As filed with the Securities and Exchange Commission on _______________, 2002
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------
PUBLIC STORAGE, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-3551121 6798
I.R.S. Employer Identification No.) (Primary Standard Industrial
Classification Code Number)
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
of registrant's principal executive offices) code, and telephone 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 1,500,000 (1) $12,994,443(1) $1,196(1)(2)
share shares(1)
===================================================================================================================
(1) This Registration Statement relates to the proposed acquisition by the
Registrant of all of the 55,150 units of limited partnership interest
("Units") in PS Partners V, Ltd., a California Limited Partnership (the
"Partnership") that are not currently owned by the Registrant. The
Registrant's acquisition of the 55,150 Units will be accomplished through a
merger of a subsidiary of the Registrant into the Partnership and the
conversion of the 55,150 Units into either cash or common stock of the
Registrant. The book value of the Units at September 30, 2001 was $235.62
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. $1,196 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.
================================================================================
Preliminary Copy
Confidential, For
Use of the Commission Only
PS Partners V, Ltd.,
a California Limited Partnership
701 Western Avenue
Glendale, California 91201-2397
____________________, 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, 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 $596 in Public Storage common
stock or, at your election, in cash.
The Partnership is not asking you to approve the merger or related
amendment to the partnership agreement. Public Storage, the holder of a majority
of the Partnership units, has executed a written consent approving the merger
and the related amendment to the partnership agreement.
We are not asking you for a proxy and you are requested not to send us
a proxy. If you want to receive cash in this transaction, you must make a cash
election by ____________, 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 V, 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 V, 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, 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 $596 in
Public Storage common stock or, at your election, in cash.
See "Risk Factors" beginning on page 12 for certain factors that you
should consider, including the following:
o Public Storage owns sufficient Partnership units to approve the merger
without your vote and has done so.
o 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.
o 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.
o 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.
o 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.
o The Partnership's assets might be worth more later. Public Storage will
realize the benefit of any increase in value.
o You will not be entitled to dissenters' rights of appraisal under
California law in the merger.
o 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
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.................................2
Benefits to Insiders.......................................................................................2
Potential Benefits of the Merger...........................................................................3
The Partnership............................................................................................3
Public Storage.............................................................................................3
Address and Phone Number...................................................................................3
Background and Reasons for the Merger......................................................................3
Detriments of the Merger...................................................................................4
Determination of Amounts to be Received by Limited Partners in the Merger..................................4
Federal Income Tax Matters.................................................................................5
Fairness Analysis; Opinion of Financial Advisor............................................................5
Comparison of Partnership Units with Public Storage Common Stock...........................................7
Summary Financial Information..............................................................................9
Relationships.............................................................................................10
Risk Factors.....................................................................................................12
Public Storage has approved the merger without your vote..................................................12
Public Storage and the Partnership have not hired anyone to represent you.................................12
The merger is taxable to you..............................................................................12
The merger will change your investment from finite life to infinite life if you receive stock.............12
Your level of distributions may be lower after the merger if you receive stock............................12
You will not benefit from any increase in value of the properties.........................................12
You have no dissenters' rights of appraisal...............................................................12
Public Storage has conflicts of interest in the merger....................................................12
The Hughes family could control Public Storage............................................................13
Provisions in Public Storage's organizational documents may prevent changes in control....................13
The number of shares of Public Storage common stock to be issued in the merger has not been determined....13
Public Storage would incur adverse tax consequences if it fails to qualify as a REIT......................13
Public Storage would incur a corporate level tax if it sold certain assets................................13
Public Storage and its shareholders are subject to financing risks........................................13
The merger payments are based on an appraisal instead of arm's length negotiation.........................14
Public Storage is subject to real estate operating risks..................................................14
Public Storage has no interest in Canadian mini-warehouses................................................15
The portable self-storage business has incurred operating losses..........................................15
ii
Page
Benefits to Insiders.............................................................................................16
About This Information Statement and Prospectus..................................................................16
Where You Can Find More Information..............................................................................16
Cautionary Statement.............................................................................................18
The Merger.......................................................................................................19
General...................................................................................................19
Background and Reasons for the Merger.....................................................................19
Fairness Analysis.........................................................................................20
Alternatives to the Merger................................................................................20
Liquidation...........................................................................................20
Continued Ownership of the Partnership................................................................21
Determination of Amounts to be Received by Limited Partners in the Merger.................................21
Potential Benefits of the Merger..........................................................................22
Detriments of the Merger..................................................................................23
Fairness Analysis.........................................................................................23
Comparison of Consideration to be Received in the Merger to Other Alternatives............................24
Real Estate Portfolio Appraisal by TNG....................................................................27
Fairness Opinion from Stanger.............................................................................29
The Merger Agreement......................................................................................33
Cash Election Procedure...................................................................................35
Consequences to the Partnership if the Merger is Not Completed............................................35
Costs of the Merger.......................................................................................35
Accounting Treatment......................................................................................36
Regulatory Requirements...................................................................................36
Comparison of Partnership Units with Public Storage Common Stock..........................................36
Amendment to Partnership Agreement...............................................................................41
Approval of the Merger and Partnership Agreement Amendment.......................................................42
General...................................................................................................42
Security Ownership of Certain Beneficial Owners and Management............................................42
Security Ownership of Certain Beneficial Owners ..........................................................42
Certain Related Transactions.....................................................................................49
Description of Partnership's Properties..........................................................................50
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......................................................................................60
Preferred Stock...........................................................................................61
Equity Stock..............................................................................................62
Effects of Issuance of Capital Stock......................................................................62
Federal Income Tax Considerations................................................................................63
Opinion of Counsel........................................................................................63
The Merger................................................................................................64
Taxation of Public Storage as a REIT......................................................................64
U.S. Taxation of Non-U.S. Shareholders....................................................................75
Information Reporting and Backup Withholding Tax Applicable to Shareholders...............................77
State and Local Taxes............................................................................................78
Legal Opinions...................................................................................................78
Experts..........................................................................................................79
iii
Appendix A - Agreement and Plan of Reorganization among Public Storage,
PS Partners V Merger Co., Inc. and the Partnership dated as
of February 25, 2002.
Appendix B - Real Estate Appraisal Report by The Nicholson Group, Ltd.
for the Partnership dated February 22, 2002
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated March 7, 2002
Appendix D - Proposed Amendment to Partnership Agreement
Appendix E - Financial Statements of the Partnership
Appendix F - Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Partnership
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:
o A wholly owned, second tier subsidiary of Public Storage will be
merged into the Partnership.
o Each Partnership unit (other than units owned by Public Storage)
will be converted into the right to receive a value of $596 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.
o The Partnership will make distributions to holders of Partnership
units to cause the estimated net asset value per unit as of
______, 2002, the Effective Date, to be substantially equivalent
to $596.
o 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.
o Following the merger, Public Storage will own all Partnership
units (through wholly owned entities).
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:
o Vote by Public Storage. Public Storage owns sufficient Partnership
units to approve the merger without your vote and has done so.
o No Arm's Length Negotiation or Independent Representatives. Public
Storage and the Partnership have not (1) negotiated the merger at
arm's length or (2) hired independent persons to negotiate the
terms of the merger for you. If independent persons had been
hired, the terms of the merger may have been more favorable to
you. In addition, Public Storage and the Partnership have not
asked any person to make an offer to buy the Partnership's assets.
Other offers could have generated higher prices.
o The Merger Is Taxable. The merger will be taxable for most of you.
This means that original taxable limited partners who receive
either cash or stock will recognize a substantial taxable gain.
o Change from Finite Life to Infinite Life. After the merger, if you
do not elect cash you will own an investment in an ongoing
integrated real estate company instead of an interest in a
specified portfolio of properties for a fixed period. Public
Storage.
1
* 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.
o 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.
o 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.
o No Dissenters' Rights of Appraisal. You will not be entitled to
dissenters' rights of appraisal under California law in the
merger.
o 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.
o 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.
o 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.
o 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."
o Financing Risks. Public Storage, unlike the Partnership, borrows
money ($149 million at September 30, 2001), which increases the
risk of loss.
o 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
($1.67 billion at September 30, 2001) 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.
2
o 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:
o 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.
o 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.
o 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.
o Eliminate Conflicts of Interest. The merger will eliminate the
conflicts of interest resulting from the competition of the
Partnership's properties with other mini-warehouses owned by
Public Storage.
Potential Benefits of the Merger
The following are the principal potential benefits of the merger to
you:
(1) If you elect to receive cash, you will liquidate your investment at
approximately 119% of your original investment (excluding prior
distributions received) and 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:
o 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.
o Increased Liquidity. There is no active market for the Partnership
units. In comparison, Public Storage has approximately 113 million
shares of common stock listed on the NYSE with an average daily
trading volume during the 12 months ended September 30, 2001 of
approximately 174,000 shares. Given Public Storage's market
capitalization and trading volume, you are likely to enjoy a more
active trading market and increased liquidity for the Public
Storage common stock you receive.
o Simplified Tax Reporting. The merger will simplify your tax
reporting for years after 2002.
The Partnership
The Partnership owns one mini-warehouse directly and interests in 32
mini-warehouses jointly with Public Storage (collectively, the "Properties").
The Partnership also owns a 1% interest in PS Business Parks, L.P. ("PSBP")
alone and an additional 2% interest jointly with Public Storage. Public Storage
has a significant interest in PSBP, which owns and operates commercial
properties. See "Description of Partnership's Properties."
3
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 September 30, 2001, Public Storage had equity interests
(through direct ownership, as well as general and limited partnership interests)
in 1,378 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 91201-2397. The
telephone number is (818) 244-8080.
Background and Reasons for the Merger
Public Storage and the Partnership have not negotiated the merger at
arm's length. Public Storage has structured the merger. Public Storage controls
the Partnership and has significant conflicts of interest in connection with,
and will benefit from, the merger. Public Storage and Mr. Hughes, the general
partners of the Partnership, believe that the merger is fair to you. This is
based in significant part on a third party appraisal of the Properties and on
the opinion of a financial advisor, in which the general partners concur.
The general partners organized the Partnership in 1985 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, The Nicholson
Group, Ltd. ("TNG"), as of December 31, 2001. The general partners believe that
the merger is fair to you. This is based in significant part on the TNG
appraisal of the Properties and on the opinion of a financial advisor, Robert A.
Stanger & Co., Inc. ("Stanger"), in which the general partners concur.
The general partners considered liquidation and continued ownership by
limited and general partners as alternatives to the merger. Based on a
comparison of the potential benefits and detriments of the merger with these
alternatives, the general partners concluded that the merger would be more
attractive to you than the alternatives considered. The general partners did not
ask any person to buy the Partnership's assets.
In comparing the merger to other alternatives, the general partners
noted the following:
4
Liquidation. The general partners oppose a sale of the Properties
because they believe that the Properties may continue to appreciate in value. In
the merger, you may either (1) convert your investment into an investment in
Public Storage, which like the Partnership primarily owns mini-warehouses, or
(2) receive cash based on the appraised value of the Properties. However, if the
Partnership liquidated its assets through asset sales to unaffiliated third
parties, you would not need to rely upon a real estate portfolio appraisal to
estimate the fair market value of the Properties.
Continued Ownership. The Partnership is operating profitably. Continued
ownership by the limited and general partners should provide you with continued
distributions of net operating cash flow and participation in any future
potential appreciation of the Properties and would avoid many of the risks
described under "Risk Factors." However, continued ownership by the limited and
general partners would fail to secure the potential benefits of the merger to
you described under "The Merger - Potential Benefits of the Merger" or to Public
Storage described under "The Merger - Benefits to Insiders."
Detriments of the Merger
For a summary of certain risks and detriments of the merger, refer to
"- Summary Risk Factors" beginning on page 2.
Determination of Amounts to be Received by Limited Partners in the Merger
The general partners have determined the amount to be received by you
in the merger based on the estimated net asset value per Partnership unit
computed as follows:
Estimated value of Partnership's interest in the Properties (1) $63,419,000
Plus:
Market value of Partnership's interest in PSBP (2) 24,271,000
Partnership's interest in other tangible net assets and liabilities (3)
1,343,000
--------------
Net proceeds available for distribution 89,033,000
Distributions to general partners (4) (890,000)
--------------
Distributions to limited partners $88,143,000
==============
Amount per Partnership unit (5) $596
==============
---------------
(1) Reflects appraised value of the Properties determined by TNG as of
December 31, 2001. 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 TNG".
(2) Reflects closing price of shares of PS Business Parks, Inc. on The
American Stock Exchange, Inc. ("AMEX") as of December 31, 2001 (the
PSBP partnership interests are exchangeable for those shares on a one
unit for one share basis). Assumes a sale of the units at that price
and an allocation of the proceeds between the Partnership and Public
Storage based on their joint venture agreement. See note (7) to table
in "The Merger - Determination of Amounts to be Received by Limited
Partners in the Merger."
