rate of 35% on capital gain from the sale of Public Storage shares held for more
than 12 months. In general, any loss recognized by a U.S. shareholder upon the
sale or other disposition of shares that have been held for six months or less,
after applying the holding period rules, will be treated as a long-term capital
loss, to the extent of distributions received by the U.S. shareholder from
Public Storage that were required to be treated as long-term capital gains.
Taxation of Tax-Exempt Shareholders
Provided that a tax-exempt shareholder has not held its common shares as
"debt financed property" within the meaning of the Internal Revenue Code,
distributions from Public Storage will not be unrelated business taxable income,
referred to as UBTI, to a tax-exempt shareholder. Similarly, income from the
sale of shares will not constitute UBTI unless the tax-exempt shareholder has
held its shares as debt financed property within the meaning of the Internal
Revenue Code or has used the shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and
qualified group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in Public Storage will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code. These tax-exempt shareholders
should consult their tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" are treated as UBTI if received by any trust which is
described in Section 401(a) of the Internal Revenue Code, is tax-exempt under
Section 501(a) of the Internal Revenue Code, and holds more than 10%, by value,
of the interests in the REIT. Tax-exempt pension funds that are described in
Section 401(a) of the Internal Revenue Code are referred to below as "pension
trusts."
A REIT is a pension held REIT if it meets the following two tests:
(1) it qualified as a REIT only by reason of Section 856(h)(3) of the
Internal Revenue Code, which provides a "look-through" rule under
which stock owned by pension trusts will be treated, for purposes of
determining if the REIT is closely held, as owned by the beneficiaries
of the trust rather than by the trust itself; and
85
(2) either (a) at least one pension trust holds more than 25% of the value
of the REIT's stock, or (b) a group of pension trusts each
individually holding more than 10% of the value of the REIT's shares,
collectively owns more than 50% of the value of the REIT's shares.
The percentage of any REIT dividend treated as UBTI under these pension
held rules is equal to the ratio of the UBTI earned by the REIT, treating the
REIT as if it were a pension trust and therefore subject to tax on UBTI, to the
total gross income of the REIT. An exception applies where the percentage is
less than 5% for any year. The provisions requiring pension trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held requirement" without relying upon the
"look-through" exception for pension trusts. Based on both Public Storage's
current share ownership and the limitations on transfer and ownership of shares
contained in its organizational documents, Public Storage does not expect to be
classified as a pension held REIT.
U.S. Taxation of Non-U.S. Shareholders
Distributions by Public Storage. Public Storage's distributions to a
non-U.S. shareholder that are neither attributable to gain from sales or
exchanges by Public Storage of "U.S. real property interests" nor designated by
Public Storage as capital gains dividends will be treated as dividends of
ordinary income to the extent that they are made out of Public Storage's current
or accumulated earnings and profits. These distributions ordinarily will be
subject to withholding of U.S. federal income tax on a gross basis at a rate of
30%, or a lower rate as permitted under an applicable income tax treaty, unless
the dividends are treated as effectively connected with the conduct by the
non-U.S. shareholder of a U.S. trade or business. Under some treaties, however,
lower withholding rates generally applicable to dividends do not apply to
dividends from REITs. Applicable certification and disclosure requirements must
be satisfied to be exempt from withholding under the effectively connected
income exemption. Dividends that are effectively connected with a trade or
business will be subject to tax on a net basis, that is, after allowance for
deductions, at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to these dividends, and are generally not subject to
withholding. Any dividends received by a corporate non-U.S. shareholder that is
engaged in a U.S. trade or business also may be subject to an additional branch
profits tax at a 30% rate, or lower applicable treaty rate.
Distributions in excess of current and accumulated earnings and profits
that exceed the non-U.S. shareholder's basis in Public Storage common shares
will be taxable to a non-U.S. shareholder as gain from the sale of common
shares, which is discussed below. Distributions in excess of current or
accumulated earnings and profits of Public Storage that do not exceed the
adjusted basis of the non-U.S. shareholder in the common shares will reduce the
non-U.S. shareholder's adjusted basis in the common shares and will not be
subject to U.S. federal income tax, but will be subject to U.S. withholding tax
as described below.
Public Storage expects to withhold U.S. income tax at the rate of 30% on
any dividend distributions (including distributions that later may be determined
to have been in excess of current and accumulated earnings and profits) made to
a non-U.S. shareholder unless:
(1) a lower treaty rate applies and the non-U.S. shareholder files an
Internal Revenue Service Form W-8BEN evidencing eligibility for that
reduced treaty rate with Public Storage; or
(2) the non-U.S. shareholder files an Internal Revenue Service Form W-8ECI
with Public Storage claiming that the distribution is effectively
connected income.
Public Storage may be required to withhold at least 10% of any distribution
in excess of its current and accumulated earnings and profits, even if a lower
treaty rate applies and the non-U.S. shareholder is not liable for tax on the
receipt of that distribution. However, a non-U.S. shareholder may seek a refund
of these amounts from the Internal Revenue Service if the non-U.S. shareholder's
U.S. tax liability with respect to the distribution is less than the amount
withheld.
86
Distributions to a non-U.S. shareholder that Public Storage designates at
the time of the distribution as capital gain dividends, other than those arising
from the disposition of a U.S. real property interest, generally should not be
subject to U.S. federal income taxation unless:
(1) the investment in the common shares is effectively connected with the
non-U.S. shareholder's U.S. trade or business, in which case the
non-U.S. shareholder will be subject to the same treatment as U.S.
shareholders on any gain, except that a shareholder that is a foreign
corporation also may be subject to the 30% branch profits tax, as
discussed above, or
(2) the non-U.S. shareholder is a nonresident alien individual who is
present in the U.S. for 183 days or more during the taxable year and
has a "tax home" in the U.S., in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital
gains.
Under the Foreign Investment in Real Property Tax Act, which is referred to
as "FIRPTA," distributions to a non-U.S. shareholder that are attributable to
gain from sales or exchanges by Public Storage of U.S. real property interests,
whether or not designated as a capital gain dividend, will cause the non-U.S.
shareholder to be treated as recognizing gain that is income effectively
connected with a U.S. trade or business. Non-U.S. shareholders will be taxed on
this gain at the same rates applicable to U.S. shareholders, subject to a
special alternative minimum tax in the case of nonresident alien individuals.
Also, this gain may be subject to a 30% branch profits tax in the hands of a
non-U.S. shareholder that is a corporation.
Public Storage will be required to withhold and remit to the Internal
Revenue Service 35% of any distributions to foreign shareholders that are
designated as capital gain dividends, or, if greater, 35% of a distribution that
could have been designated as a capital gain dividend. Distributions can be
designated as capital gains to the extent of Public Storage's net capital gain
for the taxable year of the distribution. The amount withheld is creditable
against the non-U.S. shareholder's United States federal income tax liability.
Although the law is not clear on the matter, it appears that amounts Public
Storage designates as undistributed capital gains in respect of the common
shares held by U.S. shareholders generally should be treated for non-U.S.
shareholders in the same manner as actual distributions by Public Storage of
capital gain dividends. Under that approach, the non-U.S. shareholders would be
able to offset as a credit against their United States federal income tax
liability resulting from reporting the capital gain their proportionate share of
the tax paid by Public Storage on the undistributed capital gains, and to
receive from the Internal Revenue Service a refund to the extent their
proportionate share of this tax paid by Public Storage were to exceed their
actual United States federal income tax liability.
Sale of Common Shares. Gain recognized by a non-U.S. shareholder upon the
sale or exchange of Public Storage common shares generally would not be subject
to United States taxation unless:
(1) the investment in the Public Storage common shares is effectively
connected with the non-U.S. shareholder's U.S. trade or business, in
which case the non-U.S. shareholder will be subject to the same
treatment as domestic shareholders as to any gain;
(2) the non-U.S. shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a tax home in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's net capital gains for the taxable year; or
(3) the Public Storage common shares constitute a U.S. real property
interest within the meaning of FIRPTA, as described below.
The Public Storage common shares will not constitute a U.S. real property
interest if Public Storage is a domestically controlled REIT. Public Storage
will be a domestically controlled REIT if, at all times during a specified
testing period, less than 50% in value of its stock is held directly or
indirectly by non-U.S. shareholders. Public Storage
87
believes that it currently is a domestically controlled REIT and, therefore,
that the sale of Public Storage common shares would not be subject to taxation
under FIRPTA. Because the shares are publicly traded, however, Public Storage
cannot guarantee that Public Storage is or will continue to be a domestically
controlled REIT. Even if Public Storage does not qualify as a domestically
controlled REIT at the time a non-U.S. shareholder sells Public Storage common
shares, gain arising from the sale still would not be subject to FIRPTA tax if:
(1) the class or series of shares sold is considered regularly traded
under applicable treasury regulations on an established securities
market, such as the NYSE; and
(2) the selling non-U.S. shareholder owned, actually or constructively, 5%
or less in value of the outstanding class or series of shares being
sold throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of Public Storage common shares were
subject to taxation under FIRPTA, the non-U.S. shareholder would be subject to
regular U.S. income tax as to any gain in the same manner as a taxable U.S.
shareholder, subject to any applicable alternative minimum tax and special
alternative minimum tax in the case of nonresident alien individuals.
Information Reporting and Backup Withholding Tax Applicable to Shareholders
U.S. Shareholders
In general, information reporting requirements will apply to payments of
distributions on Public Storage common shares and payments of the proceeds of
the sale of the common shares to some shareholders, unless an exception applies.
Further, the payer will be required to withhold backup withholding tax at the
rate of 30.5% (the rate is subject to reduction through 2006) if:
(1) the payee fails to furnish a taxpayer identification number, or TIN,
to the payer or to establish an exemption from backup withholding;
(2) the Internal Revenue Service notifies the payer that the TIN furnished
by the payee is incorrect;
(3) there has been a notified payee underreporting of interest, dividends
or original issue discount described in Section 3406(c) of the
Internal Revenue Code; or
(4) there has been a failure of the payee to certify under the penalty of
perjury that the payee is not subject to backup withholding under the
Internal Revenue Code.
Some shareholders, including corporations, will be exempt from backup
withholding. Any amounts withheld under the backup withholding rules from a
payment to a shareholder will be allowed as a credit against the shareholder's
United States federal income tax and may entitle the shareholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
Non-U.S. Shareholders
Generally, information reporting will apply to payments of distributions on
Public Storage common shares, and backup withholding at a rate of 30.5% (the
rate is subject to reduction through 2006) may apply, unless the payee certifies
that it is not a U.S. person or otherwise establishes an exemption.
The payment of the proceeds from the disposition of Public Storage common
shares to or through the U.S. office of a U.S. or foreign broker will be subject
to information reporting and, possibly, backup withholding unless the non-U.S.
shareholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
shareholder is a U.S. person or that the conditions of any other exemption are
88
not, in fact, satisfied. The proceeds of the disposition by a non-U.S.
shareholder of common shares to or through a foreign office of a broker
generally will not be subject to information reporting or backup withholding.
However, if the broker is a U.S. person, a controlled foreign corporation for
U.S. tax purposes, or a foreign person 50% or more of whose gross income from
all sources for specified periods is from activities that are effectively
connected with a U.S. trade or business, information reporting generally will
apply unless the broker has documentary evidence as to the non-U.S.
shareholder's foreign status and has no actual knowledge to the contrary.
Applicable treasury regulations provide presumptions regarding the status
of shareholders when payments to the shareholders cannot be reliably associated
with appropriate documentation provided to the payer. Under these treasury
regulations, some shareholders are required to have provided new certifications
as to payments made after December 31, 2000. Because the application of the
these treasury regulations varies depending on the shareholder's particular
circumstances, you are urged to consult your tax advisor regarding the
information reporting requirements applicable to you.
Other Tax Consequences for Public Storage and Its Shareholders
A portion of the cash to be used by Public Storage to fund distributions
may come from dividends paid by its taxable REIT subsidiaries. The taxable REIT
subsidiaries are subject to federal and state income tax at the full applicable
corporate rates. In addition, a taxable REIT subsidiary may be limited in its
ability to deduct interest payments made to Public Storage. To the extent that
Public Storage and its taxable REIT subsidiaries are required to pay federal,
state or local taxes, Public Storage will have less cash available for
distribution to shareholders.
STATE AND LOCAL TAXES
The tax treatment of limited partners, Public Storage and Public Storage's
shareholders in states having taxing jurisdiction over them may differ from the
federal income tax treatment. Accordingly, no discussion of state taxation of
limited partners, Public Storage or Public Storage's shareholders is provided
nor is any representation made as to the tax status of Public Storage in such
states. All limited partners should consult their own tax advisors as to the
treatment under the respective state tax laws applicable to them.
LEGAL OPINIONS
David Goldberg, vice president and senior counsel of Public Storage, will
deliver an opinion to the effect that the shares of Public Storage common stock
to be issued in the merger will be validly issued, fully paid and nonassessable.
Mr. Goldberg owns 68,702 shares of Public Storage common stock, 371 depositary
shares representing interests in equity stock and 600 shares of Public Storage
senior preferred stock and has options to acquire an additional 253,434 shares
of Public Storage common stock. A. Timothy Scott, senior vice president and tax
counsel of Public Storage, has rendered an opinion to the effect that the
discussion under "Federal Income Tax Considerations" describes the material
federal income tax considerations to a limited partner as a result of the
merger, and the subsequent ownership of Public Storage common stock. Mr. Scott
owns 3,367 shares of Public Storage common stock, 109 depositary shares
representing interests in equity stock and has options to acquire an additional
225,000 shares of Public Storage common stock.
EXPERTS
The consolidated financial statements and schedules of Public Storage, Inc.
at December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001 which are included in Public Storage's Annual Report on
Form 10-K have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements of the Partnership and SEI/PSPVI Joint Ventures at
December 31, 2001 and 2000
89
and for each of the three years in the period ended December 31, 2001 appearing
herein and schedule incorporated herein by reference and in the Annual Report on
Form 10-K of the Partnership have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports included herein. Such financial
statements are included herein in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
90
PARTNERSHIP
FINANCIAL STATEMENTS
Page
References
----------
PS Partners VI, Ltd.
Annual Audited Financial Statements:
Report of Independent Auditors F - 1
Financial Statements:
Balance Sheets as of December 31, 2001 and 2000 F - 2
For the years ended December 31, 2001, 2000 and 1999:
Statements of Income F - 3
Statements of Partners' Equity F - 4
Statements of Cash Flows F - 5
Notes to Financial Statements F - 6 - F - 11
Quarterly Unaudited Financial Statements:
Condensed balance sheets at March 31, 2002 and December 31, 2001 F - 12
Condensed statements of income for the three months ended March 31, 2002 and 2001 F - 13
Condensed statements of cash flows for the three months ended March 31, 2002 and 2001 F - 14
Notes to condensed financial statements F - 15 - F - 16
Financial Statements of 50 percent or less owned persons required pursuant to Rule 3-09:
PS Business Parks, Inc. - PS Business Parks, Inc. is a registrant with the Securities and
Exchange Commission and its filings can be accessed through the Securities and Exchange
Commission.
SEI/PSP VI Joint Ventures
Annual Audited Financial Statements:
Report of Independent Auditors F - 17
Financial Statements:
Balance Sheets as of December 31, 2001 and 2000 F - 18
For the years ended December 31, 2001, 2000 and 1999:
Statements of Income F - 19
Statements of Partners' Equity F - 20
Statements of Cash Flows F - 21
Notes to Financial Statements F - 22 - F - 26
F
Report of Independent Auditors
The Partners
PS Partners VI, Ltd., a California Limited Partnership
We have audited the balance sheets of PS Partners VI, Ltd., a California Limited
Partnership, as of December 31, 2001 and 2000 and the related statements of
income, partners' equity, and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PS Partners VI, Ltd., a
California Limited Partnership, at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
March 23, 2002
Los Angeles, California
F-1
PS PARTNERS VI, LTD.
a California Limited Partnership
BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
----------------------------
ASSETS
Cash and cash equivalents $ 2,393,000 $ 3,198,000
Rent and other receivables 87,000 5,000
Real estate facilities, at cost:
Land 404,000 404,000
Buildings and equipment 2,924,000 2,899,000
----------------------------
3,328,000 3,303,000
Less accumulated depreciation (1,859,000) (1,713,000)
----------------------------
1,469,000 1,590,000
Investment in real estate entities 28,761,000 29,923,000
Other assets 7,000 9,000
----------------------------
$ 32,717,000 $ 34,725,000
============================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 210,000 $ 116,000
Advance payments from renters 9,000 11,000
Partners' equity:
Limited partners' equity, $500 per unit, 150,000
units authorized, issued and outstanding 32,076,000 34,155,000
General partners' equity 422,000 443,000
----------------------------
Total partners' equity 32,498,000 34,598,000
----------------------------
$ 32,717,000 $ 34,725,000
============================
See accompanying notes.
F-2
PS PARTNERS VI, LTD.
a California Limited Partnership
STATEMENTS OF INCOME
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------------------------------
REVENUE:
Rental income $ 659,000 $ 605,000 $ 585,000
Equity in earnings of real estate entities 3,801,000 3,395,000 2,887,000
Interest income 193,000 182,000 114,000
------------------------------------
4,653,000 4,182,000 3,586,000
------------------------------------
COSTS AND EXPENSES:
Cost of operations 221,000 255,000 237,000
Management fees 39,000 36,000 35,000
Depreciation and amortization 146,000 153,000 146,000
Administrative 145,000 180,000 138,000
------------------------------------
551,000 624,000 556,000
------------------------------------
NET INCOME $4,102,000 $3,558,000 $3,030,000
====================================
Limited partners' share of net income
($22.98, $20.85 and $16.30 per unit in
2001, 2000 and 1999 respectively) $3,447,000 $3,127,000 $2,445,000
General partners' share of net income 655,000 431,000 585,000
------------------------------------
$4,102,000 $3,558,000 $3,030,000
====================================
F-3
PS PARTNERS VI, LTD.
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
Limited General
Partners Partners Total
--------------------------------------------------------
Balances at December 31, 1998 $ 37,148,000 $ 473,000 $ 37,621,000
Net income 2,445,000 585,000 3,030,000
Distributions (4,995,000) (611,000) (5,606,000)
--------------------------------------------------------
Balances at December 31, 1999 34,598,000 447,000 35,045,000
Net income 3,127,000 431,000 3,558,000
Distributions (3,570,000) (435,000) (4,005,000)
--------------------------------------------------------
Balances at December 31, 2000 34,155,000 443,000 34,598,000
Net income 3,447,000 655,000 4,102,000
Distributions (5,526,000) (676,000) (6,202,000)
--------------------------------------------------------
Balances at December 31, 2001 $ 32,076,000 $ 422,000 $ 32,498,000
========================================================
See accompanying notes.
F-4
PS PARTNERS VI, LTD.
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,102,000 $ 3,558,000 $ 3,030,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 146,000 153,000 146,000
Increase in rent and other receivables (82,000) - (2,000)
Decrease (increase) in other assets 2,000 (5,000) 1,000
Increase (decrease) in accounts payable 94,000 (6,000) 52,000
(Decrease) increase in advance payments from renters (2,000) 1,000 (1,000)
Equity in earnings of real estate entities (3,801,000) (3,395,000) (2,887,000)
--------------------------------------------------------
Total adjustments (3,643,000) (3,252,000) (2,691,000)
--------------------------------------------------------
Net cash provided by operating activities 459,000 306,000 339,000
--------------------------------------------------------
Cash flows provided by investing activities:
Distributions from real estate entities 4,963,000 4,817,000 5,040,000
Additions to real estate facilities (25,000) (12,000) (69,000)
--------------------------------------------------------
Net cash provided by investing activities 4,938,000 4,805,000 4,971,000
--------------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (6,202,000) (4,005,000) (5,606,000)
--------------------------------------------------------
Net cash used in financing activities (6,202,000) (4,005,000) (5,606,000)
--------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (805,000) 1,106,000 (296,000)
Cash and cash equivalents at the beginning of the period 3,198,000 2,092,000 2,388,000
--------------------------------------------------------
Cash and cash equivalents at the end of the period $ 2,393,000 $ 3,198,000 $ 2,092,000
========================================================
See accompanying notes.
F-5
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies and Partnership Matters
Description of Partnership
PS Partners VI, Ltd., a California Limited Partnership (the
"Partnership") was formed with the proceeds of an interstate public
offering. PSI Associates II, Inc. ("PSA"), an affiliate of Public
Storage Management, Inc., organized the Partnership along with B. Wayne
Hughes ("Hughes"). In September 1993, Storage Equities, Inc., now known
as Public Storage, Inc. ("PSI"), a California corporation, acquired the
interest of PSA relating to its general partner capital contribution in
the Partnership and was substituted as a co-general partner in place of
PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator),
Public Storage, Inc. and their affiliates (collectively, "PSMI"),
culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI
into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc.
was renamed Public Storage, Inc. and it acquired substantially all of
PSMI's United States real estate operations and became the operator of
the mini-warehouse properties in which the Partnership has an interest.
The Partnership has invested in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease,
usually on a month-to-month basis, to the general public and, to a
lesser extent, in existing business park facilities which offer
industrial and office space for lease.
The Partnership has ownership interests in 32 properties in 9
states (collectively referred to as the "Mini-Warehouse Properties"),
which exclude two properties transferred to PS Business Parks, L.P.
("PSBPLP") in January 1997. Thirty of the properties are owned by
SEI/PSP VI Joint Ventures (the "Joint Venture"), a general partnership
between the Partnership and PSI. The Partnership is the managing
general partner of the Joint Venture, with ownership interests in the
individual properties of the Joint Venture ranging from 50% to 76.2%.
As used hereinafter, the Joint Venture and PSBPLP are referred
to as the "Real Estate Entities."
Basis of Presentation
The financial statements include the accounts of the
Partnership. The accounts of the Joint Venture, which the Partnership
does not control, are not consolidated with the Partnership and the
Partnership's interest in the Joint Venture is accounted for on the
equity method.
The Partnership does not control the Joint Venture because PSI
has significant control rights with respect to the management of the
properties, including the right to compel the sale of each property in
the Joint Venture and the right to require the Partnership to submit
operating budgets.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
property is allocated solely to the Partnership until the limited
partners recover their initial capital contribution. Thereafter, all
depreciation and amortization is allocated solely to PSI until it
recovers its initial capital contribution. All remaining depreciation
and amortization is allocated to the Partnership and PSI in proportion
to their ownership percentages.
F-6
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Under the terms of the partnership agreements, PSI has the
right to compel the sale of each property in the general partnerships
at any time after seven years from the date of acquisition at not less
than its independently determined fair market value provided the
Partnership receives its share of the net proceeds solely in cash.
PSI's right to require the Partnership to sell all of the properties
owned jointly with the Partnership has been exercisable in all periods
presented.
Under the terms of the general partnership agreement of the
Joint Venture, for property acquisitions in which PSI issued
convertible securities to the sellers for its interest, PSI's right to
receive cash flow distributions for any year after the first year of
operation are subordinated to cash distributions to PSP VI equal to a
cumulative annual 7% of its cash investment (not compounded). In
addition, upon sale or refinancing of a property for more than its
original purchase price, distribution of proceeds to PSI is
subordinated to the return to PSP VI of the amount of its cash
investment and the 7% distribution described above.
Depreciation and amortization
The Partnership and the Joint Venture depreciate the buildings
and equipment on a straight-line method over estimated useful lives of
25 and 5 years, respectively.
Revenue Recognition
Property rents are recognized as earned.
Allocation of Net Income
The General Partners' share of net income consists of an
amount attributable to their 1% capital contribution and an additional
percentage of cash flow (as defined, see Note 4) which relates to the
General Partners' share of cash distributions as set forth in the
Partnership Agreement. All remaining net income is allocated to the
limited partners.
Per Unit Data
Per unit data is based on the number of limited partner units
(150,000) outstanding during the periods presented.
Cash Distributions
The Partnership Agreement provides for quarterly distributions
of cash flow from operations (as defined). Cash distributions per
limited partner unit were $36.84, $23.80 and $33.30 for 2001, 2000 and
1999, respectively.
Cash and Cash Equivalents
For financial statement purposes, the Partnership considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
F-7
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Environmental Cost
Substantially all of the real estate facilities in which the
Partnership has an interest were acquired prior to the time that it was
customary to conduct extensive environmental investigations in
connection with the property acquisitions. Although there can be no
assurance, the Partnership is not aware of any environmental
contamination of the Mini-Warehouse Properties which individually or in
the aggregate would be material to the Partnership's overall business,
financial condition, or results of operations.
Segment Reporting
Effective January 1, 1998, the Partnership adopted SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 established standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Partnership only has one reportable segment as defined
within SFAS No. 131, therefore the adoption of SFAS No. 131 had no
effect on the Partnership's disclosures.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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.
Recent Accounting Pronouncements and Guidance
Accounting for business combinations
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations,"
("SFAS 141") which sets forth revised accounting guidance with respect to
accounting for acquisitions of business enterprises. In accordance with the
transition provisions of SFAS 141, the Partnership adopted the disclosure and
accounting provisions of SFAS 141 on June 30, 2001 and the adoption had no
effect on Partnership financial statements.
Accounting for goodwill and other intangible assets
In June 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") which
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination, which are
addresses in SFAS 141) are to be accounted for. It also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. In accordance with SFAS 142,
the Partnership will adopt the provisions of SFAS No. 142 in its financial
statements beginning with the year ending December 31, 2002. The adoption of the
SFAS 142 will have no impact upon the Partnership's financial position or
results of operations.
F-8
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies and Partnership
Matters (Continued)
Recent Accounting Pronouncements and Guidance (Continued)
Accounting for the impairment and disposal of long-lived assets
In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS 121, and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations"
for a disposal of a segment of a business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Partnership expects to adopt SFAS 144 on
January 1, 2002, and does not expect that the adoption of the Statement
will have a material impact upon the Partnership's financial position
or results of operations.
2. Real Estate Facilities
In 1995, the Financial Accounting Standards Board issued
Statement 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. We annually evaluate
long-lived assets (including intangibles), by identifying indicators of
impairment and, if such indicators exist, 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 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 upon discounting
its estimated future cash flows. Statement No. 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. Our evaluations have indicated no
impairment in the carrying amount of our assets.
In January 1997, the Partnership and PSI and other related
partnerships transferred a total of 35 business parks to PSBPLP, an
operating partnership formed to own and operate business parks in which
PSI has a significant interest. Included among the properties
transferred were the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc. ("PSBP").
3. Investment in Real Estate Entities
During 2001, 2000 and 1999, the Partnership recognized
earnings from the Real Estate Entities of $3,801,000, $3,395,000 and
$2,887,000, respectively, and received cash distributions totaling
$4,963,000, $4,817,000 and $5,040,000, respectively from the Real
Estate Entities. 2000 equity in earnings includes $175,000 representing
the Partnership's share of a gain on sale of real estate investments
recorded by PSBPLP.
F-9
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
3. Investment in Real Estate Entities (Continued)
The accounting policies of the Real Estate Entities are similar
to that of the Partnership. Summarized combined financial data with
respect to the Real Estate Entities are as follows:
2001 2000
----------------- -----------------
For the year ended December 31,
Total revenues $ 184,427,000 $ 164,245,000
Minority interest in income 27,489,000 26,741,000
Net income 55,992,000 56,901,000
At December 31,
Total assets, net of accumulated depreciation $ 1,224,871,000 $ 987,107,000
Total liabilities 211,602,000 61,330,000
Total minority interest 359,891,000 306,478,000
Total equity 653,378,000 619,299,000
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entities for the
year ended December 31, 2001 and at December 31, 2000, respectively, as
compared to prior periods, is the result of the additional properties
acquired by PSBPLP during 2000 and 2001.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K for 2001, in Item 14. PS Business Parks, Inc.
is a registrant with the Securities and Exchange Commission, and its
filings can be accessed through the Securities and Exchange Commission.
4. General Partners' Equity
PSI has a 1% interest in the Partnership with respect to the
General Partners' contributed capital and an additional 10% interest in
cash distributions attributable to operations, exclusive of
distributions attributable to sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed
entirely to the limited partners until the limited partners recover
their investment plus a cumulative 8% annual return (not compounded);
thereafter, PSI has a 15% interest in remaining proceeds.
5. Related Party Transactions
The Partnership has a management agreement with PSI whereby PSI
operates the Mini-Warehouse Properties for a fee equal to 6% of the
facilities' monthly gross revenue (as defined). For 2001, 2000 and
1999, the Partnership paid PSI $39,000 $36,000 and $35,000,
respectively, pursuant to this management agreement.