(3) Reflects the Partnership's interest in cash and other non-real estate
assets offset by the Partnership's interest in prepaid rents, security
deposits, accounts payable and accrued expenses as of September 30,
2001.
(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 148,000 Partnership units.
5
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 $320 of taxable gain per Partnership unit as a result
of the merger (assuming that the merger is effective as of the end of the first
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 TNG appraisal and the
opinion of a financial advisor, in which the general partners concur.
The general partners base their conclusion on the following factors:
o The TNG appraisal of the Properties.
o Stanger delivered a fairness opinion to the Partnership.
o 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.
o 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:
o the prices of the limited secondary sales of Partnership units;
o a range of estimated going-concern values per unit;
o an estimated liquidation value per unit; and
o 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
6
o the independent appraised value of the Properties;
o 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;
o financial analyses and projections prepared by the general
partners concerning the going-concern value of the Partnership
under its current business plan; and
o a comparison of limited secondary sales prices of Partnership
units with the consideration being received by you in the merger.
o The Partnership did not ask Stanger to
o select the method of determining the consideration being received
by you in the merger;
o make any recommendation to you whether to select cash or Public
Storage common stock in the merger; or
o express any opinion as to the business decision regarding the
merger or its alternatives or tax factors resulting from the
merger or relating to Public Storage's qualification as a REIT.
Stanger's opinion is based on business, economic, real estate and
securities markets and other conditions as of the date of its analysis. See "The
Merger - Fairness Opinion from Stanger."
The general partners believe that hiring TNG to appraise the Properties
and Stanger to deliver a fairness opinion helped the general partners fulfill
their duties to you. However, the Partnership is paying TNG and Stanger for
their services and Public Storage is expected to pay them for other assignments.
See "The Merger - Real Estate Portfolio Appraisal by TNG" and "- Fairness
Opinion from Stanger."
7
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.
Public Storage:
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."
If you receive Public Storage common stock in the merger, you will
change your investment from "finite-life" to "infinite life" and realize the
value of your investment only by selling your Public Storage common stock. If
Public Storage issues additional securities, including securities that would
have priority over Public Storage common stock as to cash flow, distributions
and liquidation proceeds, it will dilute the interest of Public Storage
shareholders. Public Storage intends to issue additional securities under a
currently effective registration statement. See "Risk Factors - Uncertainty
Regarding Market Price of Public Storage Common Stock" and "- Financing Risks -
Dilution and Subordination."
BORROWING POLICIES
Partnership:
No outstanding borrowings.
Public Storage:
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
Partnership:
Limited partner approval required for a variety of business transactions with
affiliates. See "Amendment to Partnership Agreement."
Public Storage:
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.
8
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 SEPTEMBER 30, 2001)
Partnership:
Direct and indirect equity interests in 33 mini-warehouses in 14 states. Also
owns an interest in PSBP.
Public Storage:
Direct and indirect equity interests in 1,378 storage facilities in 37 states.
Also owns 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
Partnership:
No active trading market for Partnership units. The Partnership may not issue
securities having priority over Partnership units.
Public Storage:
Public Storage common stock is traded on the NYSE. During the 12 months ended
September 30, 2001, the average daily trading volume of Public Storage common
stock was approximately 174,000 shares. Public Storage has issued, and may in
the future issue, securities that have priority over Public Storage common stock
as to cash flow, distributions and liquidation proceeds.
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
Partnership:
The partnership agreement does not provide for the issuance of additional
Partnership units.
Public Storage:
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.
9
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:
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
($ In thousands, except per share data) (unaudited)
Operating Data:
Total revenues $336,376 $469,051 $581,085 $676,734 $757,310 $560,711 $620,986
Depreciation and amortization 64,999 92,750 111,799 137,719 148,967 109,509 123,646
Interest expense 8,482 6,792 4,507 7,971 3,293 3,293 3,023
Minority interest in income 9,363 11,684 20,290 16,006 38,356 26,565 35,370
Net income $153,549 $178,649 $227,019 $287,885 $297,088 $222,516 $240,012
Balance Sheet Data (at end
of period):
Total cash and cash
equivalents $26,856 $41,455 $51,225 $55,125 $89,467 $104,599 $288,393
Total assets 2,572,152 3,311,645 3,403,904 4,214,385 4,513,941 4,486,678 4,733,646
Total debt 108,443 103,558 81,426 167,338 156,003 160,723 149,058
Minority interest 116,805 288,479 139,325 186,600 532,918 528,406 503,102
Shareholders' equity $2,305,437 $2,848,960 $3,119,340 $3,689,100 $3,724,117 $3,691,175 $4,004,487
Per Share of Common Stock:
Net income-basic (1) $1.10 $.92 $1.30 $1.53 $1.41 $1.06 $1.14
Net income-diluted (1) 1.10 .91 1.30 1.52 1.41 1.06 1.13
Distributions (2) .88 .88 .88 1.52 1.48 1.26 1.09
Book value (at end of $15.43 $17.19 $18.30 $18.95 $18.84 $18.70 $18.12
period)(3)
Weighted average-diluted
shares of common stock (in
thousands) 77,358 98,961 114,357 126,669 131,657 131,975 123,977
---------------
Footnotes on next page.
10
Partnership:
Nine Months
Years Ended December 31, Ended September 30,
--------------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
(In thousands, except per unit data)
Operating Data:
Total revenues $3,467 $3,420 $3,930 $4,199 $5,505 $3,928 $4,577
Depreciation and amortization 521 49 49 55 33 39 45
Net income
Limited partners' share 1,771 2,692 3,190 3,254 4,566 3,173 3,963
General partners' share 416 426 431 632 615 496 365
Balance Sheet Data (at end of
period)
Cash and cash equivalents 194 1,002 2,702 2,295 2,300 2,231 2,641
Total assets 38,192 37,306 36,935 34,876 34,327 33,862 35,371
Limited Partners' per Unit Data (4)
Net income $11.97 $18.19 $21.55 $21.99 $30.85 $21.43 $26.78
Cash distributions (5) 24.00 24.00 24.00 36.03 34.23 27.93 19.54
Book value (limited partners'
equity) 254.07 248.26 245.82 231.77 228.39 225.27 235.62
Partnership - Pro Forma
Per equivalent Partnership Unit (6):
Net income-diluted $ 18.08
Distributions paid on common stock $ 19.84
Book value (at September 30, 2001) $ 289.92
---------------
(1) Net income per common share is computed in accordance with Statement of
Financial Accounting Standard No. 128 (SFAS 128) - "Earnings per Share"
and is presented on the diluted basis using the weighted average shares
of Public Storage common stock outstanding-diluted. The diluted net
income per common share is computed using the weighted average common
shares outstanding (adjusted for stock options). 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.
(2) 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.
(3) Book value per share computed based on the number of shares of Public
Storage common stock and Public Storage class B common stock
outstanding.
(4) Limited partners' per unit data is based on the weighted average
number of Partnership units (148,000) outstanding during the year.
(5) The Partnership distributed, concurrently with the distribution for the
first quarter of 1999, a portion of the operating reserve estimated at
$12.03 per Unit. In the third quarter of 2000, distributions included
an additional portion of the operating reserve estimated at $9.63 per
Unit. The Partnership distributed $12.64 in the fourth quarter of 2001,
including a special distribution of $6.02.
11
(6) 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 16 (the Partnership's merger value of $596 divided by an
assumed issue price of Public Storage common stock of $37.25).
Relationships
The following charts show the relationships among Mr. Hughes, Public
Storage and the Partnership both before and after the merger (assuming maximum
cash elections). As reflected in the charts below, Mr. Hughes, Public Storage's
chairman of the board and chief executive officer, effectively controls Public
Storage. Public Storage and Mr. Hughes are the general partners of the
Partnership. Public Storage and the Partnership jointly own 32 of the 33
Properties, all of which are managed by Public Storage
Before the Merger
-----------------
Public Storage: Hughes - 34% Public Shareholders - 66%
Partnership: Hughes - General Partner Public Limited Partners - 37%
Public Storage - General Partner, Joint Venture,
Property Manager, 63%
After the Merger
----------------
(Assuming Maximum Cash Elections)
Public Storage: Hughes - 34% Public Shareholders - 66%
Partnership: Hughes - General Partner
Public Storage - General Partner, Joint Venture,
Property Manager, 100%
SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE
------------------------------------------------------------------
OTHER RELATIONSHIPS.
--------------------
PERCENTAGE OF OWNERSHIP OF THE PARTNERSHIP BY PUBLIC STORAGE REPRESENTS
PERCENTAGE OF UNITS OF LIMITED PARTNERSHIP INTEREST OWNED BY PUBLIC STORAGE.
BOTH BEFORE AND AFTER THE MERGER, PUBLIC STORAGE'S GENERAL AND LIMITED PARTNER
INTERESTS ARE OWNED INDIRECTLY THROUGH WHOLLY OWNED ENTITIES. PERCENTAGE OF
STOCK OWNERSHIP OF PUBLIC STORAGE BY MR. HUGHES REPRESENTS PERCENTAGE OF
OUTSTANDING SHARES OF PUBLIC STORAGE COMMON STOCK OWNED BY HUGHES AND MEMBERS OF
HIS IMMEDIATE FAMILY.
12
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 has voted its units
in favor of the merger.
Public Storage and the Partnership have not hired anyone to represent you.
Public Storage and the Partnership have not (1) negotiated the merger
at arm's length or (2) hired independent persons to negotiate the terms of the
merger for you. If independent persons had been hired, the terms of the merger
may have been more favorable to you. In addition, Public Storage and the
Partnership have not asked any person to make an offer to buy the Partnership's
assets. Other offers could have generated higher prices.
The merger is taxable to you.
The merger will be taxable to most of you. This means that original
taxable limited partners who receive either cash or stock will recognize a
substantial taxable gain.
The merger will change your investment from finite life to infinite life if you
receive stock.
The Partnership is a limited partnership organized to hold interests in
properties for a fixed period. In contrast, Public Storage, which is engaged in
all aspects of the mini-warehouse industry, including property development and
management, intends to operate for an indefinite period. Therefore, if you
receive Public Storage common stock in the merger, you will be able to liquidate
your investment only by selling your shares on the NYSE or in private
transactions. The market value of Public Storage common stock may or may not
reflect the full fair market value of Public Storage's assets and will
fluctuate.
Your level of distributions 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.
You will not benefit from any increase in value of the properties.
The Partnership's properties may increase in value and might be able to
be sold for higher prices at a later date. Public Storage will realize the
benefit of any increase in value.
You have no dissenters' rights of appraisal.
Under California law, you will not be entitled to dissenters' rights of
appraisal in connection with the merger.
Public Storage has conflicts of interest in the merger.
Relationships among the parties create conflicts of interest. Because
of the relationships among Public Storage, the Partnership and Hughes, there are
significant conflicts of interest in connection with the merger. Public Storage
and Hughes are the general partners of the Partnership, and Public Storage owns
63% of the Partnership units. See "Summary - Relationships."
13
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:
o 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.
o 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.
o Elimination of Conflicts of Interest. The merger will eliminate
the conflicts of interest resulting from the public limited
partners' ownership of a minority interest in the Partnership. The
principal conflicts involve the competition of the Properties with
other mini-warehouses owned by Public Storage.
The Hughes family could control Public Storage.
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.
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.
14
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 pay full dividends on
the preferred stock could jeopardize Public Storage's qualification as a REIT.
See "Federal Income Tax Considerations - General Tax Treatment of Public
Storage," and "- Consequences of the PSMI Merger on Public Storage's
Qualification as a REIT."
For any taxable year that Public Storage fails to qualify as a REIT and
the relief provisions do not apply, Public Storage would be taxed at the regular
corporate rates on all of its taxable income, whether or not it makes any
distributions to its shareholders. Those taxes would reduce the amount of cash
available to Public Storage for distribution to its shareholders or for
reinvestment. As a result, failure of Public Storage to qualify during any
taxable year as a REIT could have a material adverse effect upon Public Storage
and its shareholders. Furthermore, unless certain relief provisions apply,
Public Storage would not be eligible to elect REIT status again until the fifth
taxable year that begins after the first year for which Public Storage fails to
qualify.
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 any of the assets it acquired in a November 1995 reorganization before
November 2005.
Public Storage and its shareholders are subject to financing risks.
Debt increases risk of loss. In making real estate investments, Public
Storage, unlike the Partnership, borrows money, which increases the risk of
loss. At September 30, 2001, Public Storage's debt of $149 million was
approximately 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
$1.67 billion with respect to preferred stock outstanding at September 30,
2001), 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 $140 million per year with respect
to preferred stock outstanding at September 30, 2001), in preference to holders
of Public Storage common stock.