In January 1997, the Joint Venture transferred its business
park facilities to PSBPLP in exchange for a partnership interest in
PSBPLP. PSI has a significant economic interest in PSBPLP and PSBP.
F-10
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
6. Leases
The Partnership has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
7. Taxes Based on Income
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do
not reflect a provision for such taxes.
Unaudited taxable net income was $6,140,000, $4,168,000 and
$2,982,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
8. Supplementary Quarterly Financial Data (Unaudited)
Three Months Ended
------------------------------------------------------------------------------
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- -------------- ------------------ -----------------
Rental Income $ 159,000 $ 166,000 $ 164,000 $ 170,000
Cost of Operations $ 64,000 $ 60,000 $ 59,000 $ 77,000
Net Income $ 956,000 $ 971,000 $ 1,036,000 $ 1,139,000
Net Income Per Unit $ 5.65 $ 4.56 $ 6.04 $ 6.73
Three Months Ended
------------------------------------------------------------------------------
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- -------------- ------------------ -----------------
Rental Income $ 146,000 $ 154,000 $ 157,000 $ 148,000
Cost of Operations $ 73,000 $ 66,000 $ 74,000 $ 78,000
Net Income $ 717,000 $ 808,000 $ 975,000 $ 1,058,000
Net Income Per Unit $ 4.07 $ 4.67 $ 5.78 $ 6.33
F-11
PS PARTNERS VI, LTD.
a California Limited Partnership
CONDENSED BALANCE SHEETS
March 31, December 31,
2002 2001
-----------------------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 2,530,000 $ 2,393,000
Rent and other receivables 36,000 87,000
Real estate facility, at cost:
Land 404,000 404,000
Buildings and equipment 2,927,000 2,924,000
-----------------------------------
3,331,000 3,328,000
Less accumulated depreciation (1,894,000) (1,859,000)
-----------------------------------
1,437,000 1,469,000
Investment in real estate entities 28,415,000 28,761,000
Other assets 54,000 7,000
-----------------------------------
$32,472,000 $32,717,000
===================================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable $ 71,000 $ 210,000
Advance payments from renters 11,000 9,000
Partners' equity:
Limited partners' equity, $500 per unit, 150,000
units authorized, issued and outstanding 31,969,000 32,076,000
General partner's equity 421,000 422,000
-----------------------------------
Total partners' equity 32,390,000 32,498,000
-----------------------------------
$32,472,000 $32,717,000
===================================
See accompanying notes.
F-12
PS PARTNERS VI, LTD.
a California Limited Partnership
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
-----------------------------------
2002 2001
-----------------------------------
REVENUE:
Rental income $ 161,000 $ 159,000
Equity in earnings of real estate entities 1,051,000 878,000
Interest income 33,000 47,000
-----------------------------------
1,245,000 1,084,000
-----------------------------------
COSTS AND EXPENSES:
Cost of operations 55,000 55,000
Management fees 9,000 9,000
Depreciation and amortization 35,000 36,000
Administrative 53,000 28,000
-----------------------------------
152,000 128,000
-----------------------------------
NET INCOME $1,093,000 $ 956,000
===================================
Limited partners' share of net income
($6.42 per unit in 2002 and
$5.65 per unit in 2001) $ 963,000 $ 847,000
General partner's share of net income 130,000 109,000
-----------------------------------
$1,093,000 $ 956,000
===================================
See accompanying notes.
F-13
PS PARTNERS VI, LTD.
a California Limited Partnership
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------
2002 2001
--------------------------------
Cash flows from operating activities:
Net income $ 1,093,000 $ 956,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Depreciation and amortization 35,000 36,000
Decrease in rent and other receivables 51,000 1,000
Increase in other assets (47,000) -
Decrease in accounts payable (139,000) (45,000)
Increase in advance payments from renters 2,000 4,000
Equity in earnings of real estate entities (1,051,000) (878,000)
--------------------------------
Total adjustments (1,149,000) (882,000)
--------------------------------
Net cash (used in) provided by operating activities (56,000) 74,000
--------------------------------
Cash flows from investing activities:
Distributions from real estate entities 1,397,000 1,140,000
Additions to real estate facility (3,000) (1,000)
--------------------------------
Net cash provided by investing activities 1,394,000 1,139,000
--------------------------------
Cash flows from financing activities:
Distributions to partners (1,201,000) (1,003,000)
--------------------------------
Net cash used in financing activities (1,201,000) (1,003,000)
--------------------------------
Net increase in cash and cash equivalents 137,000 210,000
Cash and cash equivalents at the beginning of the period 2,393,000 3,198,000
--------------------------------
Cash and cash equivalents at the end of the period $ 2,530,000 $ 3,408,000
================================
See accompanying notes.
F-14
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes
appearing in the Partnership's Form 10-K for the year ended December 31,
2001.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Partnership's financial position
at March 31, 2002, the results of operations for the three months ended
March 31, 2002 and 2001 and cash flows for the three months then ended.
3. The results of operations for the three months ended March 31, 2002 are not
necessarily indicative of the results to be expected for the full year.
4. In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business
Combinations," ("SFAS 141") which sets forth revised accounting guidance
with respect to accounting for acquisitions of business enterprises. In
accordance with the transition provisions of SFAS 141, the Partnership
adopted the disclosure and accounting provisions of SFAS 141 on June 30,
2001 and the adoption had no effect on Partnership financial statements.
5. In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." In June 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"). We
adopted these statements effective January 1, 2002.
We evaluate our long-lived assets on a quarterly basis for indicators of
impairment. When indicators of impairment are detected, we evaluate the
recoverability of such long-lived assets. To the extent that the estimated
future undiscounted cash flows are less than the respective book value, an
impairment charge is recorded. The Partnership has determined at March 31, 2002
that no such impairments existed and, accordingly, no impairment charges have
been recorded.
6. Statement No. 144 also addresses the accounting for long-lived assets that
are likely to be disposed of before the end of their previously estimated
useful life. Such assets are to be reported at the lower of their carrying
amount or fair value, less cost to sell. Our evaluations have determined
that there are no such impairments at March 31, 2002.
7. Summarized combined financial data with respect to the Real Estate Entities
is as follows:
Three Months Ended March 31,
--------------------------------
2002 2001
------------- -------------
Total revenues ............................................................. $ 54,358,000 $ 42,840,000
F-15
PS PARTNERS VI, LTD.
a California Limited Partnership
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
Minority interest in income ................................................ $ 8,844,000 $ 6,423,000
Net income ................................................................. $ 18,328,000 $ 12,897,000
8. The Partnership has entered into an Agreement and Plan of Reorganization by
and among PSI, PS Partners VI Merger Co., Inc. and the Partnership, dated
as of April 12, 2002 (the "Agreement and Plan of Reorganization"). Under
the Agreement and Plan of Reorganization, each of the Partnership units
held by the public limited partners will be converted into the right to
receive a value of $546 in PSI common stock or, at the limited partner's
election, in cash. The Agreement and Plan of Reorganization was filed with
the Partnership's Current Report on Form 8-K dated April 15, 2002, and is
referenced as Exhibit 1 hereto and is incorporated herein by this
reference.
F-16
Report of Independent Auditors
The Partners
SEI/PSP VI Joint Ventures
We have audited the balance sheets of the SEI/PSP VI Joint Ventures as of
December 31, 2001 and 2000 and the related statements of income, partners'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Joint
Ventures' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the SEI/PSP VI Joint Ventures
at December 31, 2001 and 2000, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
March 23, 2002
Los Angeles, CA
F-17
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
BALANCE SHEETS
For the years ended December 31, 2001 and 2000
2001 2000
-----------------------------------
ASSETS
Cash and cash equivalents $ 240,000 $ 266,000
Rent and other receivables 314,000 110,000
Real estate facilities, at cost:
Land 17,214,000 17,214,000
Buildings and equipment 56,647,000 55,847,000
-----------------------------------
73,861,000 73,061,000
Less accumulated depreciation (36,134,000) (33,157,000)
-----------------------------------
37,727,000 39,904,000
Investment in real estate entity 16,535,000 15,956,000
Other assets 100,000 115,000
-----------------------------------
$ 54,916,000 $ 56,351,000
===================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 969,000 $ 1,030,000
Advance payments from renters 300,000 365,000
Partners' equity:
PS Partners VI, Ltd. 28,761,000 29,923,000
Public Storage, Inc. 24,886,000 25,033,000
-----------------------------------
Total partners' equity 53,647,000 54,956,000
-----------------------------------
$ 54,916,000 $ 56,351,000
===================================
See accompanying notes.
F-18
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF INCOME
For the years ended December 31, 2001 and 2000
2001 2000 1999
---------------------------------------------------
REVENUE:
Rental income $ 12,696,000 $ 12,161,000 $ 12,023,000
Equity in earnings of real estate entity 1,340,000 1,450,000 1,183,000
---------------------------------------------------
14,036,000 13,611,000 13,206,000
---------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 4,175,000 4,164,000 3,948,000
Management fees 762,000 729,000 721,000
Depreciation and amortization 2,977,000 2,998,000 3,076,000
---------------------------------------------------
7,914,000 7,891,000 7,745,000
---------------------------------------------------
NET INCOME $ 6,122,000 $ 5,720,000 $ 5,461,000
===================================================
Partners' share of net income:
PS Partners VI, Ltd.'s share $ 3,801,000 $ 3,395,000 $ 2,887,000
Public Storage Inc.'s share 2,321,000 2,325,000 2,574,000
$ 6,122,000 $ 5,720,000 $ 5,461,000
===================================================
See accompanying notes.
F-19
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
PS Partners Public Storage
VI, Ltd. Inc. Total
-------------------------------------------------------------
Balances at December 31, 1998 $ 33,498,000 $ 24,940,000 $ 58,438,000
Net income 2,887,000 2,574,000 5,461,000
Distributions (5,040,000) (2,428,000) (7,468,000)
-------------------------------------------------------------
Balances at December 31, 1999 31,345,000 25,086,000 56,431,000
Net income 3,395,000 2,325,000 5,720,000
Distributions (4,817,000) (2,378,000) (7,195,000)
-------------------------------------------------------------
Balances at December 31, 2000 29,923,000 25,033,000 54,956,000
Net income 3,801,000 2,321,000 6,122,000
Distributions (4,963,000) (2,468,000) (7,431,000)
-------------------------------------------------------------
Balances at December 31, 2001 $ 28,761,000 $ 24,886,000 $ 53,647,000
=============================================================
See accompanying notes.
F-20
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------------------------------------------
Cash flows from operating activities:
Net income $ 6,122,000 $ 5,720,000 $ 5,461,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,977,000 2,998,000 3,076,000
Increase in rent and other receivables (204,000) (29,000) (3,000)
Decrease (increase) in other assets 15,000 (3,000) 1,000
(Decrease) increase in accounts payable (61,000) 78,000 81,000
Decrease in advance payments from renters (65,000) (1,000) (7,000)
Equity in earnings of real estate entity (1,340,000) (1,450,000) (1,183,000)
----------------------------------------------
Total adjustments 1,322,000 1,593,000 1,965,000
----------------------------------------------
Net cash provided by operating activities 7,444,000 7,313,000 7,426,000
----------------------------------------------
Cash flows used in investing activities:
Distributions from real estate entity 761,000 731,000 731,000
Additions to real estate facilities (800,000) (743,000) (784,000)
----------------------------------------------
Net cash used in investing activities (39,000) (12,000) (53,000)
----------------------------------------------
Cash flows used in financing activities:
Distributions to partners (7,431,000) (7,195,000) (7,468,000)
----------------------------------------------
Net cash used in financing activities (7,431,000) (7,195,000) (7,468,000)
----------------------------------------------
Net (decrease) increase in cash and cash equivalents (26,000) 106,000 (95,000)
Cash and cash equivalents at the beginning of the period 266,000 160,000 255,000
----------------------------------------------
Cash and cash equivalents at the end of the period $ 240,000 $ 266,000 $ 160,000
==============================================
See accompanying notes.
F-21
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
1. Description of Partnership
SEI/PSP VI Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 14 separate
general partnerships between Public Storage Inc. ("PSI") and PS
Partners VI, Ltd. ("PSP VI"). The Joint Venture, through its
predecessor general partnerships, invested in existing mini-warehouse
facilities which offer self-service storage spaces for lease, usually
on a month-to-month basis, to the general public and, to a lesser
extent, in existing business park facilities which offer industrial and
office space for lease.
The Joint Venture owns 30 properties (referred to hereinafter
as the "Mini-Warehouses"), which excludes two properties which were
transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP
VI is the managing general partner of the Joint Venture, with its
ownership interests in the properties of the Joint Venture ranging from
50% to 76.2%.
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation
The financial statements include the accounts of the Joint
Venture.
Depreciation and Amortization
The Joint Venture depreciates the buildings and equipment on a
straight-line method over estimated useful lives of 25 and 5 years,
respectively.
Revenue and Expense Recognition
Property rents are recognized as earned. Advertising costs of
$706,000, $519,000 and $410,000 in 2001, 2000 and 1999, respectively,
are expensed as incurred.
Allocation of Net Income to PSP VI and PSI
Net income prior to depreciation is allocated to PSP VI and
PSI based upon their relative ownership interest in each property and
the results of each property.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
Joint Venture is allocated solely to PSP VI until it recovers its
initial capital contribution. Thereafter, all depreciation and
amortization is allocated solely to PSI until it recovers its initial
capital contribution. All remaining depreciation and amortization is
allocated to PSP VI and PSI in proportion to their ownership
percentages.
F-22
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
2. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Cash Distributions
The general partnership agreement of the Joint Venture provides
for regular distributions of cash flow from operations (as defined).
Cash and Cash Equivalents
For financial statement purposes, the Joint Venture considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
Environmental Cost
Substantially all of the real estate facilities in which the Joint
Venture has an interest were acquired prior to the time that it was
customary to conduct extensive environmental investigations in connection
with the property acquisitions. Although there can be no assurance, the
Joint Venture is not aware of any environmental contamination of the
Mini-Warehouses which individually or in the aggregate would be material to
the Joint Venture's overall business, financial condition, or results of
operations.
Segment Reporting
Effective January 1, 1998, the Joint Venture adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS
No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Joint Venture only has one
reportable segment as defined within SFAS No. 131, therefore the adoption
of SFAS No. 131 had no effect on the Joint Venture's disclosures.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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.
Recent Accounting Pronouncements and Guidance
Accounting for business combinations
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations,"
("SFAS 141") which sets forth revised accounting guidance with respect to
accounting for acquisitions of business enterprises. In accordance with the
transition provisions of SFAS 141, the Joint Venture adopted the disclosure and
accounting provisions of SFAS 141 on June 30, 2001 and the adoption had no
effect on the Joint Venture's financial statements.
F-23
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
2. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Recent Accounting Pronouncements and Guidance (Continued)
Accounting for goodwill and other intangible assets
In June 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") which
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination, which are
addresses in SFAS 141) are to be accounted for. It also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. In accordance with SFAS 142,
the Joint Venture will adopt the provisions of SFAS No. 142 in its financial
statements beginning with the year ending December 31, 2002. The adoption of the
SFAS 142 will have no impact upon the Joint Venture's financial position or
results of operations.
Accounting for the impairment and disposal of long-lived assets
In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS 121, and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations"
for a disposal of a segment of a business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Joint Venture expects to adopt SFAS 144 on
January 1, 2002, and does not expect that the adoption of the Statement
will have a material impact upon the Joint Venture's financial position
or results of operations.
3. Real Estate Facilities
In 1995, the Financial Accounting Standards Board issued Statement 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. We annually evaluate long-lived assets (including
intangibles), by identifying indicators of impairment and, if such indicators
exist, 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 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 upon discounting
its estimated future cash flows. Statement No. 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.
Our evaluations have indicated no impairment in the carrying amount of our
assets.
In January 1997, the Joint Venture, PSI and other affiliated
partnerships of PSI transferred a total of 35 business parks to PSBPLP,
an operating partnership formed to own and operate business parks in
which PSI has a significant interest. Included among the properties
transferred were the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc. ("PSBP").
F-24
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
4. Investment in real estate entity
In 2001, 2000, and 1999, the Joint Venture recognized
$1,340,000, $1,450,000, and $1,183,000, respectively, in equity in
earnings of real estate entities with respect to the investment in
PSBPLP, described in Note 3 above. Included in equity in earnings for
2000 is $197,000 representing the Joint Venture's share of PSBPLP's
gains on sale of real estate investments.
The accounting policies of PSBPLP are similar to that of the Joint
Venture. Summarized combined financial data with respect to PSBPLP is as
follows:
2001 2000
-------------- -------------
For the year ended December 31,
Total revenues $ 170,391,000 $ 150,634,000
Minority interest in income 27,489,000 26,741,000
Net income 49,870,000 51,181,000
At December 31,
Total assets, net of accumulated depreciation $1,169,955,000 $ 930,756,000
Total liabilities 210,333,000 59,935,000
Total minority interest 359,891,000 306,478,000
Total equity 599,731,000 564,343,000
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entity for the year ended
December 31, 2001 and at December 31, 2000, respectively, as compared to prior
periods, is the result of the additional properties acquired by PSBPLP during
2000 and 2001.
PS Business Parks, Inc., which owns PSBPLP, is a registrant
with the Securities and Exchange Commission, and its filings can be
accessed through the Securities and Exchange Commission.
5. Related Party Transactions
The Joint Venture has a management agreement with PSI whereby
PSI operates the Mini-Warehouses for a fee equal to 6% of the
facilities' monthly gross revenue (as defined). For 2001, 2000 and
1999, the Partnership paid PSI $762,000 $729,000 and $721,000,
respectively, pursuant to this management agreement.
In January 1997, the Joint Venture transferred its business
park facilities to PSBPLP in exchange for a partnership interest in
PSBPLP. PSI has a significant economic interest in PSBPLP and PSBP.
6. Leases
The Joint Venture has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
F-25
SEI/PSP VI JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
7. Taxes Based on Income
Taxes based on income are the responsibility of PSP VI and PSI
and, accordingly, the Joint Venture's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $5,289,000, $4,557,000 and $4,411,000
for the years ended December 31, 2001, 2000 and 1999, respectively. The
difference between taxable income and book income is primarily related to timing
differences in depreciation expense.
F-26
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as
of this 12/th/ day of April, 2002, by and among PUBLIC STORAGE, INC., a
California corporation ("PSI"), PS Partners VI Merger Co., Inc., a California
corporation ("Sub") and PS Partners VI, Ltd., a California Limited Partnership
("PSP").
A. This Agreement provides for the merger of Sub, a wholly-owned, second
tier subsidiary of PSI, with and into PSP in accordance with the applicable
provisions of the California Revised Limited Partnership Act (the "CRLPA") and
the Certificate of Merger in the form prescribed by the California Secretary of
State as provided in Section 15678.4 of the CRLPA (the "Certificate of Merger").
B. The Board of Directors of PSI and the general partners of PSP believe
that it is in the best interests of PSI and PSP to enter into and
complete this Agreement and they have approved this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. Adoption of Plan. The parties hereby adopt the Plan of Reorganization
hereinafter set forth.
2. The Merger.
2.1 Completion of the Merger. At the Effective Time (as defined
below), Sub will be merged with and into PSP (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Certificate of
Merger. The Merger shall become effective at the time at which the Certificate
of Merger is filed with the California Secretary of State in accordance with the
CRLPA, except that if the Certificate of Merger specifies a date subsequent to
the date of such filing on which the Merger is to become effective, the Merger
shall be effective on such specified subsequent date (the "Effective Time"). Sub
and PSP are sometimes collectively referred to herein as the "Constituent
Entities" and PSP, as the surviving entity in the Merger, is sometimes referred
to herein as the "Surviving Entity."
2.2 Effect of the Merger. At the Effective Time:
2.2.1 Constituent Entities. The separate corporate existence of
Sub shall cease and the Surviving Entity shall thereupon succeed, without other
transfer, to all the rights and property of Sub and shall be subject to all the
debts and liabilities of Sub in the same manner as if the Surviving Entity had
itself incurred them; all rights of creditors and all liens upon the property of
each of the Constituent Entities shall be preserved unimpaired, provided that
such liens upon property of Sub shall be limited to the property affected
thereby immediately prior to the Effective Time; and any action or proceeding
pending by or against Sub may be prosecuted to judgment, which shall bind the
Surviving Entity, or the Surviving Entity may be proceeded against or
substituted in its place.
2.2.2 Partnership Agreement. The partnership agreement of PSP in
effect at the Effective Time shall continue in full force and effect until
amended or terminated as provided in such partnership agreement or as provided
by law.
2.2.3 General Partners. The general partners of PSP shall remain
as its general partners with the same interests in PSP that they owned at the
Effective Time.
2.3 Conversion of Partnership Units. The manner of converting the
outstanding units of limited
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partnership interest of PSP (the "Units") into cash and/or shares of Common
Stock ($.10 par value) of PSI (the "PSI Shares") shall be as follows:
2.3.1 Cash Election. At the Effective Time, each Unit as to which
a cash election has been made in accordance with the provisions of Section 2.5
hereof and has not been revoked, relinquished or lost pursuant to Section 2.5
hereof (the "Cash Election Units") shall be converted into and shall represent
the right to receive $546 in cash (the "Cash Election Price"). As soon as
practicable after the Effective Time, the registered holders of Cash Election
Units shall be paid the cash to which they are entitled hereunder in respect of
such Cash Election Units.
2.3.2 Share Exchange. At the Effective Time, subject to Sections
2.4 and 2.5 hereof, each Unit (other than Cash Election Units and Units owned by
the parent of Sub) shall be converted into that number of PSI Shares equal to,
rounded to the nearest thousandth, the quotient (the "Conversion Number")
derived by dividing $546 by the average of the per share closing prices on the
New York Stock Exchange, Inc. (the "NYSE") of PSI Shares during the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Time. If, prior to the Effective Time, PSI should split or combine the PSI
Shares, or pay a stock dividend, the Conversion Number will be appropriately
adjusted to reflect such action.
2.4 No Fractional Shares. Notwithstanding any other term or provision
of this Agreement, no fractional PSI Shares and no certificates
or script therefor, or other evidence of ownership thereof, will be issued in
the Merger. In lieu of any such fractional share interests, each holder of Units
who would otherwise be entitled to such fractional share will receive a whole
PSI Share if such fractional share to which such holder would otherwise have
been entitled is .5 of an PSI Share or more, and such fractional share shall be
disregarded if it represents less than .5 of an PSI Share; provided, however,
that, such fractional share shall not be disregarded if such fractional share to
which such holder would otherwise have been entitled represents .5 of 1% or more
of the total number of PSI Shares such holder is entitled to receive in the
Merger. In such event, such holder shall be paid an amount in cash (without
interest), rounded to the nearest $.01, determined by multiplying (i) the per
share closing price on the NYSE of the PSI Shares at the Effective Time by (ii)
the fractional interest.
2.5 Procedure for Cash Election. At the time of the mailing of the
Information Statement provided for in Section 6.5 hereof, PSI will send to each
holder of record of Units a cash election form (the "Form of Election")
providing such holder with the option to elect to receive the Cash Election
Price with respect to all of such holder's Units. Any such election to receive
the cash payment contemplated by Section 2.3.1 hereof shall have been properly
made only if BankBoston, N.A. (the "Exchange Agent") shall have received at its
designated office, by 5:00 p.m., New York time, on the last business day
preceding the Effective Time, a Form of Election properly completed, as set
forth in such Form of Election. Any Form of Election may be revoked by the
person submitting the same to the Exchange Agent only by written notice received
by the Exchange Agent prior to 5:00 p.m., New York time, on the last business
day before the Effective Time. In addition, all Forms of Election shall
automatically be revoked if the Exchange Agent is notified in writing by the
parties hereto that the Merger have been abandoned. The Exchange Agent may
determine whether or not elections to receive cash have been properly made or
revoked pursuant to this Section 2.5, and any such determination shall be
conclusive and binding. If the Exchange Agent determines that any election to
receive cash was not properly or timely made, the Units covered thereby shall
not be treated as Cash Election Units, and shall be converted in the Merger as
provided in Section 2.3.2 hereof. The Exchange Agent may, with the agreement of
PSI and PSP, establish such procedures, not inconsistent with this Section 2.5,
as may be necessary or desirable to implement this Section 2.5.
2.6 Conversion of Shares. At the Effective Time, the shares of
capital stock of Sub shall be converted into an aggregate of 150,000 Units.
2.7 Cancellation of Units Owned by Parent of Sub. At the Effective
Time, any Units owned by the parent of Sub (other than Units acquired pursuant
to Section 2.6 hereof) shall be cancelled and retired and no shares shall be
issuable, and no cash shall be exchangeable, with respect thereto.
2.8 Delivery of Certificates. After the Effective Time, each holder
of Units which were converted
A-2
into PSI Shares pursuant to Section 2.3.2 shall be entitled to receive a
certificate representing the number of whole PSI Shares into which such Units
shall have been converted as provided in Section 2.3.2 hereof and cash payment
in lieu of fractional share interests, if any, as provided in Section 2.4
hereof.
3. Closing.
3.1 Time and Place of Closing. If this Agreement is approved by the
limited partners of PSP, a meeting (the "Closing") shall take place as promptly
as practicable thereafter at which the applicable parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as PSI may designate. The date of the
Closing shall be referred to as the "Closing Date."
3.2 Execution and Filing of Certificate of Merger. At or before the
Closing and after approval of the limited partners of PSP, the applicable
parties shall execute the Certificate of Merger for filing with the California
Secretary of State. The Certificate of Merger shall be duly filed with the
California Secretary of State in accordance with the CRLPA.
4. Representations, Warranties and Agreements of PSP. PSP represents,
warrants and agrees with PSI that:
4.1 Authorization. Subject to approval of this Agreement by the
limited partners of PSP, (i) the execution, delivery and performance of this
Agreement by PSP has been duly authorized and approved by all necessary action
of PSP, and (ii) PSP has necessary power and authority to enter into this
Agreement, to perform its obligations hereunder and to complete the transactions
contemplated hereby.
4.2 Organization and Related Matters. PSP is a limited partnership
duly organized, existing and in good standing under the laws of
the State of California with all requisite power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business and is in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business carried on by it
requires such qualification and where the failure to so qualify would have a
material adverse effect on its business, properties, results of operations or
financial condition.
4.3 Units. PSP has outstanding 150,000 Units, all of which have been
duly and validly authorized and issued, and are fully paid and nonassessable.
There are no options or agreements to which PSP is a party or by which it is
bound calling for or requiring the issuance of additional Units.
4.4 Consents and Approvals; No Violation. Assuming approval of the
Merger and of this Agreement by the limited partners of PSP, neither the
execution and delivery of this Agreement nor the consummation by PSP of the
transactions contemplated hereby will: (i) conflict with or result in any breach
of any provision of its partnership agreement; (ii) require any consent, waiver,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) where the failure to obtain such consent, approval, authorization
or permit, or to make such filing or notification, would not in the aggregate
have a material adverse effect on PSP or adversely affect the ability of PSP to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, mortgage, agreement or other instrument or obligation to
which PSP is a party or any of its properties or assets may be bound, except for
such violations, breaches and defaults which, in the aggregate, would not have a
material adverse effect on PSP or adversely affect the ability of PSP to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
this Section 4.4 are duly and timely obtained or made, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to PSP or its
properties or assets,
A-3
except for violations which would not in the aggregate have a material adverse
effect on PSP or adversely affect the ability of PSP to consummate the
transactions contemplated hereby.
4.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSP, threatened against PSP or
involving any of its properties or assets.
4.6 SEC Reports. Since January 1, 1999, PSP has filed all forms,
reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the rules
and regulations promulgated by the SEC thereunder, all of which complied in all
material respects with all applicable requirements of the federal securities
laws and such rules and regulations (collectively, the "PSP SEC Reports"). None
of the PSP SEC Reports, including without limitation any financial statements or
schedules included therein, at the time filed contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 Financial Statements. The financial statements included in the
PSP SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSP as
of their respective dates, and the results of operations of PSP for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
4.8 Absence of Certain Changes or Events. Since January 1, 2000, the
business of PSP has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 Registration Statement and Information Statement. None of
the information supplied or to be supplied by PSP for inclusion or incorporation
by reference in the S-4 Registration Statement or the Information Statement (as
such terms are defined in Section 6.5 hereof) will (i) in the case of the S-4
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) in the case of the Information
Statement, at the time of the mailing of the Information Statement and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
4.10 Insurance. All material insurance of PSP is currently in full
force and effect and PSP has reported all claims and occurrences to the extent
required by such insurance.