The merger payments are based on an appraisal instead of arm's length
negotiation.
The payments you receive in the merger is based in significant part on
a third party appraised value of 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.
15
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
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions, changes in supply
of or demand for similar or competing facilities in an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage
funds which may render the sale or financing of a property
difficult or unattractive; and
o changes in tax, real estate and zoning laws.
There is significant competition among mini-warehouses. Like the
Partnership, most of Public Storage's properties are mini-warehouses.
Competition in the market areas in which many of their properties are located is
significant and has affected the occupancy levels, rental rates and operating
expenses of certain of their properties. Any increase in availability of funds
for investment in real estate may accelerate competition. Recent increases in
development of mini-warehouses are expected to further intensify competition
among mini-warehouse operators in certain market areas in which Public Storage
operates.
Public Storage may incur significant environmental costs and
liabilities. Under various federal, state and local environmental laws, an owner
or operator of real estate interests may have to clean up spills or other
releases of hazardous or toxic substances on or from a property. Certain
environmental laws impose liability whether or not the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. In some
cases, liability may not be limited to the value of the property. The presence
of such substances, or the failure to properly remediate any resulting
contamination, also may adversely affect the owner's or operator's ability to
sell, lease or operate its property or to borrow using its property as
collateral.
Public Storage has conducted preliminary environmental assessments of
most of its properties (and intends to conduct such assessments in 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.
16
Public Storage has no interest in Canadian mini-warehouses.
The Hughes family owns and operates mini-warehouses in Canada. Public
Storage has a right of first refusal to acquire the stock or assets of the
corporation engaged in these operations if the Hughes family or the corporation
agree to sell them. However, Public Storage has no interest in the operations of
this corporation and no right to acquire this stock or assets unless the Hughes
family decides to sell.
The 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 the
economic interest of Pickup & Delivery. Since Pickup & Delivery will operate
profitably only if it can succeed in the relatively new field of portable
self-storage, there can be no assurance as to its profitability. Pickup &
Delivery incurred operating losses of $7,396,000 in 1999, $5,135,000 in 2000 and
$1,110,000 for the first nine months of 2001. See "Federal Income Tax
Considerations - General Tax Treatment of Public Storage" concerning the
treatment of income from and investment in Pickup & Delivery for purposes of the
REIT income and asset tests.
17
BENEFITS TO INSIDERS
The merger involves certain benefits to Public Storage, including the
following:
o 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.
o 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.
o 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.
18
Public Storage incorporates by reference the documents listed below:
o Public Storage's Annual Report on Form 10-K for the year ended
December 31, 2000;
o Public Storage's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2001, June 30, 2001; and September 30, 2001;
o Public Storage's Current Reports on Form 8-K dated January 16,
2001, April 5, 2001, September 4, 2001, October 16, 2001, January
15, 2002, and February 13, 2002; and
o 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:
o The Partnership's Annual Report on Form 10-K for the year ended
December 31, 2000;
o The Partnership's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2001, June 30, 2001, September 30, 2001; and
o The Partnership's Current Report on Form 8-K dated February 25,
2002.
The Commission has assigned file number 0-14476 to the reports and
other information that the Partnership files with the Commission.
This statement also incorporates by reference any future filings made
by Public Storage with the Commission under Sections 13(a), 13(c), 14 and 15(d)
of the Exchange Act. You should be aware that any statement contained in this
statement or in a document incorporated by reference may be modified or
superseded by a document filed with the Commission at a later date. Any
statement which has been modified or superseded shall not be considered to
constitute a part of this statement.
You may request a copy of each of the filings of Public Storage or the
Partnership, at no cost, by writing or telephoning Public Storage at the
following address, telephone or facsimile number:
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Telephone: (800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
In order to ensure timely delivery of any documents, you must request
the information by __________________, 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.
19
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.
20
THE MERGER
General
The acquisition of the Partnership units not currently owned by Public
Storage will be accomplished in the merger as follows:
o A wholly-owned, second tier subsidiary of Public Storage will be
merged into the Partnership.
o Each Partnership unit (other than units owned by Public Storage)
will be converted into the right to receive a value of $596 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.
o 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 $596. 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.
o 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.
o Following the merger, Public Storage (through a wholly owned
entity) will own all Partnership units,and the Partnership will
remain in existence.
It is estimated that the aggregate consideration (cash or Public
Storage common stock or a combination of the two) to be paid by Public Storage
to acquire in the merger the Partnership units owned by the public limited
partners (including costs) will be approximately $33.1 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 $74 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.
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 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
21
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 1994
and 1997. As a result of these purchases, public limited partners now own only
37% of the units with the balance owned by Public Storage. Since the Partnership
is beyond its original anticipated term and the public limited partners own only
a minority of the units, the general partners have decided to eliminate through
the merger the ongoing costs of a public structure and the conflicts of interest
resulting from the public limited partners' ownership of a minority interest in
the Partnership. The principal conflicts involve the competition of the
Properties with other mini-warehouses owned by Public Storage.
Public Storage, which was organized in 1980, has from time to time
taken actions to increase its asset and capital base and increase
diversification, such as by increasing its interest in affiliated entities, like
the Partnership. Public Storage's interest in the Partnership include (1) Public
Storage and the Partnership jointly own 32 of the 33 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.
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 TNG and Stanger to
provide the portfolio appraisal and the fairness opinion, respectively, assisted
the general partners in the fulfillment of their duties to public limited
partners, notwithstanding that these parties received fees in connection with
their engagements by the Partnership and in connection with other engagements
and may receive fees in the future. See "- Real Estate Portfolio Appraisal by
TNG" and "- Fairness Opinion from Stanger."
Alternatives to the Merger
The general partners considered liquidation and continued ownership by
the limited and general partners as alternatives to the merger. In order to
determine whether the merger or one of its alternatives would be more
advantageous to public limited partners, the general partners compared the
potential benefits and detriments of the merger with the potential benefits and
detriments of the alternatives.
22
Liquidation
Benefits of Liquidation. An alternative to the merger would be
to liquidate the Partnership's assets, distribute the net liquidation proceeds
to the partners and thereafter dissolve the Partnership. Through such
liquidation, the Partnership would provide for a final disposition of its
partners' interests in the Partnership. Limited partners would receive cash
liquidation proceeds (as they will if they make cash elections). If the
Partnership liquidated its assets through asset sales to unaffiliated third
parties, limited partners would not need to rely upon a real 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.
Disadvantages of Liquidation. Over the last several years, the
performance of the Properties has improved as described under "- Continued
Ownership of the Partnership - Benefits of Continued Ownership." The general
partners believe that the improvement may continue. The merger provides limited
partners with the opportunity either to convert their investment in the
Partnership into an investment in Public Storage, which like the Partnership
primarily owns mini-warehouses, or to receive cash based on the appraised value
of the Properties. In contrast to the merger, the Partnership would also be
expected to incur certain costs in a liquidation.
Limited partners should recognize that appraisals are 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.
Continued Ownership of the Partnership
Benefits of Continued Ownership. Another alternative to the
merger would be to continue the Partnership in accordance with its existing
business plan, with the Partnership continuing to be owned by the limited and
general partners. The Partnership is operating profitably.
There has been improvement in the mini-warehouse markets. As the
pace of new mini-warehouse development has slowed 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, monthly realized rents per occupied
square foot of the Properties increased from 1998 to 2000 from $8.64 to $9.16
with average occupancies of 92% in 1998 and 91% in 2000. Despite significant
recent increases in the development of new mini-warehouses, the general partners
believe that the financial performance of the Properties may continue to
improve, although not necessarily at the rate of improvement experienced in
prior years. Should such improvements continue, the value of the Properties
could be expected to increase. See "Description of Partnership Properties."
A number of advantages could be expected to arise from the
continued ownership of the Partnership by the limited and general partners.
Limited partners would continue to receive regular quarterly distributions of
net cash flow arising from operations and the sale or refinancing of the
Partnership's assets. Given the currently improving market conditions for
mini-warehouses, the general partners believe that the level of these
distributions to limited partners may increase. Continued ownership of the
Partnership by the general and limited partners affords limited partners with
the opportunity to participate in any future appreciation in the Partnership's
assets. In addition, this decision, if elected, would mean that there would be
no change in the nature of the investment of limited partners. This option
avoids whatever disadvantages might be deemed inherent in the merger. See "Risk
Factors" for discussion of various risks associated with the merger.
Disadvantages of Continued Ownership. Not only is the
Partnership well beyond its anticipated term, but continued ownership of the
Partnership by the limited and general partners fails to secure the benefits
that the limited and general partners expect to result from the merger. The
benefits to limited partners are highlighted under "- Potential Benefits of the
Merger," and the benefits to the general partners are highlighted under
"Benefits to Insiders." The merger affords limited partners increased liquidity.
23
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
$596 per Partnership unit in cash or Public Storage common stock. The general
partners have determined this amount based on the estimated net asset value per
unit computed as follows:
Estimated value of Partnership's interest in the
Properties (1) $63,419,000
Plus:
Market value of Partnership's
interest in PSBP (2) 24,271,000
Partnership's interest in other tangible
net assets and liabilities (3) 1,343,000
--------------
Net proceeds available for distribution 89,033,000
Distributions to general partners (4) (890,000)
--------------
Distributions to limited partners $88,143,000
==============
Amount per Partnership unit (5)(6)(7)(8) $596
==============
---------------
(1) Reflects appraised value of the Properties determined by TNG
as of December 31, 2001. 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 TNG".
(2) Reflects closing price of shares of PS Business Parks, Inc. on
the AMEX as of December 31, 2001 (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 September 30, 2001.
(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 148,000 Partnership units.
(6) Upon completion of the merger, each Partnership unit would be
converted into Public Storage common stock with a value of
$596 or, at the election of a limited partner, in cash. The
number of shares of Public Storage common stock to be issued
in the merger will be determined by dividing $596 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.
24
(7) Distributions will be made to limited partners to cause the
estimated net asset value per Partnership unit as of the
Effective Date to be substantially equivalent to $596 per
unit. 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.
(8) Original purchase price of a Partnership unit was $500.
Potential Benefits of the Merger
The general partners believe that the following are the principal
potential benefits to limited partners:
(1) Limited partners who elect to receive cash will have fully
liquidated their investment at approximately 119% of their original investment
(excluding prior distributions received) and at an amount substantially higher
than the prices in the limited secondary transactions. Also, they will have
simplified their tax reporting for years after 2002.
(2) For limited partners who receive Public Storage common stock,
the principal potential benefits are:
o 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.
o Increased Liquidity. There is no active market for the Partnership
units. In comparison, Public Storage has approximately 113 million
shares of Public Storage common stock listed on the NYSE with an
average daily trading volume during the 12 months ended September
30, 2001 of approximately 174,000 shares. Given Public Storage's
market capitalization and trading volume, limited partners who
receive Public Storage common stock are likely to enjoy a more
active trading market and increased liquidity for the Public
Storage securities they receive.
o 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 12.
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.
25
Although the general partners reasonably believe the terms of the
merger are fair to public limited partners, the general partners have
significant conflicts of interest with respect to the merger. The merger has
been initiated and structured by Public Storage, one of the general partners.
See "Summary - Relationships" and "Risk Factors - Conflicts of Interest."
Material Factors Underlying Conclusions of General Partners. The
following is a discussion of the material factors underlying the conclusions of
the general partners. The general partners have not quantified the relative
importance of these factors.
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 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 TNG and Stanger's fairness opinion. The general
partners attributed significant weight to these items, which they believe
support their position, and do not know of any factors that are reasonably
likely to detract from the conclusions in TNG's portfolio appraisal and
Stanger's fairness opinion. The general partners believe that the engagement of
TNG and Stanger to provide the portfolio appraisal and the fairness opinion,
respectively, assisted the general partners in the fulfillment of their duties
to public limited partners, notwithstanding that these parties received fees in
connection with their engagements by the Partnership and in connection with
other engagements by Public Storage and its affiliates and may receive fees in
the future. See "- Real Estate Portfolio Appraisal by TNG" and "- Fairness
Opinion from Stanger."
4. Comparison of Payments to be Received in the Merger to Other
Alternatives. The payments to be received in the merger of $596 per Partnership
unit generally compares favorably with (A) the prices at which limited secondary
sales of units have been effectuated, (B) a range of estimated going-concern
value per unit ($540 to $562), (C) an estimated liquidation value per unit
($577) and (D) the book value per unit as of September 30, 2001 ($236). 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.