4.11 Disclosure. The representations and warranties by PSP in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
5. Representations, Warranties and Agreements of PSI. PSI hereby
represents, warrants and agrees with PSP that:
5.1 Authorization. The execution, delivery and performance of this
Agreement by PSI have been duly authorized and approved by all necessary
corporate action of PSI, and PSI has all necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
complete the transactions contemplated hereby.
5.2 Organization and Related Matters. PSI is a corporation duly
organized, existing and in good
A-4
standing under the laws of the State of California, with all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as and where now owned, leased, operated or carried on, as the case may
be; and is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business carried on by it requires such qualification
and where the failure to so qualify would have a material adverse effect on the
business, properties, results of operations or financial condition of PSI.
5.3 Capital Stock. The authorized capital stock of PSI consists
solely of (i) 200,000,000 shares of Common Stock ($.10 par value), 115,499,647
of which were issued and outstanding as of December 31, 2001, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of December 31, 2001, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 11,156,600 of which were issued and outstanding as of December
31, 2001 and (iv) 200,000,000 shares of Equity Stock ($.01 par value),
4,523,220.338 of which were issued and outstanding at December 31, 2001. All of
the issued and outstanding shares of Common Stock, Class B Common Stock,
Preferred Stock and Equity Stock of PSI have been duly and validly authorized
and issued, and are fully paid and nonassessable. The issuance of the PSI Shares
in the Merger has been duly and validly authorized and, when issued and
delivered as provided in this Agreement, the PSI Shares will have been duly and
validly issued, fully paid and nonassessable; and the shareholders of PSI have
no preemptive rights with respect to any shares of capital stock of PSI.
5.4 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement nor the consummation by PSI of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Certificate of Merger pursuant to
the CRLPA, (D) as may be required by any applicable state securities or takeover
laws, or (E) where the failure to obtain such consent, approval, authorization
or permit, or to make such filing or notification, would not in the aggregate
have a material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, mortgage, agreement or other instrument or obligation to
which PSI is a party or any of its properties or assets may be bound, except for
such violations, breaches and defaults which, in the aggregate, would not have a
material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby; or (iv) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in
this Section 5.4 are duly and timely obtained or made, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to PSI or its
properties or assets, except for violations which would not in the aggregate
have a material adverse effect on PSI or adversely affect the ability of PSI to
consummate the transactions contemplated hereby.
5.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSI, threatened against PSI or
involving any of its properties or assets.
5.6 SEC Reports. Since January 1, 1999, PSI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Financial Statements. The financial statements included in PSI's
SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSI as
of their
A-5
respective dates, and the results of operations of PSI for the periods presented
therein (subject, in the case of the unaudited interim financial statements, to
normal year-end adjustments).
5.8 Absence of Certain Changes or Events. Since January 1, 2001, the
business of PSI has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
5.9 S-4 Registration Statement and Information Statement. None of
the information supplied or to be supplied by PSI for inclusion or incorporation
by reference in the S-4 Registration Statement or the Information Statement (as
those terms are defined in Section 6.5 hereof) will (i) in the case of the S-4
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (ii) in the case of the Information
Statement, at the time of the mailing of the Information Statement and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
5.10 Insurance. All material insurance of PSI is currently in full
force and effect and PSI has reported all claims and occurrences to the extent
required by such insurance.
5.11 Disclosure. The representations and warranties by PSI in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
6. Covenants and Agreements.
6.1 Ordinary Course. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, each of
PSI and PSP will carry on its business in the ordinary course in substantially
the same manner as heretofore conducted and use all reasonable efforts to: (a)
preserve intact its present business, organization and goodwill, (b) maintain
all permits, licenses and authorizations required by applicable laws, and (c)
keep available the services of its present employees and preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. PSP will not issue
any Units or debt securities convertible into Units. PSI and PSP will promptly
notify the other of any event or occurrence not in the ordinary and usual course
of business or which may have a material adverse effect on the properties or
financial condition of such party.
6.2 Action by PSP. PSP will take all action necessary in accordance
with applicable law as promptly as practicable to secure approval of this
Agreement, it being understood that the principal terms of the Agreement must be
approved by the affirmative vote of a majority of the outstanding Units.
6.3 Vote by PSI. PSI agrees to cause its subsidiary to vote its
Units in favor of the Merger prior to the mailing of the Information Statement.
6.4 Acquisition Proposals. PSP will not initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving PSP, or any purchase of all or any significant portion of its assets,
or any equity interest in it, other than the transactions contemplated hereby
(an "Acquisition Proposal"), or engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any person relating to an Acquisition Proposal; provided, however, that PSP's
general partners may furnish or cause to be furnished information and may
participate in such discussions and negotiations through its representatives
with persons who have sought the same if the failure to provide such information
or participate in such negotiations and discussions might cause the general
partners of PSP to breach their fiduciary duty to the limited partners of PSP
under applicable law as advised by counsel. PSP will notify PSI immediately if
A-6
any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with PSP, and will keep PSI informed of the status and
terms of any such proposals and any such negotiations or discussions.
6.5 Registration and Information Statement. PSP will promptly prepare
and file with the SEC a preliminary information statement and notice of action
without a meeting in connection with the approval of the Merger by the limited
partners of PSP. PSI will, as promptly as practicable, prepare and file with the
SEC a registration statement on Form S-4 (the "S-4 Registration Statement"),
containing an information statement, notice of action without a meeting and
prospectus, in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act") of the PSI Shares to be issued to
holders of Units in the Merger (such information statement, notice of action
without a meeting and prospectus, together with any amendments thereof or
supplements thereto, in each case in the form or forms to be mailed to the
limited partners of PSP, being herein called the "Information Statement"). PSI
and PSP will use their best efforts to have or cause the S-4 Registration
Statement to be declared effective as promptly as practicable, and also will
take any other action required to be taken under federal or state securities
laws, and PSP will use its best efforts to cause the Information Statement to be
mailed to its limited partners at the earliest practicable date. PSP agrees that
if at any time prior to the Effective Time any event with respect to PSP should
occur which is required to be described in an amendment of, or a supplement to,
the Information Statement or the S-4 Registration Statement, such event shall be
so described, and such amendment or supplement shall be promptly filed with the
SEC and, as required by law, disseminated to the limited partners of PSP and
(ii) the Information Statement will (with respect to PSP) comply as to form in
all material respects with the requirements of the federal securities laws. PSI
agrees that (i) if at any time prior to the Effective Time any event with
respect to PSI should occur which is required to be described in an amendment
of, or a supplement to, the Information Statement or the S-4 Registration
Statement, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the limited partners of PSP and (ii) the Information Statement will (with
respect to PSI) comply as to form in all material respects with the requirements
of the federal securities laws.
6.6 Best Efforts. Each of PSI and PSP shall: (i) promptly make its
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best efforts to promptly take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 Registration and Listing of PSI Shares. PSI will use its best
efforts to register the PSI Shares under the applicable provisions of the
Securities Act and to cause the PSI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 Distributions. PSP will not, at any time prior to the Effective
Time, declare or pay any cash distributions to its limited partners, except (i)
regular quarterly distributions at a quarterly rate not in excess of $7.13 per
Unit and (ii) distributions to limited partners of record immediately prior to
the Effective Time in an aggregate amount equal to the amount by which the
estimated Net Asset Value of PSP (as defined below) as of the Effective Time
exceeds $546 per Unit. For this purpose, the Net Asset Value of PSP is the sum
of (a) PSP's share of the fair market value as of February 28, 2002 of the 32
improved properties in which PSP has an interest, as determined by appraisal by
Charles R. Wilson & Associates, Inc., (b) the book value of PSP's non-real
estate assets (excluding marketable securities) as of the date of determination
and (c) the fair value of PSP's partnership interests in PS Business Parks, L.P.
based on the average of the per share closing prices on the American Stock
Exchange of the shares of common stock of PS Business Parks, Inc. during the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Time and less (d) PSP's liabilities as of the date of determination. The
determination of book value and liabilities shall be from PSP's financial
statements prepared in accordance with generally accepted accounting principles
on a basis consistent with prior periods.
A-7
7. Conditions.
7.1 Conditions to Each Party's Obligations. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or prior to the Closing of each of
the following conditions, any or all of which may be waived in whole or in part,
to the extent permitted by applicable law:
7.1.1 Limited Partner Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved by the limited
partners of PSP as contemplated by Section 6.2.
7.1.2 Governmental and Regulatory Consents. All filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from, governmental and regulatory authorities in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the expiration of the waiting period
requirements of the HSR Act) shall have been made or obtained (as the case may
be) without material restrictions, except where the failure to obtain such
consents, approvals, permits and authorizations could not reasonably be expected
to have a material adverse effect on PSI or PSP.
7.1.3 Litigation. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) or taken any action
which prohibits the consummation of the transactions contemplated by this
Agreement and no legal action challenging such transactions shall be pending.
7.1.4 Registration Statement. The S-4 Registration Statement
shall have been declared effective and no stop order suspending effectiveness
shall have been issued, no action, suit, proceeding or investigation by the SEC
to suspend the effectiveness thereof shall have been initiated and be
continuing, and all necessary approvals under federal and state securities laws
relating to the issuance or trading of the PSI Shares shall have been received.
7.1.5 Listing of PSI Shares on NYSE. The PSI Shares shall have
been approved for listing on the NYSE upon official notice of issuance.
7.1.6 Fairness Opinion. PSP shall have received the opinion of
Robert A. Stanger & Co., Inc. in form and substance satisfactory to it to the
effect that the consideration to be received by the public limited partners of
PSP in the Merger is fair to such public limited partners from a financial point
of view, and such opinion shall not have been withdrawn or revoked.
7.2 Conditions to Obligations of PSI. The obligations of PSI to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSI to the extent permitted by applicable law:
7.2.1 Accuracy of Representations; Performance of Agreements.
Each of the representations and warranties of PSP contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSP shall have performed or complied with all agreements
and covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
7.2.2 Certificate of General Partners. PSI shall have received
such certificates of the general partners of PSP as PSI may reasonably request
in connection with the Closing, to the effect that, to the best of their
knowledge, all representations and warranties of PSP contained in this Agreement
are true and correct in all material respects at and as of the Closing Date as
if made at and as of the Closing Date, and PSP has performed or complied with
all agreements and covenants required by this Agreement to be performed or
complied with by PSP at or prior to the Closing.
7.2.3 Title to Properties; Environmental Audits. PSI in its
sole discretion shall be
A-8
satisfied as to the status of title to (including the existence and effect of
liens and encumbrances), and the results of an environmental audit of, each of
the real properties owned by PSP.
7.2.4 Trading Price of PSI Shares. The average of the per share
closing prices of the PSI Shares on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the Effective Time (the "Average
PSI Share Price") shall be not less than $34.
7.3 Conditions to Obligations of PSP. The obligations of PSP to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSP to the extent permitted by applicable law.
7.3.1 Accuracy of Representations; Performance of Agreements.
Each of the representations and warranties of PSP contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSI shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing.
7.3.2 Certificate of Officers. PSP shall have received such
certificates of officers of PSI as PSP may reasonably request in connection with
the Closing, including upon request a certificate satisfactory to PSP of the
Chief Executive Officer and the Chief Financial Officer of PSI, to the effect
that, to the best of their knowledge, all representations and warranties of PSI
contained in this Agreement are true and correct in all material respects at and
as of the Closing Date as if made at and as of the Closing Date, and PSI has
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing.
8. Termination.
8.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after limited partner approval, by the mutual written consent of PSI and PSP.
8.2 Termination by PSI or PSP. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of PSI or by the
general partners of PSP if (i) the Merger shall not have been consummated by
December 31, 2002 (provided that the right to terminate this Agreement under
this Section 8.2 shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date); (ii) any court of
competent jurisdiction in the United States or some other governmental body or
regulatory authority shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or (iii) the limited partners of PSP shall have failed to
approve this Agreement and the transactions contemplated hereby.
8.3 Termination by PSI. This Agreement may be terminated by PSI, and
the Merger may be abandoned at any time prior to the Effective Time, as to the
defaulting party if (i) PSP shall have failed to comply in any material respect
with any of the covenants, conditions or agreements contained in this Agreement
to be complied with or performed by such party at or prior to such date of
termination, which failure to comply has not been cured within five business
days following notice to such party of such failure to comply, or (ii) any
representation or warranty of PSP contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or breach (if capable of
cure) has not been cured within five business days following notice to PSP of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.4 Termination by PSP. This Agreement may be terminated by PSP and
the Merger may be abandoned at any time prior to the Effective Time, before or
after limited partner approval, if (i) PSI shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in this Agreement to be
A-9
complied with or performed by PSI at or prior to such date of termination, which
failure to comply has not been cured within five business days following notice
to PSI of such failure to comply, or (ii) any representation or warranty of PSI
contained in this Agreement shall not be true in all material respects when
made, which inaccuracy or beach (if capable of cure) has not been cured within
five business days following notice to PSI of the inaccuracy or breach, or on
and as of the Closing as if made on and as of the Closing Date.
8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Section 8, no party (or any directors, officers, employees, agents or
representatives of any party) shall have any liability or further obligation to
any other party or any person who controls a party within the meaning of the
Securities Act, except as provided in Section 9.1 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
9. Miscellaneous.
9.1 Payment of Expenses. If the Merger is consummated, PSI shall pay
all the expenses incident to preparing for, entering into and carrying out this
Agreement and the consummation of the transactions contemplated hereby. If the
Merger is not consummated, each of PSI and PSP shall pay its own expenses,
except that any expenses incurred in connection with the printing of the S-4
Registration Statement and the Information Statement, the real estate appraisals
and environmental audits of the properties of PSP and preparation for real
estate closings, and any filing fees under the HSR Act, the Securities Act and
the Securities Exchange Act of 1934, as amended shall be paid 50% by PSI and 50%
by PSP.