26
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 $596 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 (3) estimates of the value of the Partnership on a going-concern
basis assuming that it were to continue as a stand-alone entity and its assets
sold at the end of a five-year holding period. Due to the uncertainty in
establishing these values, the Partnership established a range of estimated
values for certain of the alternatives, representing a high and low estimated
value for the potential consideration. Since the value of the consideration for
alternatives to the merger is dependent upon varying market conditions, no
assurance can be given that the range of estimated values indicated establishes
the highest or lowest possible values. However, the general partners believe
that analyzing the alternatives in terms of ranges of estimated value, based on
currently available market data and, where appropriate, reasonable assumptions
made in good faith, establishes a reasonable framework for comparing
alternatives.
The results of these comparative analyses are summarized in the
following tables. Limited partners should bear in mind that the estimated values
assigned to the alternate forms of consideration are based on a variety of
assumptions that have been made by the Partnership. These assumptions relate,
among other things, to: projections as to the future income, expenses, cash flow
and other significant financial matters of the Partnership; the capitalization
rates that will be used by prospective buyers when the Partnership's assets are
liquidated; and, appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows that may be received with respect
to Partnership units. In addition, these estimates are based upon certain
information available to the Partnership at the time the estimates were
computed, and no assurance can be given that the same conditions analyzed by
them in arriving at the estimates of value would exist at the time of the
merger. The assumptions used have been determined by the Partnership in good
faith, and, where appropriate, are based upon current and historical information
regarding the Partnership and current real estate markets, and have been
highlighted below to the extent critical to the conclusions of the general
partners.
No assurance can be given that such consideration would be realized
through any of the designated alternatives, and limited partners should
carefully consider the following discussions to understand the assumptions,
qualifications and limitations inherent in the presented valuations. The
estimated values presented in the following table are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These estimated values are based upon certain assumptions that relate,
among other things, to (1) the price of Public Storage common stock and common
stock of PS Business Parks, Inc. as of the date of the merger being the same as
during the 20 trading days ending on the fifth trading day prior to the
Effective Date, (2) projections as to the future revenues, expenses, cash flow
and other significant financial matters of the Partnership, (3) the
capitalization rates that will be used by prospective buyers when the
Partnership's assets are liquidated, (4) selling costs, (5) appropriate discount
rates to apply to expected cash flows in computing the present value of the cash
flows and (6) the manner of sale of the Properties. Actual results may vary from
those set forth below based on numerous factors, including interest rate
fluctuations, tax law changes, supply and demand for mini-warehouses, the manner
in which the properties are sold and changes in availability of capital to
finance acquisitions of mini-warehouses.
27
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)
---------------------------- ---------------------------- ----------------------------- ---------------------------------
$596(1) $297 $451 $540 $562 $577
---------------------------- -------------- ------------- --------------- ------------- ---------------------------------
---------------
(1) Based on the Partnership's net asset value consisting of the
independently appraised market value of the Properties as of December
31, 2001, the closing price of PS Business Parks, Inc. on the AMEX on
December 31, 2001, the estimated book value of its other net assets as
of September 30, 2001. 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."
(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. See "Distributions and Market Prices of Partnership Units."
(3) Reflects a range of values based upon a number of assumptions
regarding the future net operating income and distributions of the
Partnership and the date of its liquidation. See "- Going-Concern
Value."
(4) Based upon TNG's real estate appraisal for 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 $451 per unit from January 1, 2000 through December 31, 2001. Included
in this price range are sales to Public Storage. See "Distributions and Market
Prices of Partnership Units."
Going-Concern Value. The Partnership has estimated the going-concern
value of the Partnership by analyzing projected cash flows and distributions
assuming that the Partnership was operated as an independent stand-alone entity
and its assets sold in a liquidation of the Partnership after a five-year
holding period. The Partnership assumed sale of the Properties at the terminal
value projected by capitalizing the net operating income in year six at a
capitalization rate equal to the midpoint of the effective capitalization rate
in the appraisal and the capitalization rate used by the appraiser in the
residual value component of the discounted cash flow analysis (an average
capitalization rate of 9.6% for the Properties). The Partnership assumed that
the Partnership's interest in PSBP was sold at an FFO multiple of 10 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 (4.4%) 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.
28
Liquidation Values. Since one of the alternatives available to the
general partners is to proceed with a liquidation of the Partnership, and the
corresponding distribution of the net liquidation proceeds between the joint
venture partners and, within the Partnership, to the limited partners and the
general partners, the Partnership has estimated the liquidation value of the
Partnership assuming that the Properties are sold at their appraised value based
upon the TNG real estate portfolio appraisal. This alternative assumes that the
Partnership's interest in PSBP is sold at the December 31, 2001 trading price
(less a commission of $.06 per share), the Partnership incurs real estate
selling costs at the time of liquidation (state and local transfer taxes, real
estate commissions of 3% of sales proceeds and legal and other closing costs) of
approximately $4.8 million, and the remaining net liquidation proceeds are
distributed between the joint venture partners in accordance with the joint
venture agreement and between the limited and general partners in accordance
with the partnership agreement.
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, TNG's
professional opinion as to the market value of the Properties as of December 31,
2001. While the portfolio appraisal is not necessarily indicative of the price
at which the assets would sell, market value generally seeks to estimate the
price at which the Properties would sell if disposed of in an arm's length
transaction between a willing buyer and a willing seller, each having access to
relevant information regarding the historical revenues and expenses. The real
estate portfolio appraisal assumes that these Properties are disposed of in an
orderly manner and are not sold in forced or distressed sales where sellers
might be expected to dispose of their interests at substantial discounts to
their actual fair market value. See "- Real Estate Portfolio Appraisal by TNG."
Distribution Comparison. The general partners have considered the
potential impact of the merger upon distributions that would be made to limited
partners who exchange their Partnership units for Public Storage common stock.
Based on a market price of Public Storage common stock of $37.25, the current
regular quarterly distribution rate for Public Storage ($.45 per share) and the
regular and special distributions for the Partnership during 2001 ($32.18 per
unit), limited partners would receive approximately $3.38 (10.5%) less in annual
distributions per Partnership unit after the merger from Public Storage than
before the merger from the Partnership and approximately $0.75 less per unit in
annual distributions for each $1.00 (2.7%) increase in the market price of
Public Storage common stock above $37.25.
In evaluating this estimate, limited partners should bear in mind that
this comparison does not reflect the tax that a limited partner will have to pay
in connection with the merger. The merger will be a taxable event for the public
limited partners resulting in the recognition of gain to most taxable public
limited partners who receive either cash or Public Storage common stock. In
evaluating this estimate, limited partners should also bear in mind that a
number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, if any, capital expenditure levels (in excess of normal
expenditures for ongoing maintenance and repairs) and the corporate policy with
respect to cash distributions. A comparison of the current distribution levels
of Public Storage with those of the Partnership does not show how the merger
might affect a limited partner's distribution level over a number of years.
Real Estate Portfolio Appraisal by TNG
TNG was engaged by the Partnership to appraise 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 December 31, 2001. The appraisal was limited in that TNG did
not inspect all of the Properties and its conclusion is primarily based on the
Income Capitalization Approach. The Partnership selected TNG to provide the
appraisal because of its experience and reputation in appraising
mini-warehouses, including its appraisal of other properties managed by Public
29
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 TNG. TNG was formed by Lawrence R. Nicholson, CRE, MAI to
succeed to the business of Nicholson-Douglas Realty Consultants, which was
founded by Mr. Nicholson in 1993. Mr. Nicholson has specialized in the appraisal
of mini-warehouses and other commercial properties since 1981. TNG has conducted
real estate appraisals on a variety of property types and uses throughout the
United States for owners, banks and thrift organizations, insurance companies
and other financial institutions. During 1999, 2000 and 2001 TNG appraised over
400 properties.
Summary of Methodology. At the request of the Partnership, TNG
evaluated the Properties. In valuing the Properties, TNG considered the
applicability of all three commonly recognized approaches to value: the cost
approach, the income capitalization approach and the sales comparison approach.
The type and age of a property, market conditions and the quantity and quality
of data affect the applicability of each approach in a specific appraisal
situation. TNG did not consider the cost approach to be applicable to 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,
TNG analyzed the individual Properties by (a) reviewing each Property's previous
three years' operating statements, (b) reviewing information submitted to TNG by
on-site managers which included competitive rental surveys, subject facility
descriptions, area trends and other factors and (c) developing information from
a variety of sources about market conditions for each individual property that
included population, employment and housing trends within the market. TNG
verified the competitive property rental rates via telephone. TNG also 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.
TNG 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.
TNG 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, TNG reviewed the
acquisition criteria and projection parameters in use in the marketplace by
major mini-warehouse investors, owners and operators, appraisers and financing
sources. In addition, TNG reviewed other published information concerning
acquisition criteria in use by property investors. Further, TNG gathered and
reviewed sales of mini-warehouses located nationwide within the past 24 months
30
in order to derive certain valuation indicators. Sources for data concerning
such transactions included local appraisers, property owners, real estate
brokers and others. TNG also reviewed information compiled by management
identifying sales and acquisitions of mini-warehouses.
In applying a discounted cash flow analysis, projections of cash flow
from each property (assuming no indebtedness) were developed for a 10-year
period ending in the year 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. TNG 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.
Estimated expenses were based upon each of the Properties' actual
operating history. The projected expenses were tested for reasonableness based
upon a comparison of the operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
property. Consideration was given, and adjustments made, to reflect replacement
reserves. Income and expense growth rates were based on projection parameters
currently being used by property investors as well as upon local, regional and
historical trends.
TNG used annual revenue growth rates from 1.5% to 5.0% for the initial
two years of its cash flow projection and a 3% annual growth rate thereafter.
Expenses for the Properties were increased between 2% and 3% per annum. TNG then
used terminal capitalization rates of 9.75% to 10.25% 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 12.25% to 12.50%. In addition, TNG valued each of the Properties
using the direct capitalization method by applying capitalization rates ranging
from 9.5% 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 $110,100,000 and based upon the direct
capitalization method is approximately $110,200,000. TNG 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 $108,400,000 and based upon the direct
capitalization technique is $108,500,000.
In applying the sales comparison approach to the Properties, TNG
analyzed approximately 72 mini-warehouse properties that were sold during 2000
and 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, TNG reviewed capitalization rates and purchase prices paid
in recent transactions of properties similar to the Properties involving Public
Storage and others and has concluded that the Properties are reasonably and
appropriately valued relative to these other portfolio transactions.
Conclusions as to Value. TNG reconciled the values indicated from the
direct sales comparison and income capitalization approaches to arrive at a
final valuation conclusion. TNG gave primary emphasis to the income
capitalization approach, an emphasis deemed appropriate based on acquisition
criteria currently employed in the mini-warehouse market.
Based on the valuation methodology described above, TNG assigned a
market value to the Properties as of December 31, 2001 of $108,400,000. 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 December 31, 2001 averaged
approximately 9.2%.
31
TNG's conclusion as to value relates to 100% of the Properties, which
includes the joint venture interests of both the Partnership and Public Storage.
TNG did not separately value the interest of the Partnership in the Properties.
Assumptions, Limitations and Qualifications of the Appraisal. The
appraisal reflects TNG's valuation of the Properties as of December 31, 2001 in
the context of the information available on such date. Events occurring after
December 31, 2001 and before the closing of the merger could affect the
properties or assumptions used in preparing the appraisal. TNG has no obligation
to update the appraisal on the basis of subsequent events; however, TNG has
informed the Partnership that, as of the date of this statement, TNG is not
aware of any event or change in conditions since December 31, 2001 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. TNG is being paid an aggregate
fee of $47,000 for preparation of the appraisal, which fee includes
reimbursement for all of TNG's related out-of-pocket expenses. TNG is also
entitled to indemnification against certain liabilities. The fee was negotiated
with TNG and payment is not dependent upon completion of the merger. As a
leading appraiser of mini-warehouses, TNG (and its predecessor) have prepared
appraisals for Public Storage and its affiliates, including appraisals of the
properties of prior partnership and REITs in connection with their mergers with
Public Storage, and TNG is expected to continue to prepare appraisals for Public
Storage. From January 1, 1999 to the present, TNG (and its predecessor) have
received compensation aggregating approximately $149,500 for these services
(exclusive of amounts received in connection with the merger).
Fairness Opinion from Stanger
Stanger was engaged by the Partnership to deliver a written opinion of
its determination as to the fairness of the consideration to be received in the
merger, from a financial point of view, to the public limited partners. The full
text of the opinion, which contains a description of the assumptions and
qualifications made, matters considered and limitations on the review and
opinion, is set forth in Appendix C to this statement and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the fairness opinion are set forth below. The summary set forth below does not
purport to be a complete description of the analyses used by Stanger in
rendering the fairness opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description.