9.2 Survival of Representations, Warranties and Covenants. The
respective representations and warranties of PSI and PSP contained herein or in
any certificate or document delivered pursuant hereto shall expire with and be
terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 Modification or Amendment. The parties may modify or amend this
Agreement by written agreement authorized by the Board of Directors of PSI and
the general partners of PSP and executed and delivered by the parties; provided,
however, that after approval of this Agreement by the limited partners of PSP,
no amendment shall be made which changes any of the principal terms of the
Merger or this Agreement, without the approval of such limited partners.
9.4 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect to
the principles of conflict of laws thereof.
9.6 Interpretation. This Agreement has been negotiated by the parties
and is to be interpreted according to its fair meaning as if the
parties had prepared it together and not strictly for or against any party. Each
of the capitalized terms defined in this Agreement shall, for all purposes of
this Agreement (and whether defined in the plural and used in the singular, or
vice versa), have the respective meaning assigned to such term in the Section in
which such meaning is set forth. References in this Agreement to "parties" or a
"party" refer to parties to this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation."
9.7 Headings. The descriptive headings contained in the Sections and
subsections of this Agreement are for convenience of reference only and shall
not affect in any way the meaning or interpretation of this Agreement.
A-10
9.8 Parties in Interest. This Agreement, and the rights, interests
and obligations created by this Agreement, shall bind and inure to the benefit
of the parties and their respective successors and permitted assigns, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
9.9 Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or sent by U.S. mail, postage prepaid, addressed as follows or such
other address as the party to be notified has furnished in writing by a notice
given in accordance with this Section 9.9:
If to PSI or to Sub:
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PSP:
PS Partners VI, Ltd., a California Limited Partnership
c/o Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
9.11 Assignment. No rights, interests or obligations of either party
under this Agreement may be assigned or delegated without the prior written
consent of the other party.
9.12 Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations,
representations and discussions, whether written or oral.
A-11
9.13 Severable Provisions. If any of the provisions of this Agreement
may be determined to be illegal or otherwise unenforceable, in whole or in part,
the remaining provisions, and any partially enforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first above written.
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
----------------------
Harvey Lenkin
President
PS PARTNERS VI, LTD.,
a California Limited Partnership
By:Public Storage, Inc.,
General Partner
By: /s/ HARVEY LENKIN
--------------------------
Harvey Lenkin
President
By: /s/ B. WAYNE HUGHES
--------------------------
B. Wayne Hughes
General Partner
PS PARTNERS VI MERGER CO., INC.
By: /s/ HARVEY LENKIN
----------------------
Harvey Lenkin
President
A-12
APPENDIX B
Charles R. Wilson & Associates, Inc.
Real Estate Appraisers & Consultants
199 South Los Robles Avenue, Suite 540
Pasadena, Ca 91101-2458
Charles Ray Wilson, MAI, CRE Telephone (626) 792.2107
Russell Babbitz, MAI Facsimile (626) 792.4180
J. Richard Donahue, MAI
William M. Landy, MAI
Rolland R. Stephens, MAI
Matthew J. Swanson, MAI
April 4, 2002
PS PARTNERS VI, LTD. and
PUBLIC STORAGE, INC.
701 Western Avenue . Suite 200
Glendale, California 91201-2397
Re: Market Value Appraisal
32-Property Self-Storage Portfolio
CRW Job File No. PA-02002
24601 200 E. Kirkham Ave., St. Louis, MO
24602 3940 Reavis Barracks Rd., St. Louis, MO
24604 2377 E. Loop 820 S., Fort Worth, TX
24605 7501 Baker Blvd., Richland Hills, TX
24607 6938 Franklin Blvd., Sacramento, CA
24608 2935 S. 3600 W. Salt Lake City, UT
24609 2300 Purdue Ave., Los Angeles, CA
24611 8701 Central Ave., Capitol Heights, MD
24613 4555 Peralta Blvd., Fremont, CA
24614 2745 Dixie Hwy, Waterford, MI
24615 3607 Fort Meade Rd., Laurel, MD
24616 3150 S. 44/th/ St., Kansas City, KS
24617 1224 27/th/ Pl. S., Birmingham, AL
24618 1900 Mini Warehouse Rd., Birmingham, AL
24619 6917 Oporto Madrid Bl. S., Birmingham, AL
24620 1055 Pebble Creek Pkwy, Birmingham, AL
24621 1120 Center Point Rd., Birmingham, AL
24622 1147 Gadsen Hwy, Birmingham, AL
24623 209 Oxmoor Blvd., Birmingham, AL
24624 3232 Lorna Rd., Birmingham, AL
24625 575 Bessemer Super Hwy, Midfield, AL
24626 3052 Leman Ferry Rd., SW, Huntsville, AL
24627 2902 Drake Ave., SW, Huntsville, AL
24628 4314 Whiteside Dr., Anniston, AL
24629 8610 Glenvista St., Houston, TX
24630 9030 North Fwy, Houston, TX
24631 2850 Rogerdale Rd., Houston, TX
24632 6615 Gessner Dr., Houston, TX
24633 6336 Fairdale Ln., Houston, TX
24634 5200 Gulfton St., Houston, TX
24635 8950 Westpark Dr., Houston, TX
24636 7493 Jonesboro Rd., Jonesboro, GA
Gentlemen:
In accordance with your request and authorization, we have prepared a limited
appraisal of the 32-property portfolio in which PS Partners VI, Ltd. has an
interest. Our investigation and analysis is presented in a restricted report
format.
This restricted report is intended to comply with the reporting requirements set
forth under Standard Rule 2-2(c) of the Uniform Standards Professional Appraisal
Practice (USPAP). As such, this restricted report is presented in summary format
and primarily states only the conclusions, and procedures that were used in the
appraisal process to develop the appraiser's opinion of value. As such, it does
not include detailed discussions of the data, reasoning and analyses used in the
appraisal process to develop the appraiser's opinion of value. The appraiser's
opinions and conclusions set forth in the report cannot be understood properly
without additional information in the appraiser's workfile Supporting
documentation containing the data, reasoning and analyses is retained in the
working files of the appraiser. A synopsis of the methodology of the appraisal
in contained in Part I of the report.
The addressee is notified that PS Partners VI, Ltd., its advisors, and its
partners are considered by the appraiser to be the only users of this appraisal
report. Any other party who may receive this report is not considered an
intended user as the depth of discussion contained in this restricted report is
specific to the needs of the intended user. This report may be
Charles R. Wilson & Associates, Inc.
PA-02002-PS PARTNERS VI, LTD.
included in an Information Statement sent to limited partners of PS Partners VI,
Ltd. in connection with the proposed merger of PS Partners VI, Ltd. with a
subsidiary of Public Storage, Inc.
As described in further detail in the Assumptions and Limiting Conditions, this
appraisal invokes the Departure Rule of the USPAP. The reliability of the value
conclusion provided may be impacted to the degree that there is departure from
specific guidelines of USPAP. However, we believe we have performed actions
necessary to ensure a fair valuation of the subject portfolio.
Attached to this transmittal letter is the summary appraisal report which
contains the following components:
Part 1 - Appraisal Information
Part 2 - Assumptions and Limiting Conditions
Part 3 - Certification
AGGREGATE MARKET VALUE
Based upon the analyses made, it is our opinion that the Fee Simple Aggregate
Market Value of the Portfolio of subject properties, as of February 28, 2002,
is:
EIGHTY SEVEN MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
($87,250,000)
This market value assumes an exposure time of six to 12 months. This letter of
transmittal is not a complete appraisal report and is only intended to summarize
the value estimates of the subject properties. Assumptions and Limiting
Conditions are noted in the body of this report.
Sincerely,
CHARLES R. WILSON & ASSOCIATES, INC.
CHARLES R. WILSON, MAI, CRE
Charles R. Wilson, MAI, CRE
State of California Certification No. AG002172
Charles R. Wilson & Associates, Inc. 2
PA-02002-PS PARTNERS VI, LTD.
PART ONE-APPRAISAL INFORMATION
PROPERTY IDENTIFICATION AND CLASSIFICATION
The subject properties are located in 32 locations in different states and are
specifically identified by the street addresses below:
Property Net Rentable
Number Property Address Square Feet
===============================================================================
24601 200 E. Kirkham Ave., St. Louis, MO ............... 30,550
24602 3940 Reavis Barracks Rd., St. Louis, MO ........... 29,050
24604 2377 E. Loop 820 S., Fort Worth, TX ............... 36,090
24605 7501 Baker Blvd., Richland Hills, TX .............. 55,800
24607 6938 Franklin Blvd., Sacramento, CA ............... 49,575
24608 2935 S. 3600 W., Salt Lake City, UT ............... 65,867
24609 2300 Purdue Ave., Los Angeles, CA ................. 50,977
24611 8701 Central Ave., Capitol Heights, MD ............ 54,430
24613 4555 Peralta Blvd., Fremont, CA ................... 39,100
24614 2745 Dixie Hwy, Waterford, MI ..................... 60,398
24615 3607 Fort Meade Rd., Laurel, MD ................... 35,106
24616 3150 S. 44/th/ St., Kansas City, KS ............... 76,932
24617 1224 27/th/ Pl. S., Birmingham, AL ................ 19,609
24618 1900 Mini Warehouse Rd., Birmingham, AL ........... 53,874
24619 6917 Oporto Madrid Blvd. S., Birmingham, AL ....... 36,560
24620 1055 Pebble Creek Pkwy, Birmingham, AL ............ 30,022
24621 1120 Center Point Rd., Birmingham, AL ............. 41,550
24622 1147 Gadsden Hwy, Birmingham, AL .................. 20,771
24623 209 Oxmoor Blvd., Birmingham, AL ................. 39,080
24624 3232 Lorna Rd., Birmingham, AL .................... 35,430
24625 575 Bessemer Super Hwy, Midfield, AL ............. 19,137
24626 3052 Leman Ferry Rd. SW, Huntsville, AL ........... 43,800
24627 2902 Drake Ave. SW, Huntsville, AL ................ 43,400
24628 4314 Whiteside Dr., Anniston, AL .................. 25,125
24629 8610 Glenvista St., Houston, TX ................... 59,211
24630 9030 North Fwy, Houston, TX ....................... 96,319
24631 2850 Rogerdale Rd., Houston, TX ................... 114,691
24632 6615 Gessner Dr., Houston, TX ..................... 111,082
24633 6336 Fairdale Ln., Houston, TX .................... 118,671
24634 5200 Gulfton St., Houston, TX ..................... 103,647
24635 8950 Westpark Dr., Houston, TX .................... 52,186
24636 7493 Jonesboro Rd., Jonesboro, GA ................. 33,400
----------
TOTALS ................................................... 1,681,440
The subject properties have all been under the same ownership for more than the
past three years with the exception of a 1.57 acre parcel of land acquired in
2000 at a cost of $271,778. This land is part of the 6938 Franklin Blvd.,
Sacramento, California location.
PURPOSE OF THE APPRAISAL
The purpose of this appraisal is to estimate the aggregate Fee Simple Market
Value of the 32-property portfolio in which PS Partners VI, Ltd. has an interest
and to present our conclusions in a restricted report format.
Effective Date of Value and Date of Report
The effective date of value for this restricted appraisal report is February 28,
2002. The date of the report is March 28, 2002.
Charles R. Wilson & Associates, Inc. 3
PA-02002-PS PARTNERS VI, LTD.
METHODOLOGY
In valuing the portfolio, we considered the applicability of all three commonly
recognized approaches to value: Cost Approach, the Income Capitalization
Approach and the Sales Comparison Approach. The type and age of properties
within the portfolio, market conditions and the quantity and quality of data
affect the applicability of each approach in a specific appraisal situation. We
did not consider the Cost Approach to be applicable to the portfolio.
The Income Capitalization Approach estimates a property's capacity to produce
income through an analysis of the rental market, operating expenses and net
operating income. Net operating income may then be processed into a value
estimate through either, or a combination, of two methods: direct capitalization
or yield capitalization (i.e., a discounted cash flow analysis).
The Sales Comparison Approach is based on the principle of substitution, that
is, that an informed purchaser would pay no more for a property that 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 the subject properties based on amounts paid for similar-type
properties.
The Cost Approach is based on the estimated market value of the site as if
vacant plus the depreciated replacement cost of existing improvements. The Cost
Approach was not considered applicable because today's investors generally do
not rely upon this approach when buying older existing properties like the
portfolio.
Our valuation of the portfolio relied most heavily on the Income Capitalization
Approach. Our conclusion arrived using this approach was then tested for
reasonability using the Sales Comparison Approach. Assets in our appraisal
include land, land improvements and building improvements. Assets excluded are
personal property, fixtures and intangible or other business-related assets that
are not real property, except for that equipment and personal property
considered usual and incidental to the operation of the facilities such as
electric carts, office supplies, computer systems, etc. We valued each facility
individually, taking into consideration any portfolio premium and then
reconciled the individual values into a final value conclusion.
The specific actions taken by us in valuing the portfolio of properties included
the following:
General
.. For each property, we reviewed three years of operating statements provided
by management.
.. Historical income and expense information of each of the subject properties
provided by management was compared to the operating performance of
comparable properties found in the Self Storage Data Services, Inc., (SSDS)
database. SSDS is a subsidiary of Charles R. Wilson & Associates, Inc. The
SSDS database contains operating income and expense data on several hundred
self-storage facilities nationwide.
.. Site inspections were conducted on all the Alabama and Houston, Texas
properties, for the purpose of verifying physical condition (including
necessary reserves for deferred maintenance) and discussing maintenance
requirements with property management.
.. We interviewed members of management responsible for property operations to
ascertain the competitive conditions, area economic trends affecting the
properties and items of deferred maintenance or of unusual nature.
.. Rental rates and occupancies, as available, on competitive facilities were
utilized to judge each subject's level of performance relative to the
market. Management provided rental information on the subject properties
and competing properties. Rental rates of competing properties were
verified by telephone by personnel of Charles R. Wilson & Associates, Inc.
We also developed information from a variety of sources about the market
conditions for each individual property that included population,
employment and housing trends within the market.
.. We defined our occupancy levels, rental rate and expense growth expense
escalators by reviewing the acquisition criteria and projection parameters
used in the marketplace.
Charles R. Wilson & Associates, Inc. 4
PA-02002-PS PARTNERS VI, LTD.
.. No interviews with city and county officials were conducted.
.. Based on the information gathered, we determined significant differences in
the quality among the properties by considering such variables as property
income growth patterns and potential, quality of location and construction,
tenant appeal, property appearance, security and potential competition.
Income Capitalization Approach
.. We utilized the Direct Capitalization method (a type of Income
Capitalization) by projecting stabilized operating results for the next
twelve months and capitalizing that into a value for the property using
capitalization rates ranging from 9.25% to 10.0%, except for the
capitalization rate on the Sacramento, California - Franklin Blvd facility
of 9.0% which was adjusted to reflect its excess land. Adjustments were
then made for deferred maintenance.
.. We also utilized the Yield Capitalization method or discounted cash flow
model (another type of Income Capitalization). In applying Yield
Capitalization method, cash flow projections for each property were
developed for a ten-year period. Consideration was given, and adjustments
made, to reflect replacement reserves and scheduled capital repairs. We
capitalized each property's eleventh year net operating income into a
residual value at the end of the ten-year holding period and assumed a
normal cost of disposing the properties. The ten yearly cash flows were
then discounted to present worth.
.. We used annual revenue growth rates ranging from -0.3% to 5.4% and expense
growth rates from -2.4% to 16.4% over the twelve-month period ending
December 31, 2001 numbers for the initial year of the cash flow projection.
We used revenue growth rates from 3.0% to 3.5% thereafter. Expenses for the
properties were increased between 3.0% and 3.5% per annum, except for real
estate taxes in California that were increased 2.0% per annum. We used
terminal capitalization rates ranging from 9.75% to 10.0% (9.5% for
Sacramento, California - Franklin Blvd. facility to reflect its excess
land) to capitalize each of the properties' eleventh year net operating
income into a residual value. The annual cash flows were discounted to
present worth using discount rates ranging from 12.0% to 12.5%, except for
Sacramento, California - Franklin Blvd facility for which 11.5% was
utilized to reflect its excess land.
.. We tested the reasonableness of the adjusted valuation parameters utilized
for the Sacramento, California facility to account for its excess land by
observing land transaction prices in the general market of this facility.
.. We reconciled the aggregate property values using the Direct Capitalization
Method and the Yield Capitalization Method into a single portfolio value.
Sales Comparison Approach
.. The value conclusions were tested for their reasonableness using the Sales
Comparison Approach which analyzes 142 property sales that occurred during
the past 36 months. Using a regression analysis, a strong correlation (R
Squared = .9508) was derived between the comparable property net operating
income and sales prices per square foot. Included in the property sales
analyzed are property sales/acquisitions involving Public Storage and
others.
AGGREGATE MARKET VALUE
Based upon the analyses made, it is our opinion that the Fee Simple Aggregate
Market Value of the Portfolio of subject properties, as of February 28, 2002,
is:
EIGHTY SEVEN MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
($87,250,000)
This market value assumes an exposure time of six to 12 months. This letter of
transmittal is not a complete appraisal report and is only intended to summarize
the value estimates of the subject properties. General and Specific Assumptions
and Limiting Conditions are noted in the body of this report.
Charles R. Wilson & Associates, Inc. 5
PA-02002-PS PARTNERS VI, LTD.
DEFINITIONS
Property Rights Appraised
The property rights appraised consist of the Fee Simple Estate. Due to the
short-term, month-to-month tenancies in the facilities, and the fact that rents
are at market levels, a Fee Simple Interest is appropriate. According to the
Appraisal Institute, Dictionary of Real Estate Appraisal, 3rd Edition, 1993, p.
140, "Fee Simple 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, taxation, and escheat."
Market Value
The following Market Value definition is based on Uniform Standards of
Professional Appraisal Practice Regulations and Standards.
"Market Value" means the most probable price that 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 CFR, part
34, Subpart C-Appraisals, 34.43 Definitions [g].)
OTHER INFORMATION
Competency Rule
Charles R. Wilson & Associates, Inc., and Charles Ray Wilson, MAI, CRE, have the
knowledge and experience necessary to complete this assignment and have
appraised over 300 self-storage facilities over the past 12 months. Charles R.
Wilson & Associates, Inc., and Charles Ray Wilson, MAI, CRE have appraised
self-storage facilities and commercial facilities since 1972 and have appraised
over 300 self-storage facilities over the past 12 months.
Charles R. Wilson & Associates, Inc. 6
PA-02002-PS PARTNERS VI, LTD.
PART TWO- ASSUMPTIONS & LIMITING CONDITIONS
Standards Rule (SR) 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 SR 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
that 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. To the best of our knowledge the data set forth in this report and utilized
in this appraisal is true and accurate. The information furnished by others
is believed to be reliable.
5. No opinion as to title is rendered. 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 surveys have 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 subsurface, 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 transformer, 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 material except as is expressly stated.
14. No opinion is intended to be expressed for matters that require legal
expertise or specialized investigation or knowledge beyond that customarily
employed by real estate appraisers.
Charles R. Wilson & Associates, Inc. 7
PA-02002-PS PARTNERS VI, LTD.
15. 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, it's financial advisors or partners without the
written consent of the appraiser and in any event only with proper written
qualification and only in its entirety.
16. 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.
17. Disclosure of the contents of this appraisal report is governed by the
By-Laws and Regulations of the Appraisal Institute.
18. 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 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.
19. This report departs from specific guidelines of USPAP as follows:
. Standard Rule 1-3(a): the appraiser should consider the effect on use
and value of the following factors: existing land use regulations,
reasonably probable modification of such land use regulations,
economic supply and demand, the physical adaptability of the real
estate, and market area trends; and (b) develop an opinion of the
highest and best use of the real estate. City and county officials
were not interviewed and thus it is assumed that each property
complies with city and county building codes and zoning ordinances.
20. The content of the appraisal report has been limited as presented herein.
This report is not intended to meet the disclosure requirements of Title XI
of the Federal Financial Institutions Reform, Recovery, and Enforcement Act
of 1989. Therefore, federally regulated institutions should not rely solely
on this report for financing purposes.
21. This valuation covers only the real properties described herein and only
applies to the valuation issues as stated and does not include
consideration of mineral rights or related rights 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 or any other property or utilization that 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 electric carts, office supplies,
computer systems, etc.
22. For the properties located in California real estate taxes used in our
proforma and reversionary year are adjusted to reflect a fair sale, as is
standard practice in California in compliance with Proposition 13 which was
enacted in 1978. It is assumed real estate taxes for the properties located
in other states would not change as a result of a property transfer.
Charles R. Wilson & Associates, Inc. 8
PA-02002-PS PARTNERS VI, LTD.
PART THREE-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 analysis, opinions, and conclusions.
.. The appraiser has no present or prospective interest in the properties that
are the subject of this report and no personal interest or bias with
respect to the parties involved.
.. The appraiser's 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 has extensive experience in appraising properties similar to
those comprising the portfolio.
.. The appraisers' analyses, opinions and conclusions were developed and this
report has been prepared in conformity with the agreement between Charles
R. Wilson & Associates, Inc., and PS Partners VI, Ltd. The appraiser has
invoked the Departure Rule of the 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, Charles R. Wilson, MAI, CRE, has
completed the requirements of the continuing education program of the
Appraisal Institute.
.. No one provided significant professional assistance to the person signing
this report.
.. 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).
.. This report indicates the perspective of the appraiser on the market
conditions as of the effective date of the appraisal, February 28, 2002.
.. The appraiser's As Is Market Value for the portfolio, as of February 28,
2002, in Fee Simple Estate is, $87,250,000.
Respectfully submitted,
Charles R. Wilson & Associates, INC.
CHARLES R. WILSON, MAI, CRE
Charles R. Wilson, MAI, CRE
State of California, Certification No. AG002172
Charles R. Wilson & Associates, Inc. 9
Appendix C
PS Partners VI, LTD.
701 Western Avenue, Suite 200
Glendale, CA 91201-2397
Gentlemen:
We have been advised that PS Partners VI, Ltd. (the "Partnership"), a
California Limited Partnership, is entering into a transaction (the
"Transaction") in which the Partnership will be merged with a subsidiary of
Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the limited partners of the Partnership
(the "Limited Partners") will be offered the option of converting their
interests in the Partnership (the "Units") into $546 of cash per Unit or shares
of PSI Common Stock with an equivalent market value based upon the average
closing price of the PSI Common Stock on the New York Stock Exchange during the
20 consecutive trading days ending five trading days prior to the closing date
of the Transaction (collectively, the "Consideration"). We have been further
advised that the Unit price offered to the Limited Partners is equivalent to the
net asset value per Unit based in part on an independent appraisal of the
Partnership's properties. We also have been advised that additional
distributions will be made to the Limited Partners prior to the consummation of
the Transaction to the extent required to cause the Partnership's net asset
value per Unit as of the closing date of the Transaction to be substantially
equivalent to the estimate of the Partnership's net asset value per Unit as
contained in the Information Statement to be filed with the Securities and
Exchange Commission and that in computing the Partnership's net asset value per
Unit as of the closing date of the Transaction, the Partnership's interest in PS
Business Parks, Inc. will be valued at the average of the per share closing
price on the American Stock Exchange of the shares of PS Business Parks Inc.'s
common stock during the 20 consecutive trading days ending on the fifth trading
day prior to the closing date of the Transaction.
The Partnership has requested that Robert A. Stanger & Co., Inc.
("Stanger") provide its opinion as to the fairness to the Limited Partners
(excluding PSI or its affiliates), from a financial point of view, of the
Consideration to be received in the Transaction.
In the course of our review to render this opinion, we have, among
other things:
. Reviewed a draft of the Information Statement related to the
Transaction in substantially the form to be filed with the
Securities and Exchange Commission (the "SEC") and provided to
Limited Partners;
C-1
. Reviewed the Partnership's and PSI's financial statements
contained in Form 10-K filed with the SEC for the years ending
December 31, 1999, 2000, and 2001, and the financial
statements contained in Form 10-Q filed with the SEC for the
three months ended March 31, 2002, which reports the
Partnership's management and PSI's management have indicated
to be the most current financial statements available;
. Reviewed the MAI-certified appraised value of the property
portfolio owned by the Partnership as of February 28, 2002
prepared by Charles R. Wilson & Associates, Inc. (the
"Appraisal");
. Reviewed information regarding purchases and sales of
self-storage properties by PSI or any affiliated entities and
other information available relating to acquisition criteria
for self-storage properties;
. Reviewed internal financial analyses and forecasts prepared by
the Partnership, and based in part on the Appraisal, of the
current net liquidation value per Unit of the Partnership's
assets and projections of cash flow from operations, cash flow
distributions and going-concern values per Unit for the
Partnership, including the Partnership's calculation of the
allocation of such values between the joint venture partners
and between the limited and general partners;
. Discussed with certain members of management of the
Partnership and PSI conditions in self-storage property
markets, conditions in the market for sales/acquisitions of
properties similar to those owned by the Partnership, current
and projected operations and performance, and the financial
condition and future prospects of the Partnership and PSI;
. Reviewed historical market prices, trading volume and
dividends for PSI Common Stock, and secondary market
transactions involving interests in the Partnership; and
. Conducted other studies, analyses, inquiries and
investigations, as we deemed appropriate.
In rendering this fairness opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the Information Statement or that was
furnished or otherwise communicated to us by the Partnership and PSI. We have
not performed an independent appraisal of the assets and liabilities of PSI, the
Partnership or any joint ventures and have relied upon and assumed the accuracy
of the restricted appraisal and adjustments included therein, including but not
limited to the amount and timing of deferred maintenance items, performed by
Charles R. Wilson & Associates, Inc. We have also relied on the assurance of the
Partnership and PSI that any pro forma financial statements, projections,
budgets, estimates of deferred maintenance or environmental liability, or value
estimates contained in the Information Statement or otherwise
C-2
provided to us, were reasonably prepared on bases consistent with actual
historical experience and reflect the best currently available estimates and
good faith judgments; that the allocation of Consideration to the Limited
Partners has been determined by the Partnership in accordance with the
provisions of the joint venture and Partnership Agreements in the same manner
they would be allocated upon the joint venture's and Partnership's liquidation;
that no material changes have occurred in the appraised value of the properties
or the information reviewed between the date of the Appraisal or the date of the
other information provided and the date of this letter; and that the Partnership
and PSI are not aware of any information or facts that would cause the
information supplied to us to be incomplete or misleading in any material
respect.
We have not been requested to, and therefore did not: (i) select the
method of determining the Consideration offered in the Transaction; (ii) make
any recommendation to the Limited Partners of the Partnership as to whether to
select the cash or Common Stock option in the Transaction; or (iii) express any
opinion as to the business decision to effect the Transaction, alternatives to
the Transaction, or tax factors resulting from the Transaction or relating to
PSI's continued qualification as a REIT. Our opinion is based on business,
economic, real estate and securities markets, and other conditions as of the
date of our analysis and addresses the Transaction in the context of information
available as of the date of our analysis. Events occurring after that date may
materially affect the assumptions used in preparing the opinion.
Based upon and subject to the foregoing, and in reliance thereon, it is
our opinion that as of the date of this letter the Consideration to be received
in the Transaction is fair to the public Limited Partners of the Partnership
from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Partnership that our entire analysis must be considered as a whole
and that selecting portions of our analysis and the factors considered by us,
without considering all analyses and facts, could create an incomplete view of
the evaluation process underlying this opinion.
Yours truly,
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
July 11, 2002
C-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors, Officers and Agents.
In August 1988, the Company's Articles of Incorporation were amended
(as approved by the shareholders in August 1988) to provide that the Company may
indemnify the agents of the Company to the maximum extent permitted under
California law. See Section V of the Certificate of Amendment of Articles of
Incorporation (Exhibit 3.11) and Article VII of the By-Laws (Exhibit 3.24) which
are incorporated herein by this reference. In October 1988, the Company also
entered into indemnity agreements (in the form approved by the shareholders in
August 1988) with its management and non-management directors and executive
officers. The agreements permit the Company to indemnify directors and executive
officers to the maximum extent permitted under California law and prohibit the
Company from terminating its indemnification obligations as to acts or omissions
of any director or executive officer occurring before the termination. The
indemnification and limitations on liability permitted by the amendment to the
Articles of Incorporation and the agreements are subject to the limitations set
forth by California law. The Company believes the indemnification agreements
will assist it in attracting and retaining qualified individuals to serve as
directors and executive officers of the Company.
ITEM 21. Exhibits and Financial Statement Schedules.
(a) Exhibits: See Exhibit Index contained herein.
(b) Financial Statement Schedules:
See Index to Financial Statement Schedules in registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 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.