Except for certain assumptions, described more fully below, which the
Partnership advised Stanger that it would be reasonable to make, the Partnership
imposed no conditions or limitations on the scope of Stanger's investigation or
with respect to the methods and procedures to be followed in rendering the
fairness opinion. The Partnership has agreed to indemnify Stanger against
certain liabilities arising out of its engagement to prepare and deliver the
fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided
information, research, investment banking and consulting services to clients
throughout the United States, including major NYSE firms and insurance companies
and over 70 companies engaged in the management and operation of partnerships
and REITs. The investment banking activities of Stanger include financial
advisory services, asset and securities valuations, 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.
32
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. In particular, Stanger's valuation practice principally involves
partnerships, partnership securities and the assets typically owned through
partnerships including, but not limited to, oil and gas reserves, real estate,
cable television systems and equipment leasing assets.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the merger, Stanger: (1) reviewed 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, 1998,
1999 and 2000 and the quarterly report on Form 10-Q of Public Storage and the
Partnership for the nine months ended September 30, 2001; (3) reviewed the MAI
certified appraised value of the portfolio prepared by TNG; (4) reviewed
information regarding purchases and sales of self-storage properties by Public
Storage or any affiliated entities over the past three years, and other
information available relating to acquisition criteria for self-storage
properties; (5) reviewed estimates prepared by the Partnership, and based in
part on the appraisal, of the current net liquidation value per Partnership unit
of the Partnership's assets and projections of cash flow from operations, cash
distributions and going-concern values 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 December 31, 2001
by TNG, an independent appraiser. Stanger reviewed the appraised value rendered
by TNG and discussed with TNG its experience and qualifications and the
appraisal conclusions.
Stanger observed that the appraisal was certified by a Member of the
Appraisal Institute and was conducted on a limited scope basis utilizing the
income approach to valuation, applying the direct capitalization and discounted
cash flow methods to establish a value for each individual property, and the
sales comparison approach.
Stanger observed that the effective capitalization rate utilized in the
appraisal based upon the Properties' net operating income generated for the 12
months ended December 31, 2001 and before the reduction in value for deferred
maintenance items was approximately 9.3% and approximately 9.2% after certain
property tax adjustments to such net operating income. Lower capitalization
rates generally reflect higher sales prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared
by the Partnership of the estimated value of the Partnership based upon
liquidation of its portfolio utilizing estimates prepared by the Partnership and
information provided by TNG.
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 $4.8 million and were comprised of estimates of $464,000 in
state and local transfer taxes, $3,252,000 in commissions and $1,084,000 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
33
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 $577 per Partnership unit, versus the consideration offered in the
merger of $596 cash per unit, or the equivalent of $596 of Public Storage common
stock per unit, based on the average closing price of Public Storage common
stock on the NYSE during the 20 consecutive trading days ending on the fifth
trading day prior to the Effective Date.
Stanger also reviewed information on multi-property purchases and sales
of self-storage properties transacted by Public Storage, Public Storage
Management or affiliates. Stanger observed that Public Storage, Public Storage
Management or affiliated entities have 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 estimates of revenues and operating
expenses for the Properties, capital 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. The analyses and projections assumed,
among other things, that (1) net operating income 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 5.4%
over the five-year projection period; (2) general and administrative expenses
were not escalated over the projection period; and (3) 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 and the
capitalization rate used by the appraiser in the residual value component of the
discounted cash flow analysis (an average capitalization rate of 9.6%). Real
estate selling costs were assumed to be incurred at the same percentage of sale
proceeds (4.4%) as incurred in the liquidation alternative.
34
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 (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 $540 and $562,
compared with the consideration in the merger of $596 per Partnership unit.
The estimated values assigned to the alternative forms of consideration
are based on a variety of assumptions that have been made by the Partnership.
While the Partnership has advised Stanger that it believes that it has a
reasonable basis for these assumptions, these assumptions may not reflect the
Partnership's actual experience and such differences could be material. See "-
Comparison of Consideration to be Received in the Merger to Other Alternatives."
Review of Tender Offer and Secondary Market Prices. Stanger observed
that Partnership units have been purchased in recent months on the informal
secondary market for partnership securities and through tender offers by Public
Storage.
Stanger observed that, based on prices reported to Stanger by various
firms active in the informal secondary market for partnership interests, the
highest selling price reported for Partnership units in the informal secondary
market between January 1, 2000 and December 31, 2001 was $451 per unit compared
with the consideration in the merger of $596 per unit.
Stanger also observed that the Partnership units had been the subject
of tender offers and informal secondary market purchases by Public Storage in
2000 and 2001 at prices ranging from $355 to $381 per unit.
Distribution/FFO Analysis. Stanger reviewed distributions per
Partnership unit and FFO per Partnership unit on an equivalent per unit basis.
Stanger noted that based on a closing price of $37.25 for Public Storage 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 (32.18 per unit),
annual distributions per share would decrease by approximately $3.38 (10.5%) for
limited partners receiving Public Storage common stock.
Stanger observed that, at a closing price of $37.25 for Public Storage
common stock and based on operating results for the Partnership and Public
Storage during the nine months ending September 30, 2001, annualized FFO per
Partnership unit on a fully diluted basis on the equivalent per share basis
earned by limited partners would decrease by approximately 9.4%. 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 be
approximately the same.
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
35
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.
Compensation and Material Relationships. For preparing the fairness
opinion and related services in connection with the merger, Stanger is being
paid a fee of $75,000. In addition, Stanger will be reimbursed for certain
out-of-pocket expenses, including legal fees, up to a maximum of $9,000 and will
be indemnified against certain liabilities, including certain liabilities under
the federal securities laws. The fee was negotiated with Stanger. Payment of the
fee to Stanger is not dependent upon completion of the merger. Stanger has
rendered consulting and related services and provided products to Public Storage
and its affiliates, including fairness opinion to the public shareholders of 18
REITs and five 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 $255,000
for these services and products (exclusive of amounts received in connection
with the merger).
Limitations and Qualifications. Stanger was not requested to, and
therefore did not: (1) select the method of determining the consideration being
paid in the merger; (2) make any recommendation to the public limited partners
with respect to whether to approve or reject the merger or whether to select the
cash or Public Storage common stock option in the merger; or (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.
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.
36
Conditions to Consummation of the Merger. Consummation of the merger is
contingent upon standard conditions, including the following: (1) the
Registration Statement shall have been declared effective by the Commission and
Public Storage shall have received all other authorizations necessary to issue
Public Storage common stock in exchange for Partnership units and to consummate
the merger; (2) the merger agreement and the merger shall have been approved and
adopted by the requisite vote of the limited partners (which condition has been
satisfied by Public Storage's vote of its Partnership units in favor of the
merger); (3) the shares of Public Storage common stock issued to limited
partners shall be listed on the NYSE; (4) the Partnership shall have received a
fairness opinion from Stanger (which opinion has been received); (5) 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 the Public
Storage common stock during the 20 consecutive trading days ending on the fifth
trading day prior to the Effective Date is not less than $34. The obligation of
Public Storage to effect the merger is also subject to Public Storage, in its
sole discretion, being satisfied as to title to, and the results of an
environmental audit of, the Properties. Any of these conditions may be waived by
the board of directors of Public Storage.
Amendment or Termination. The merger agreement provides for amendment
or modification thereof with respect to the merger by written agreement
authorized by the board of directors of Public Storage and the general partners.
The merger may be abandoned at any time before or after shareholder approval by
mutual written consent and may be abandoned by either party if, among other
things, the closing of the merger has not occurred on or before December 31,
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
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
37
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 $6.62 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 $596 per Partnership unit. See "- Determination of Payments to be
Received by Limited Partners in the Merger."
Cash Election Procedure
Each holder of record of Partnership units may make a cash election to
have his or her Partnership units converted into the right to receive cash in
the merger. All cash elections are to be made on a cash election form. A cash
election form is being sent to all holders of record of Partnership units on the
date of this statement. To be effective, a cash election form must be properly
completed and signed and must be received by the exchange agent, EquiServe Trust
Company, N.A., no later than 5:00 p.m. New York City time on _________, 2002.
Holders of record of units who hold units as nominees, trustees or in other
representative capacities may submit multiple cash election forms, provided that
such representative certifies that each such cash election form covers all the
units held by such representative for a particular beneficial owner. Any cash
election form may be revoked by written notice received by the exchange agent
prior to 5:00 p.m., New York City time, on _________, 2002. In addition, all
cash election forms will automatically be revoked if the exchange agent is
notified in writing that the merger has been abandoned. The exchange agent may
determine whether or not elections to receive cash have been properly made or
revoked, and any such determination shall be conclusive and binding.
A holder of Partnership units may not make a cash election as to less
than all of the units owned by such holder. Any holder of units who does not
submit a properly completed and signed cash election form which is received by
the exchange agent prior to 5:00 p.m., New York City time, on _________, 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.
38
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 $33.1 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.
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 50,000
Real estate appraisal and fairness opinion 129,000
Registration, listing and filing fees 10,000
Accounting 15,000
Other 15,000
---------
TOTAL $239,000
=========
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.
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.
39
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.
Limited partners who receive Public Storage common stock in the merger
will be changing their investment from "finite-life" to "infinite-life"; they
will be able to realize the value of their investment only by selling the Public
Storage common stock. The interest of Public Storage shareholders can be diluted
through the issuance of additional securities, including securities that would
have priority over Public Storage common stock as to cash flow, distributions
and liquidation proceeds. Public Storage has an effective registration statement
for preferred stock, common stock, equity stock and warrants and intends to
issue additional securities under this registration statement. There is no
assurance that any such securities will be issued. See "Risk Factors -
Uncertainty Regarding Market Price of Public Storage Common Stock" and "-
Financing Risks - Dilution and Subordination."
Public Storage has no plans with respect to a sale or financing of any
of the Properties.
40
BORROWING POLICIES
Partnership:
The Partnership has no outstanding borrowings. It is fully invested and would
distribute the proceeds from a financing of properties.
Public Storage:
Subject to certain limitations in Public Storage's bylaws, Public Storage has
broad powers to borrow in furtherance of its investment objectives. Public
Storage has incurred in the past, and may incur in the future, both short-term
and long-term debt to increase its funds available for investment in real
estate, capital expenditures and distributions. As of September 30, 2001, Public
Storage's ratio of "Debt" (liabilities other than "accrued and other
liabilities" and "minority interest" that should, in accordance with GAAP, be
reflected on Public Storage's balance sheet) to "Assets" (Public Storage's total
assets that should, in accordance with GAAP, be reflected on Public Storage's
balance sheet) was approximately 3%.
Public Storage has outstanding debt and reinvests proceeds from
borrowings. The incurrence of debt increases the risk of loss of investment.
TRANSACTIONS WITH AFFILIATES
Partnership:
The partnership agreement restricts a variety of business transactions with
affiliates. The partnership agreement may be amended by a majority vote of
limited partners. See "Amendment to Partnership Agreement."
Public Storage:
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.
PROPERTIES (AS OF SEPTEMBER 30, 2001)
Partnership:
The Partnership owns direct and indirect equity interests in 33 mini-warehouses
in 14 states. Also owns an interest in PSBP. For the nine months ended September
30, 2001, the weighted average occupancy level and realized annual rent per
square foot of the Properties were 90% and $9.78, respectively. See "Description
of Partnership Properties."
Public Storage:
Public Storage owns equity interests (directly, as well as through general and
limited partnership interests) in 1,378 storage facilities in 37 states,
including 643 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.
41
LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS
Partnership:
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:
Public Storage common stock is traded on the NYSE. During the 12 months ended
September 30, 2001, the average daily trading volume of Public Storage common
stock was approximately 174,000 shares. Public Storage has issued, and may in
the future issue, securities that have priority over Public Storage common stock
as to cash flow, distributions and liquidation proceeds.
Distributions are paid to limited partners from cash available for
distribution. Public Storage is required to distribute at least 95% of its
ordinary REIT taxable income in order to maintain its qualification as a REIT.
Public Storage distributes less than its cash available for distribution
(recently distributing amounts approximately equal to its taxable income),
permitting it to retain funds for additional investment and debt reduction.
A limited partner who receives Public Storage common stock in the
merger will have an investment for which the market is broader and more active
than the market for Partnership units. Distributions on Public Storage common
stock are lower than the distributions on the Partnership units. Distributions
on Public Storage common stock also are subject to priority of preferred stock.
See "Distributions and Price Range of Public Storage Common Stock" and
"Distributions and Market Prices of Partnership Units" for information on market
prices of Partnership units and Public Storage Common Stock.
TAXATION
Partnership:
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:
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
"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."
42
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
Partnership:
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:
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
Partnership:
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:
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 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
43
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
Partnership:
The Partnership Agreement does not provide for the issuance of additional
Partnership units.
Public Storage:
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.
44
LIMITED LIABILITY OF INVESTORS
Partnership:
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 in undistributed
income, if any. The Partnership units are fully paid and nonassessable.
Public Storage:
Under California law, shareholders are not generally liable for corporate debts
or obligations. The Public Storage common stock is nonassessable.
The limitation on personal liability of Public Storage shareholders is
substantially the same as that of the limited partners.
REVIEW OF INVESTOR LISTS
Partnership:
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.
Public Storage:
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.
45
AMENDMENT TO PARTNERSHIP AGREEMENT
While the general partners do not believe that the partnership
agreement prohibits the merger, the partnership agreement is being amended to
expressly authorize the merger. Appendix D contains a complete text of the
amendment.
46
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 148,000
Partnership units. As of the record date, Public Storage beneficially owned
92,850 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 owns
92,850 units (63% of the units).
Security Ownership of Certain Beneficial Owners
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, Series A
Beneficially Owned Beneficially Owned
---------------------------- --------------------------------
Number Percent Number Percent
Name and Address of Shares of Class of Shares of Class
------------------------------------------------ ----------- ----------- ------------- -------------
B. Wayne Hughes, B. Wayne Hughes, Jr., Tamara 38,157,815 32.8% 1,292,520 22.9%
Hughes Gustavson, PS Orangeco, Inc., a
California corporation ("PSOI")
701 Western Avenue,
Glendale, California 91201-2349,
PS Insurance Company, Ltd., a
Bermuda corporation ("PSIC")
41 Cedar Avenue
Hamilton, Bermuda (1)
FMR Corp. 8,157,765 7.0% -- --
82 Devonshire Street
Boston, Massachusetts 02109 (2)
----------------
47
(1) This information is as of March 27, 2001. The common stock of PSOI
(representing approximately 5% of the equity) is owned one-third each
by B. Wayne Hughes, Tamara Hughes Gustavson (an adult daughter of B.
Wayne Hughes) and B. Wayne Hughes, Jr. (an adult son of B. Wayne
Hughes), and the non-voting preferred stock of PSOI (representing
approximately 95% of the equity) is owned by Public Storage. The stock
of PSIC is owned approximately 45% by B. Wayne Hughes, 47% by Tamara
Hughes Gustavson and 8% by B. Wayne Hughes, Jr. B. Wayne Hughes has
voting and dispositive power with respect to 30,777 Common Shares and
1,000 Depositary Shares owned by PSOI, and B. Wayne Hughes and Tamara
Hughes Gustavson share voting and dispositive power with respect to
301,032 Common Shares and 9,783 Depositary Shares owned by PSIC. B.
Wayne Hughes disclaims beneficial ownership of the shares owned by B.
Wayne Hughes, Jr. and Tamara Hughes Gustavson (Tamara Hughes Gustavson
beneficially owns an aggregate of 16,759,304 Common Shares and
1,192,882 Depositary Shares (exclusive of the shares owned by PSIC) or
approximately 14.4% of the Common Shares and 21.2% of the Depositary
Shares outstanding as of March 27, 2001). Each of the other persons
listed above disclaims beneficial ownership of the shares owned by any
other person listed above.
The above table does not include 7,000,000 shares of Public Storage
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, 2000 and is based on a Schedule
13G (Amendment No. 7) filed by FMR Corp. (except that the percent shown
in the table is based on the Common Shares outstanding at March 27,
2001). As of December 31, 2000, FMR Corp. beneficially owned 8,157,765
Common Shares. This number includes 6,774,210 Common Shares
beneficially owned by Fidelity Management & Research Company, as a
result of its serving as investment adviser to several investment
companies registered under Section 8 of the Investment Company Act of
1940, and 1,383,555 Common Shares beneficially owned by Fidelity
Management Trust Company, as a result of its serving as investment
manager of various institutional accounts. FMR Corp. has sole voting
power with respect to 1,309,355 Common Shares and sole dispositive
power with respect to 8,157,765 Common Shares.
The following table sets forth information as of March 27, 2001
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, 2000 and all directors and executive officers as
a group:
48
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 20,322,643(1)(3) 17.5% 64,928(1)(3) 1.2%
Harvey Lenkin 85,716(1)(4) * 3,068(1)(4) *
151,332(2) 0.1%
--------------------- ---------
237,048 0.2%
Marvin M. Lotz 74,871(1)(5) * 2,432(1)(5) *
176,332(2) 0.2%
--------------------- ---------
251,203 0.2%
B. Wayne Hughes, Jr. 1,075,868(1)(6) 0.9% 34,710(1)(6) 0.6%
Robert J. Abernethy 66,568(1) * 2,108(1) *
14,165(2) *
--------------------- ---------
80,733 *
Dann V. Angeloff 78,500(1)(7) * -- --
9,165(2) *
--------------------- ---------
87,665 *
William C. Baker 20,000(1) * 455(1) *
14,165(2) *
--------------------- ---------
34,165 *
Thomas J. Barrack, Jr. -- -- 8,900(1)(12) 0.2%
16,666(2) *
--------------------- ---------
16,666 *
Uri P. Harkham 13,376(1)(8) * 555(1)(8) *
6,665(2) *
--------------------- ---------
20,041 *
Daniel C. Staton 1,458(1) * 47(1) *
20,239(2) *
--------------------- ---------
21,697 *
Carl B. Phelps 8,910(1)(9) * 605(1)(9) *
84,999(2) *
--------------------- ---------
93,909 *
David Goldberg 111,713(1)(10) * 4,048(1)(10) *
170,499(2) 0.1%
282,212 0.2%
All Directors and Executive Officers 21,977,887(1)(3)(4)(5) 128,542(1)(3)(4)(5)
as a Group (6)(7)(8)(9) (6)(7)(8)(9)
(20 persons) (10)(11) 18.9% (10)(11)(12) 2.3%
1,162,550(2) 1.0%
--------------------- ---------
23,140,437 19.7%
---------------
* Less than 0.1%
(1) Common Shares or Depositary Shares, as applicable, beneficially owned
as of March 27, 2001. 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.
49
(2) Represents vested portion as of March 27, 2001, and portion of which
will be vested within 60 days of March 27, 2001, of Common Shares
subject to options granted to the named individuals or the group
pursuant to the Company's stock option and incentive plans.
(3) The 20,322,643 Common Shares include 19,945,983 Common Shares held of
record by the B. W. Hughes Living Trust as to which Mr. Hughes has
voting and investment power, 1,427 Common Shares held by a custodian of
an IRA for Mr. Hughes as to which he has investment power, 30,777
Common Shares held of record by PSOI as to which Mr. Hughes has voting
and dispositive power, 301,032 Common Shares held of record by PSIC as
to which Mr. Hughes and Tamara Hughes Gustavson share voting and
dispositive power and 43,424 Common Shares held in the 401(k) Plan.
The 64,928 Depositary Shares include 52,547 Depositary Shares held of
record by the B.W. Hughes Living Trust as to which Mr. Hughes has
voting and investment power, 46 Depositary Shares held by a custodian
of an IRA for Mr. Hughes as to which he has investment power, 1,000
Depositary Shares held of record by PSOI as to which Mr. Hughes has
voting and dispositive power, 9,783 Depositary Shares held of record by
PSIC as to which Mr. Hughes and Tamara Hughes Gustavson share voting
and dispositive power and 1,552 Depositary Shares held in the 401(k)
Plan.
(4) The 85,716 Common Shares include 1,249 and 734 Common Shares, held by
custodians of IRAs for Mr. Lenkin and Mrs. Lenkin as to which each has
investment power, 468 Common Shares held by Mrs. Lenkin, 1,568 Common
Shares held by Mrs. Lenkin as custodian for a son, 107 Common Shares
held by a custodian of an IRA for a son and 24,292 Common Shares held
in the 401(k) Plan.
The 3,068 Depositary Shares include 138 and 23 Depositary Shares, held
by custodians of IRAs for Mr. Lenkin and Mrs. Lenkin as to which each
has investment power, 38 Depositary Shares held by Mrs. Lenkin, 100
Depositary Shares held by Mrs. Lenkin as custodian for a son, 100
Depositary Shares held by a custodian of an IRA for a son and 789
Depositary Shares held in the 401(k) Plan.
(5) The 74,871 Common Shares include 17,384 Common Shares held in the
401(k) Plan.
The 2,432 Depositary Shares include 564 Depositary Shares held in the
401(k) Plan.
(6) The 1,075,868 Common Shares include 1,231 and 233 Common Shares, held
by custodians of IRAs for Mr. Hughes, Jr. and Mrs. Hughes, Jr. as to
which each has investment power, 344 Common Shares held by Mrs. Hughes,
Jr., 8,506 and 3,390 Common Shares, held by Mr. Hughes, Jr. as
custodian for a daughter and a son, 25,692 and 17,890 Common Shares
held by Mrs. Hughes, Jr. as custodian for a daughter and a son, 11,348
Common Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson -
Separate Property and 17,585 Common Shares held in the 401(k) Plan.
The 34,710 Depositary Shares include 40 and 7 Depositary Shares, held
by custodians of IRAs for Mr. Hughes, Jr. and Mrs. Hughes, Jr. as to
which each has investment power, 11 Depositary Shares held by Mrs.
Hughes, Jr., 213 and 96 Depositary Shares, held by Mr. Hughes, Jr. as
custodian for a daughter and a son, 772 and 581 Depositary Shares held
by Mrs. Hughes, Jr. as custodian for a daughter and a son, 43
Depositary Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson -
Separate Property and 788 Depositary Shares held in the 401(k) Plan.
(7) The 78,500 Common Shares include 6,000 Common Shares held by a
custodian of an IRA for Mr. Angeloff and 70,500 Common Shares held by
Mr. Angeloff as trustee of Angeloff Family Trust.
50
(8) The 13,376 Common Shares include 500 Common Shares held by Harkham
Industries, Inc. (dba Jonathan Martin, Inc.), a corporation wholly
owned by Mr. Harkham, 1,500 Common Shares held by Mr. Harkham as
trustee of Uri Harkham Trust, 1,440 Common Shares held by a custodian
of an IRA for Mr. Harkham as to which he has investment power, 4,716,
410, 210 and 600 Common Shares held by Mr. Harkham as custodian for
four of his children and 4,000 Common Shares held by Mr. Harkham as
trustee of Harkham Industries Profit Sharing Plan.
The 555 Depositary Shares include 256 Depositary Shares held by Mr.
Harkham as trustee of Uri Harkham Trust, 146 Depositary Shares held by
a custodian of an IRA for Mr. Harkham as to which he has investment
power and 153 Depositary Shares held by Mr. Harkham as custodian for a
son.
(9) The 8,910 Common Shares include 6,330 Common Shares held by Mr. and
Mrs. Phelps as trustee of Phelps Family Trust, 296, 1,000 and 1,000
Common Shares held by custodians of IRAs for Mr. Phelps and 284 Common
Shares held in the 401(k) Plan.
The 605 Depositary Shares include 205 Depositary Shares held by Mr. and
Mrs. Phelps as trustee of Phelps Family Trust, 9, 32 and 32 Depositary
Shares held by custodians of IRAs for Mr. Phelps and 327 Depositary
Shares held in the 401(k) Plan.
(10) The 111,713 Common Shares include 7,199 Common Shares held by a
custodian of an IRA for Mr. Goldberg, 4,260 Common Shares held by David
Goldberg Profit Sharing Plan and 499 Common Shares held in the 401(k)
Plan.
The 4,048 Depositary Shares include 233 Depositary Shares held by a
custodian of an IRA for Mr. Goldberg, 138 Depositary Shares held by
David Goldberg Profit Sharing Plan and 652 Depositary Shares held in
the 401(k) Plan.
(11) Includes shares held of record or beneficially by members of the
immediate family of executive officers of the Company, shares held by
custodians of IRAs for the benefit of executive officers of the Company
and shares credited to the accounts of the executive officers of the
Company that are held in the 401(k) Plan.
(12) Shares held of record by Colony PSA, LLC, a limited liability company
of which Mr. Barrack is a controlling member.