(iii) To include any material information with respect to the plan of
distribution not previously
II-1
disclosed in the registration statement or any material change to
such information in the registration statement. Provided,
however, that paragraphs 1.(i) and 1.(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
4. That, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
5. That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
6. That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
7. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
8. Except as permitted by General Instruction H to Form S-4 (in a transaction
not covered by General Instruction I), to supply by means of a post-
effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification
II-2
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.
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 11th day of July, 2002.
PUBLIC STORAGE, INC.
By: /S/ HARVEY LENKIN
-----------------
Harvey Lenkin, President
Each person whose signature appears below hereby authorizes B. Wayne
Hughes and Harvey Lenkin, and each of them, as attorney-in-fact and agent, with
full powers of substitution and resubstitution, to sign on his behalf,
individually and in each capacity stated below, any amendment, including
post-effective amendments to this Registration Statement and/or to sign any
related registration statement filed pursuant to Rule 462(b) of the Securities
Act of 1933, as amended, and in each case to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, with full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully
as to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone, or his substitute(s), may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
-------------------------------- ----------------------------------------------------- -------------
/s/ B. Wayne Hughes Chairman of the Board, Chief Executive Officer and July 11, 2002
--------------------------------
B. Wayne Hughes Director (principal executive officer)
/s/ Harvey Lenkin President and Director July 11, 2002
--------------------------------
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Vice President and Director July 11, 2002
--------------------------------
B. Wayne Hughes, Jr.
/s/ Marvin M. Lotz Senior Vice President and Director July 11, 2002
--------------------------------
Marvin M. Lotz
/s/ John Reyes Senior Vice President and Chief Financial Officer July 11, 2002
--------------------------------
John Reyes (principal financial officer and principal accounting
officer)
/s/ Robert J. Abernethy Director July 11, 2002
--------------------------------
Robert J. Abernethy
II-3
/s/ Dann V. Angeloff Director July 11, 2002
--------------------------------
Dann V. Angeloff
/s/ William C. Baker Director July 11, 2002
--------------------------------
William C. Baker
________________________________ Director
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director July 11, 2002
--------------------------------
Uri P. Harkham
/s/ Daniel C. Staton Director July 11, 2002
--------------------------------
Daniel C. Staton
II-4
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization among Registrant, PS Partners VI
Merger Co., Inc. and PS Partners VI, Ltd., a California Limited
Partnership dated as of February 25, 2002 (filed as Appendix A to the
Information Statement and Prospectus).
3.1 Restated Articles of Incorporation. Filed with Registrant's Registration
Statement No. 33-54557 and incorporated herein by reference.
3.2 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series A. Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock,
Series B. Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the 9.20% Cumulative
Preferred Stock, Series B. Filed with Registrant's Registration Statement
No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Cumulative Preferred
Stock, Series C. Filed with Registrant's Registration Statement No.
33-54557 and incorporated herein by reference.
3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock,
Series D. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.50% Cumulative Preferred Stock, Series D and
incorporated herein by reference.
3.8 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series E. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 10% Cumulative Preferred Stock, Series E and incorporated
herein by reference.
3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock,
Series F. Filed with Registration's Form 8-A/A Registration Statement
relating to the 9.75% Cumulative Preferred Stock, Series F and
incorporated herein by reference.
3.10 Certificate of Determination for the Convertible Participating Preferred
Stock. Filed with Registrant's Registration Statement No. 33-63947 and
incorporated herein by reference.
3.11 Certificate of Amendment of Articles of Incorporation, Filed with
Registrant's Registration Statement No. 33-63947 and incorporated herein
by reference.
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock,
Series G. Filed with Registration's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000/th/ of a
Share of 8-7/8% Cumulative Preferred Stock, Series G and incorporated
herein by reference.
3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock,
Series H. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000/th/ of a
Share of 8.45% Cumulative Preferred Stock, Series H and incorporated
herein by reference.
3.14 Certificate of Determination for the Convertible Preferred Stock, Series
CC. Filed with Registrant's Registration Statement No. 333-03749 and
incorporated herein by reference.
3.15 Certificate of Correction of Certificate of Determination for the
Convertible Participating Preferred Stock. Filed with Registrant's
Registration Statement No. 333-08791 and incorporated herein by
reference.
3.16 Certificate of Determination for 8-5/8% Cumulative Preferred Stock,
Series I. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share of
8-5/8% Cumulative Preferred Stock, Series I and incorporated herein by
reference.
3.17 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 333-18395 and incorporated herein
by reference.
3.18 Certification of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference.
3.19 Certificate of Determination for Equity Stock, Series AA. Filed with
Registrant's Form 10-Q for the quarterly period ended September 30, 1999
and incorporated herein by reference.
3.20 Certificate Decreasing Shares Constituting Equity Stock, Series A. Filed
with Registrant's Form 10-Q for the quarterly period ended September 30,
1999 and incorporated herein by reference.
3.21 Certificate of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended September 30, 1999
and incorporated herein by reference.
3.22 Certification of Determination for 8% Cumulative Preferred Stock, Series
J. Filed with Registrant's Form 8-A/A Registration Statement relating to
the Depositary Shares Each Representing 1/1,000 of a Share of 8%
Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.23 Certificate of Correction of Certificate of Determination for the 8.25%
Convertible Preferred Stock. Filed with Registrant's Registration
Statement No. 333-61045 and incorporated herein by reference.
3.24 Certification of Determination for 8-1/4% Cumulative Preferred Stock,
Series K. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share of
8-1/4% Cumulative Preferred Stock, Series K and incorporated herein by
reference.
3.25 Certificate of Determination for 8-1/4% Cumulative Preferred Stock,
Series L. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share of
8-1/4% Cumulative Preferred Stock, Series L and incorporated herein by
reference.
3.26 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series
M. Filed with Registrant's Form 8-A/A Registration Statement relating to
the Depositary Shares Each Representing 1/1,000 of a Share of 8.75%
Cumulative Preferred Stock, Series M and incorporated herein by
reference.
3.27 Certificate of Determination for Equity Stock, Series AAA. Filed with
Registrant's Current Report on Form 8-K dated November 15, 1999 and
incorporated herein by reference.
3.28 Certification of Determination for 9.5% Cumulative Preferred Stock,
Series N. Filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
3.29 Certification of Determination for 9.125% Cumulative Preferred Stock,
Series O. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000 and incorporated herein by
reference.
3.30 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series
P. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 and incorporated herein by
reference.
3.31 Certificate of Determination for 8.600% Cumulative Preferred Stock,
Series Q. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share of
8.600% Cumulative Preferred Stock, Series Q and incorporated herein by
reference.
3.32 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.33 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.34 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.35 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.36 Amendment to Bylaws adopted on February 10, 1998. Filed with Registrant's
Current Report on Form 8-K dated February 10, 1998 and incorporated
herein by reference.
3.37 Amendment to Bylaws adopted on March 4, 1999. Filed with Registrant's
Current Report on Form 8-K dated March 4, 1999 and incorporated herein by
reference.
3.38 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrant's Form
10-Q for the quarterly period ended March 31, 1999 and incorporated
herein by reference.
5.1 Legality Opinion. Filed herewith.
8.1 Tax Opinion. Filed herewith.
10.1 Second Amended and Restated Management Agreement by and among Registrant
and the entities listed therein dated as of November 16, 1995. Filed with
PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.2 Amended Management Agreement between Registrant and Public Storage
Commercial Properties Group, Inc. dated as of February 21, 1995. Filed
with Registrant's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.
10.3 Loan Agreement between Registrant and Aetna Life Insurance Company dated
as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K
dated July 14, 1988 and incorporated herein by reference.
10.4 Amendment to Loan Agreement between Registrant and Aetna Life Insurance
Company dated as of September 1, 1993. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference.
10.5 Second Amended and Restated Credit Agreement by and among Registrant,
Wells Fargo Bank, National Association, as agent, and the financial
institutions party thereto dated as of February 25, 1997. Filed with
Registrant's Registration Statement No. 333-22665 and incorporated herein
by reference.
10.6 Note Assumption and Exchange Agreement by and among Public Storage
Management, Inc., Public Storage, Inc., Registrant and the holders of the
notes dated as of November 13, 1995. Filed with Registrant's Registration
Statement No. 33-64971 and incorporated herein by reference.
10.7* Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference.
10.8* Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 and incorporated
herein by reference.
10.9* Registrant's 1996 Stock Option and Incentive Plan. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000 and incorporated herein by reference.
10.10 Deposit Agreement dated as of December 13, 1995, among Registrant, The
First National Bank of Boston, and the holders of the depositary receipts
evidencing the Depositary Shares Each Representing 1/1,000 of a Share of
8-7/8 Cumulative Preferred Stock, Series G. Filed with Registrant's Form
8-A/A Registration Statement relating to the Depositary Shares Each
Representing 1/1000/th/ of a Share of 8-7/8 Cumulative Preferred Stock,
Series G and incorporated herein by reference.
10.11 Deposit Agreement dated as of January 25, 1996, among Registrant, The
First National Bank of Boston, and the holders of the depositary receipts
evidencing the Depositary Shares Each Representing 1/1,000 of a Share of
8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form
8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1000/th/ of a
Share of 8.45% Cumulative Preferred Stock, Series H and incorporated
herein by reference.
10.12** Employment Agreement between Registrant and B. Wayne Hughes dated as of
November 16, 1995. Filed with Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference.
10.13 Deposit Agreement dated as of November 1, 1996, among Registrant, The
First National Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of a
Share of 8-5/8% Cumulative Preferred Stock, Series I. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1000/th/ of a Share of 8-5/8%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
10.14 Limited Partnership Agreement of PSAF Development Partners, L. P.
between PSAF Development, Inc. and the Limited Partner dated as of April
10, 1997. Filed with Registrant's Form 10-Q for the quarterly period
ended March 31, 1997 and incorporated herein by reference.
10.15 Deposit Agreement dated as of August 28, 1997 among Registrant, The
First National Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of a
Share of 8% Cumulative Preferred Stock, Series J. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative
Preferred Stock, Series J and incorporated herein by reference.
10.16 Agreement of Limited Partnership of PS Business Parks, L. P. dated as of
March 17, 1998. Filed with PS Business Parks, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.
10.17 Deposit Agreement dated as of January 19, 1999 among Registrant,
BankBoston, N. A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4%
Cumulative Preferred Stock, Series K. Filed with Registrant's Form 8-A/A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock,
Series K and incorporated herein by reference.
10.18 Agreement and Plan of Merger among Storage Trust Realty, Registrant and
Newco Merger Subsidiary, Inc. dated as of November 12, 1998. Filed with
Registrant's Registration Statement No. 333-68543 and incorporated
herein by reference.
10.19 Amendment No. 1 to Agreement and Plan of Merger among Storage Trust
Realty, Registrant, Newco Merger Subsidiary, Inc. and STR Merger
Subsidiary, Inc. dated as of January 19, 1999. Filed with Registrant's
Registration Statement No. 333-68543 and incorporated herein by
reference.
10.20 Amended and Restated Agreement of Limited Partnership of Storage Trust
Properties, L. P., dated as of March 12, 1999. Filed with Registrant's
Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference.
10.21* Storage Trust Realty 1994 Share Incentive Plan. Filed with Storage Trust
Realty's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by reference.
10.22 Amended and Restated Storage Trust Realty Retention Bonus Plan effective
as of November 12, 1998. Filed with Registrant's Registration Statement
No. 333-68543 and incorporated herein by reference.
10.23 Deposit Agreement dated as of March 10, 1999 among Registrant, Bank
Boston, N.A. and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4%
Cumulative Preferred Stock, Series L. Filed with Registrant's Form 8-A/A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock,
Series L and incorporated herein by reference.
10.24 Note Purchase Agreement and Guaranty Agreement with respect to
$100,000,000 of Senior Notes of Storage Trust Properties, L.P. Filed
with Storage Trust Realty's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
10.25 Deposit Agreement dated as of August 17, 1999 among Registrant, Bank
Boston, N.A. and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 8.75%
Cumulative Preferred Stock, Series M. Filed with Registrant's Form 8-A/A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock,
Series M and incorporated herein by reference.
10.26 Limited Partnership Agreement of PSAC Development Partners, L.P. among
PS Texas Holdings, Ltd., PS Pennsylvania Trust and PSAC Storage
Investors, L.L.C. dated as November 15, 1999. Filed with Registrant's
Current Report on Form 8-K dated November 15, 1999 and incorporated
herein by reference.
10.27 Agreement of Limited Liability Company of PSAC Storage Investors, L.L.C.
dated as of November 15, 1999. Filed with Registrant's Current Report on
Form 8-K dated November 15, 1999 and incorporated herein by reference.
10.28 Deposit Agreement dated as of January 14, 2000 among Registrant,
BankBoston, N.A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of Equity
Stock, Series A. Filed with Registrant's Form 8-A/A Registration
Statement relating to the Depositary Shares Each Representing 1/1,000 of
a Share of Equity Stock, Series A and incorporated herein by reference.
10.29 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the
Limited Partners dated as of March 29, 2000. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference.
10.30 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the
Limited Partners dated as of August 11, 2000. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 and incorporated herein by reference.
10.31* Registrant's 2000 Non-Executive/Non-Director Stock Option and Incentive
Plan. Filed with Registrant's Registration Statement No. 333-52400 and
incorporated herein by reference.
10.31 Deposit Agreement dated as of January 19, 2001 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 8.600%
Cumulative Preferred Stock, Series Q. Filed with Registrant's Form 8-A/A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock,
Series Q and incorporated herein by reference.
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of A. Timothy Scott (included in Exhibit 8.1).
23.4 Consent of Charles R. Wilson & Associates, Inc. Filed herewith.
23.5 Consent of Robert A. Stanger & Co., Inc. Filed herewith.
99.1 Cash Election Form. Previously filed.
99.2 Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc.
dated April 4, 2002 (filed as Appendix B to the Information Statement
and Prospectus).
99.3 Opinion of Robert A. Stanger & Co., Inc. dated June 26, 2002 (filed as
Appendix C to the Information Statement and Prospectus).
99.4 General Partnership Agreement of SEI/PSPVI Joint Ventures between
Registrant and PS Partners VI, Ltd., a California Limited Partnership,
dated as of December 31, 1990. Filed with the form 10-K/A of PS Partners
VI, Ltd. dated July 11, 2002 and incorporated herein by reference.