51
The following tables set forth information as of March 27, 2001
concerning the remaining security ownership of each director of Public Storage,
the chief executive officer of Public Storage, the four most highly compensated
persons who were executive officers of Public Storage on December 31, 2000 and
all directors and executive officers of Public Storage as a group:
Shares of Adjustable Rate
Shares of 10% Cumulative Shares of 9.20% Cumulative Cumulative Preferred Stock,
Preferred Stock, Series A Preferred Stock, Series B Series C
Beneficially Owned (1) Beneficially Owned (1) Beneficially Owned (1)
------------------------- ------------------------- -------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
Marvin M. Lotz - - - - - -
B. Wayne Hughes, Jr. - - 400 (1)(3) * - -
Robert J. Abernethy - - 225 (1) * - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
Daniel C. Staton - - - - - -
Carl B. Phelps - - - - - -
David Goldberg - - - - 600 (1)(4) *
All Directors and Executive 4,060 (1)(2) 0.2% 4,625 (1)(2)(3) 0.2% 600 (1)(4) *
Officers as a Group
(20 persons)
Shares of 9.50% Cumulative Shares of 10% Cumulative Shares of 9.75% Cumulative
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Beneficially Owned(1) Beneficially Owned (1) Beneficially Owned (1)
------------------------- ------------------------- -------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
Marvin M. Lotz - - - - - -
B. Wayne Hughes, Jr. - - - - - -
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
Daniel C. Staton - - - - - -
Carl B. Phelps - - - - - -
David Goldberg - - - - - -
All Directors and Executive 6,800 (1)(2) 0.6% 13,100 (1)(2) 0.6% 8,600 (1)(2) 0.4%
Officers as a Group
(20 persons)
52
Depositary Shares Depositary Shares
Each Representing 1/1,000 Each Representing 1/1,000
of a Share of 8-7/8% of a Share of 8.45%
Cumulative Preferred Stock, Cumulative Preferred Stock,
Series G Series H Class B Common Stock
Beneficially Owned (1) Beneficially Owned(1) Beneficially Owned(1)
--------------------------- --------------------------- ---------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
--------- ------- --------- ------- --------- -------
B. Wayne Hughes - - - - - -
Harvey Lenkin - - - - - -
Marvin M. Lotz - - - - - -
B. Wayne Hughes, Jr. - - - - 3,204,758 (1) 45.8%
Robert J. Abernethy - - - - - -
Dann V. Angeloff - - - - - -
William C. Baker - - - - - -
Thomas J. Barrack, Jr. - - - - - -
Uri P. Harkham - - - - - -
Daniel C. Staton - - - - - -
Carl B. Phelps - - - - - -
David Goldberg - - - - - -
All Directors and Executive 8,600 (1)(2) 0.1% 8,000 (1)(2) 0.1% 3,204,758 (1) 45.8%
Officers as a Group
(20 persons)
-----------------
* Less than 0.1%
(1) Shares of 10% Cumulative Preferred Stock, Series A, 9.20% Cumulative
Preferred Stock, Series B, Adjustable Rate Cumulative Preferred Stock,
Series C, 9.50% Cumulative Preferred Stock, Series D, 10% Cumulative
Preferred Stock, Series E, 9.75% Cumulative Preferred Stock, Series F,
Depositary Shares, each representing 1/1,000 of a Share of 8-7/8%
Cumulative Preferred Stock, Series G, Depositary Shares, each
representing 1/1,000 of Share of 8.45% Cumulative Preferred Stock,
Series H, or Class B Common Stock, as applicable, beneficially owned as
of March 27, 2001. Except as otherwise indicated and subject to
applicable community property and similar statutes, the persons listed
as beneficial owners of the shares have sole voting and investment
power with respect to such shares.
(2) Includes shares held of record or beneficially by members of the
immediate family of executive officers of the Company and shares held
by custodians of IRAs for the benefit of executive officers of the
Company.
(3) Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson - Separate
Property.
(4) Includes 500 shares held by a custodian of an IRA for Mr. Goldberg
and 100 shares held by David Goldberg Profit Sharing Plan.
As of March 27, 2001, the directors and executive officers of Public
Storage did not own any shares of the Company's Depositary Shares Each
Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I,
Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative
Preferred Stock, Series J, Depositary Shares Each Representing 1/1,000 of a
Share of 8 1/4% Cumulative Preferred Stock, Series K, Depositary Shares Each
Representing 1/1,000 of a Share of 8 1/4% Cumulative Preferred Stock, Series L,
Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative
Preferred Stock, Series M, Depositary Shares Each Representing 1/1,000 of a
Share of 8.600% Cumulative Preferred Stock, Series Q, Equity Stock, Series AA or
Equity Stock, Series AAA.
53
CERTAIN RELATED TRANSACTIONS
The following are the principal relationships between Public Storage
and the Partnership:
Joint Venture Interests. Public Storage owns a joint venture interest
(ranging from approximately 29% to 50%) in 32 of the Properties and in the
interest in PSBP. Under the joint ventures, certain special allocation rules
apply and Public Storage has the right to compel the sale of the Properties. See
Note (1) to the Notes to Consolidated Financial Statements of the Partnership.
(Appendix E).
General Partners' Interest. Public Storage and Hughes are general
partners of the Partnership. Public Storage receives incentive distributions
equal to 10% of the Partnership's cash flow and has a subordinated interest in
proceeds from sales or financings of the Properties (15% of such proceeds so
long as limited partners have received sale or financing distributions equal to
their capital contributions plus any deficiency in a simple 8% annual return).
In 1998, 1999 and 2000 and the first nine months of 2001, the general partners
received from the Partnership $399,000, $599,000, $569,000 and $325,000,
respectively, in respect of their incentive distributions. The general partners
also have a 1% interest in the Partnership in respect of their capital
contributions and participate in Partnership distributions in proportion to
their interest in the Partnership.
Property Management. The Properties are managed by Public Storage under
a management agreement under which Public Storage receives 6% of gross revenues
from operations of the Properties. In 1998, 1999 and 2000 and the first nine
months of 2001, Public Storage received $855,000, $878,000, $906,000 and
$724,000, respectively, for managing the Properties.
Limited Partner Interests. Of the 148,000 outstanding Partnership
units, 92,850 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 1% interest in PSBP and an additional 2%
interest held jointly with Public Storage. Public Storage has a significant
ownership interest in PSBP.
54
DESCRIPTION OF PARTNERSHIP'S PROPERTIES
The Partnership and Public Storage jointly own 32 of the 33 Properties
and the remaining one is 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 September 30, 2001
about the Properties.
Net Rentable Number Date of Ownership
Location Square Feet of Spaces Acquisition Percentage
------------------------------------ ------------ --------- ------------- ----------
California
Brea 82,400 773 02/28/86 60.0%
E. Imperial Highway
Costa Mesa 43,500 495 02/21/86 50.0
Pomona Ave.
Sun Valley 47,500 482 01/08/86 50.0
Sheldon St.
Westlake Village 36,000 303 05/09/86 60.0
W. Agoura Rd.
Colorado
Colorado Springs 45,000 432 07/15/86 100.0
Hollow Tree Ct.
Colorado Springs 58,800 578 02/19/86 50.0
N. Sinton Rd.
Denver 32,300 235 12/06/85 50.0
Leetsdale Dr.
Florida
Jacksonville 31,800 325 03/12/86 60.0
Wiley Rd.
Illinois
Skokie 49,500 458 02/27/86 50.0
McCormick Blvd.
Massachusetts
Brockton 49,800 430 12/03/85 50.0
Main St.
55
Net Rentable Number Date of Ownership
Location Square Feet of Spaces Acquisition Percentage
------------------------------------ ------------ --------- ------------- ----------
Missouri
St. Louis 43,900 382 03/28/86 69.7
Forder Rd.
Nevada
Las Vegas 47,300 435 01/17/86 50.0
S. Martin Luther King Blvd.
Reno 81,000 570 04/01/86 70.6
Telegraph St.
New Jersey
Bordentown 30,500 290 01/16/86 50.0
Route 130
Eatontown 82,400 897 12/31/85 60.0
Highway 35
Mapleshade 55,400 499 01/16/86 50.0
Rudderow Ave.
New York
Amherst 32,000 299 12/31/85 50.0
Niagara Falls Blvd.
Oklahoma
Oklahoma City 35,000 278 02/20/86 60.0
N. Pennsylvania Ave.
Oklahoma City 32,700 276 02/28/86 60.3
NW 39th Expressway
Pennsylvania
Whitehall 54,300 532 12/03/85 50.0
MacArthur Rd.
Texas
Dallas 53,200 453 10/04/85 66.4
Alvin St.
Dallas 65,400 665 10/04/85 66.4
S. Westmoreland
Ft. Worth 52,500 500 10/04/85 66.4
Cockrell Ave.
Ft. Worth 58,600 588 10/04/85 66.4
E. Seminary Dr.
Ft. Worth 54,200 524 10/04/85 66.4
W. Beach St.
San Antonio 53,000 513 10/04/85 66.4
Callaghan Rd.
San Antonio 53,100 492 10/04/85 66.4
Fredericksburg Rd.
San Antonio (1) 92,000 801 10/04/85 66.4
Hackberry St.
56
Net Rentable Number Date of Ownership
Location Square Feet of Spaces Acquisition Percentage
------------------------------------ ------------ --------- ------------- ----------
San Antonio 56,700 567 10/04/85 66.4
Wetmore Rd.
San Antonio 48,700 530 10/04/85 66.4
Zarzamora Rd.
Utah
Kearns 48,600 474 12/18/85 50.0
W. Sams Blvd.
Washington
Everett 83,000 946 11/07/85 50.0
Evergreen Way
Seattle 133,400 1,473 11/07/85 50.0
Empire Way South
--------------
(1) In 2000, the Property was expanded at a cost of $1,794,000,
increasing the size by 273 spaces and 38,000 square feet.
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% in the
nine months ended September 30, 2001 compared to 92% in the same period in 2000.
The annual average realized rent per square foot for the Properties was $9.78 in
the nine months ended September 30, 2001, compared to $9.08 in the same period
in 2000.
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.
57
Set forth below is a schedule showing the overall occupancy rate and
realized rent for the Properties for the periods indicated:
Years ended Nine months ended
December 31, September 30,
-------------------------- -----------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
Weighted average occupancy level 92% 92% 91% 92% 90%
Annual realized rent per occupied
square foot (1) $8.64 $8.89 $9.16 $9.08 $9.78
---------------
(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 1% interest in PSBP alone and an additional
2% interest jointly with Public Storage.
58
DESCRIPTION OF PUBLIC STORAGE'S PROPERTIES
At September 30, 2001, Public Storage had equity interests (through
direct ownership, as well as general and limited partnership interests in 1,378
storage facilities (1,264 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 Properties."
The following table reflects the geographic diversification of Public
Storage's self-storage facilities:
At September 30, 2001
----------------------------------------------------
Net Rentable Square Feet
Number of Facilities(1) (in thousands)(1)
----------------------- ------------------------
California:
Southern 160 10,306
Northern 138 7,704
Texas 163 10,922
Florida 141 8,459
Illinois 94 5,816
Georgia 62 3,626
Colorado 51 3,199
Washington 39 2,533
New Jersey 38 2,244
Virginia 37 2,247
Missouri 37 2,128
Maryland 37 2,097
New York 36 2,162
Ohio 31 1,899
Oregon 25 1,171
Tennessee 25 1,494
South Carolina 24 1,082
North Carolina 24 1,266
Kansas 22 1,278
Nevada 22 1,409
Alabama 22 895
Pennsylvania 20 1,360
Indiana 18 1,050
Other states (15 states) 112 6,770
Totals 1,378 83,117
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 September 30, 2001, 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 $24,558,000, bearing
interest at rates ranging from 7.134% to 10.75% 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.
59
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 945 of the 1,378 self-storage facilities in which Public
Storage had an interest at September 30, 2001. These 945 facilities reflect a
consistent pool of properties that have been operated under the Public Storage
name at a stabilized level since January 1, 1994.
Years ended Nine months ended
December 31, September 30,
-------------------------- -----------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
Weighted average occupancy level (1) 92.5% 92.5% 92.3% 92.7% 90.5%
Annual realized rent per occupied
square foot (1)(2) $9.84 $10.26 $10.73 $10.62 $11.71
---------------
(1) Properties owned throughout the periods.
(2) 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.
60
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 (through
__________, 2002) (4)
---------------
(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.
(4) Distribution of $0.45 per share payable on March 29, 2002 to
shareholders of record on March 15, 2002.
As of September 30, 2001, there were approximately 20,465 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 - General Tax Treatment of Public Storage."
Public Storage's revolving credit facility with a commercial bank
restricts Public Storage's ability to pay distributions in excess of "Funds from
Operations" for the prior four fiscal quarters less scheduled principal payments
and less capital expenditures. Funds from Operations is defined in the loan
agreement generally as net income before gain on sale of real estate,
extraordinary loss on early retirement of debt and deductions for depreciation,
amortization and non-cash charges. Also, unless full dividends on Public
Storage's preferred stock have been paid for all past dividend periods, no
dividends may be paid on Public Storage common stock, except in certain
instances.
61
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 $ 6.00
Second Quarter 6.00
Third Quarter 15.93(1)
Fourth Quarter 6.30
2001:
First Quarter 6.30
Second Quarter 6.62
Third Quarter 6.62
Fourth Quarter 12.64(2)
---------------
(1) Includes a special distribution of approximately $9.63 per
unit. See note (5) under "Summary - Summary Financial
Information."
(2) Includes a special distribution of approximately $6.02 per
unit. See Note (5) under "Summary - Summary Financial
Information."
Holders of Partnership Units. As of December 31, 2001, there were
approximately 2,606 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 1,390(2) 0.94% 50(2)
2000 858(3) 0.58% 34(3)
2001 1,925(4) 1.30% 11(4)
---------------
(1) Transfers are recorded quarterly on the Partnership's records, as of
the first day following each calendar quarter.
62
(2) In 1999, the Company purchased 422 units in 19 transactions at $355 per
unit.
(3) In 2000, the Company purchased 730 units in 23 transactions at $355 per
unit.
(4) In 2001, the Company purchased 866 units in 54 transactions: 484 units
at $355 per unit and 402 units at $381 per unit. On January 1, 2002,
the Company purchased 41 units in 6 transactions at $381 per unit.
All of the purchases of Partnership units described in notes (2), (3),
(4) and (5) above were acquired directly from limited partners or through
secondary firms of the type described below under "Information From The Stanger
Report Regarding Sales Transactions."
Information Obtained from Dean Witter Regarding Sales Transactions.
Dean Witter Reynolds Inc. ("Dean Witter") was the dealer-manager for the
Partnership's initial offering of Units. Set forth below is information obtained
from Dean Witter on the high and low sale price per Unit for sale transactions
during each quarter of 2000 and 2001:
Per Unit Transaction Price (1)(2)
--------------------------------- Number Number of
High Low of Sales(2 Units Sold(2)
-------------------- ------------ -------------- -------------
2000
First Quarter $323.51 $323.51 1 30
Second Quarter - - - -
Third Quarter - - - -
Fourth Quarter - - - -
2001
First Quarter - - - -
Second Quarter - - - -
Third Quarter (3) - - - -
Fourth Quarter (3) - - - -
---------------
(1) The original purchase price was $500 per Unit.
(2) This information was compiled by Dean Witter in the ordinary course
based upon reports made of negotiated sales. The price information
represents the prices reported to have been paid by the buyers to the
sellers net of commissions.
(3) Dean Witter did not compile information during these quarters.
Information From The Stanger Report 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 30, 2000, March 31, 2001, June 30, 2001 and
Third Quarter 2001 issues of The Stanger Report captioned "Limited Partnership
Secondary-Market Prices" and additional information provided to the General
Partners by Robert A. Stanger & Co., Inc. ("Stanger"). Those publications (the
"Stanger Publications") and the additional information provided by Stanger
summarized secondary market prices for public limited partnerships based on
actual transactions during the reporting periods listed on the tables below. The
following secondary-market firms provided high and low price data to The Stanger
Report for some or all of the reporting periods: A-1 Partnership Service Network
- (800) 483-0776, (727) 596-9898; American Partnership Board - (800) 736-9797,
(480) 368-6400; DCC Securities Corp. - (800) 945-0440, (212) 370-1090; Fox &
Henry, Inc. - (630) 325-4445; Frain Asset Management - (800) 654-6110;
MacKenzie-Patterson Securities - (800) 854-8357, (510) 631-9100; National
Partnership Exchange - (800) 356-2739, (813) 636-9299; Newport Financial corp. -
(877) 552-3200; New York Partnership Exchange - (800) 444-7357, (941) 955-8816;
Northcoast Securities - (561) 496-5387; Pacific Partnership Group - (800)
727-7244; and The Partnership Marketing Company - (888) 824-8600, (707)
824-8600.
63
The information regarding sale transactions in Partnership units from
the Stanger Publications and Stanger is as follows:
Per Unit Transaction Price(1)
-----------------------------
Reporting period High Low No. of Units(2)
------------------------------ ---------- ---------- ---------------
1999
January 1 - March 31 $325 $285 30
April 1 - June 30 285 285 26
July 1 - September 30 -- -- --
October 1 - December 31 325 195 25
2000
January 1 - March 31 -- -- --
April 1 - June 30 448 350 18
July 1 - September 30 355 297 55
October 1 - December 31 451 307 191
2001
January 1 - March 31 367 367 90
April 1 - June 30 -- -- --
July 1 - September 30 -- -- --
October 1 - December 31 -- -- --
---------------
(1) The original purchase price was $500 per Unit. The General
Partners do not know whether the transaction prices shown are
before or after commissions.
(2) The General Partners do not know the number of transactions.
The information from The Stanger Report contained above is provided
without verification by the General Partners and is subject to the following
qualifications in The Stanger Report: "Limited partnerships are designed as
illiquid, long-term investments. Secondary-market prices generally do not
reflect the current value of partnership assets, nor are they indicative of
total return since prior cash distributions and tax benefits received by the
original investor are not reflected in the price. Transaction prices are not
verified by Robert A. Stanger & Co."
64
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 September 30, 2001, Public Storage had
outstanding 113,636,305 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, 11,161,500 shares of
preferred stock (of which 55,500 shares were represented by 55,500,000
depositary shares) and 4,523,220.338 shares of equity stock (of which 8,676.102
shares were represented by 8,676,102 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.
65
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 - General Tax Treatment of Public
Storage."
Public Storage's Board of Directors, in its sole and absolute
discretion, may grant an exception to the ownership limits to any person so
requesting, so long as (A) the Board of Directors has determined that, after
giving effect to (x) an acquisition by such person of beneficial ownership
(within the meaning of the Code) of the maximum amount of capital stock of
Public Storage permitted as a result of the exception to be granted and (y)
assuming that the four other persons who would be treated as "individuals" for
the purposes of Section 542(a)(2) of the Code and who would beneficially own the
largest amounts of stock of Public Storage (determined by value) beneficially
own the maximum amount of capital stock of Public Storage permitted under the
ownership limits (or any waivers of the ownership limits granted with respect to
such persons), Public Storage would not be "closely held" within the meaning of
Section 856(h) of the Code and would not otherwise fail to qualify as a REIT,
and (B) such person provides to Public Storage's Board of Directors such
representations and undertakings as the Board of Directors may require.
Notwithstanding any of the foregoing ownership limits, no holder may own or
acquire, either directly, indirectly or constructively under the applicable
attribution rules of the Code, any shares of any class of Public Storage's
capital stock if such ownership or acquisition (i) would cause more than 50% in
value of Public Storage's outstanding capital stock to be owned, either directly
or constructively, under the applicable attribution rules of the Code, by five
or fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds), (ii) would
result in Public Storage's stock being beneficially owned by less than 100
persons (determined without reference to any rules of attribution), or (iii)
would otherwise result in Public Storage's failing to qualify as a REIT.
Public Storage's articles of incorporation and bylaws provide that, if
any holder of Public Storage's capital stock purports to transfer shares to a
person or there is a change in the capital structure of Public Storage and
either the transfer or the change in capital structure would result in Public
Storage failing to qualify as a REIT, or such transfer or the change in capital
structure would cause the transferee to hold shares in excess of the applicable
ownership limit, then the stock being transferred (or in the case of an event
other than a transfer, the stock beneficially owned) which would cause one or
more of the restrictions on ownership or transfer to be violated shall be
automatically transferred to a trust for the benefit of a designated charitable
beneficiary. The purported transferee of such shares shall have no right to
receive dividends or other distributions with respect to such shares and shall
have no right to vote such shares. Any dividends or other distributions paid to
such purported transferee prior to the discovery by Public Storage that the
shares have been transferred to a trust shall be paid to the trustee of the
trust for the benefit of the charitable beneficiary upon demand. The trustee of
the trust will have all rights to dividends with respect to shares of stock held
in trust, which rights will be exercised for the exclusive benefit of the
charitable beneficiary. Any dividends or distributions paid over to the trustee
will be held in trust for the charitable beneficiary. The trustee shall
designate a transferee of such stock so long as such shares of stock would not
violate the restrictions on ownership or transfer in the Public Storage articles
of incorporation or bylaws in the hands of such designated transferee. Upon the
sale of such shares, the purported transferee shall receive the lesser of (A)(i)
the price per share such purported transferee paid for the stock in the
purported transfer that resulted in the transfer of the shares to the trust, or
(ii) if the transfer or other event that resulted in the transfer of the shares
of the trust was not a transaction in which the purported transferee gave full
value for such shares, a price per share equal to the market price on the date
of the purported transfer or other event that resulted in the transfer of the
shares to the trust and (B) the price per share received by the trustee from the
sale or other disposition of the shares held in the trust.
66
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 September 30, 2001, Public Storage had 14 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 8% to 10% per year in the case of
the 13 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
67
whole or in 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 January 31, 2001 and September 28, 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 September 30, 2001, Public Storage had
4,523,220.338 outstanding shares of equity stock (of which 8,676.102 shares were
represented by 8,676,102 depositary shares), which rank on a parity with the
Public Storage common stock. Public Storage's articles of incorporation provide
that the equity stock may be issued from time to time in one or more series and
give the Board of Directors broad authority to fix the dividend and distribution
rights, conversion and voting rights, redemption provisions and liquidation
rights of each series of equity stock. Holders of equity stock have no
preemptive rights. The shares of equity stock will be, when issued, fully paid
and nonassessable.
Effects of Issuance of Capital Stock
The issuance of Public Storage common stock and the issuance of
preferred stock or equity stock with special voting rights could be used to
deter attempts by a single shareholder or group of shareholders to obtain
control of Public Storage in transactions not approved by Public Storage's Board
of Directors. Public Storage has no intention to issue Public Storage common
stock or the preferred stock or equity stock for such purposes.
68
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 following discussion and is of the opinion that this
discussion fairly summarizes the material federal income tax considerations to
the public limited partners as a result of the merger and as a result of the
subsequent ownership of Public Storage common stock for limited partners that do
not make a cash election, and that Public Storage is organized and operated so
as to meet the requirements for qualification as a REIT. As is noted below,
Public Storage's qualification and taxation as a REIT depends upon both Public
Storage's satisfaction in the past, and Public Storage's ability to meet on a
continuing basis in the future, through actual annual operating and other
results, the various requirements under the Code with regard to, among other
things, the sources of its gross income, the lack of "C" corporation earnings
and profits, the composition of its assets, the levels of distributions to
shareholders, and the diversity of its stock ownership. Tax counsel has relied
upon representations of management with respect to these matters and has not
reviewed or audited, and will not review or audit, compliance with these
requirements and does not express an opinion about those representations.
69
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
$320 per unit as a result of the merger (assuming that the merger is effective
as of the end of the first 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 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 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.
70
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 "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; and
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; and
(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.
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.
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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, 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 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.
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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 Common
Stock and Class B Common 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 are modeled after certain
arrangements that the Internal Revenue Service has ruled in private letter
rulings will preclude a REIT from being considered to violate the ownership
restrictions so long as the arrangements are enforceable as a matter of state
law and the REIT seeks to enforce them as and when necessary. There can be no
assurance, however, that the 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 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
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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
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.
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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;
(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.
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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 substantially 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 of these
partnerships that entitle Public Storage to a percentage of profits (either from
operations, or upon a sale, or both) in excess of the percentage of total
capital originally contributed to the partnership with respect to such interest.
Existing treasury regulations do not specifically address how Public Storage's
"capital interest" in partnerships of this type should be determined. This
determination is relevant because it affects both the percentage of the gross
rental income of the partnership that is considered gross rental income (or
qualifying income) to Public Storage and the percentage of the management fees
paid to Public Storage that is disregarded in determining 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
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
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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;
(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):
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(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.
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
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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 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:
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(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 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 a U.S. shareholder.
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
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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 pay 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 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.
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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 that 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
(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
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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.
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
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(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 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
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(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 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.
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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 117,881 shares of Public Storage common stock,
3,396 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" fairly
summarizes the material federal income tax considerations to a limited partner
as a result of the merger, and the subsequent ownership of Public Storage common
stock. Mr. Scott owns 3,367 shares of Public Storage common stock, 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, 2000 and 1999 and for the three years in the period ended
December 31, 2000 which are included in Public Storage's Annual Report on Form
10-K have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated by reference herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of the Partnership and SEI/PSPV Joint Ventures
at December 31, 2000 and 1999 and for the three years in the period ended
December 31, 2000 appearing herein and in the Annual Report on Form 10-K of the
Partnership have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports included herein. Such financial statements are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
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Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into
as of this 25th day of February, 2002, by and among PUBLIC STORAGE, INC., a
California corporation ("PSI"), PS Partners V Merger Co., Inc., a California
corporation ("Sub") and PS Partners V, 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 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 $596 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 $596 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 148,000 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 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 148,000 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, 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, 1998, 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 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), 113,636,305
of which were issued and outstanding as of September 30, 2001, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of September 30, 2001, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 11,161,500 of which were issued and outstanding as of
September 30, 2001 and (iv) 200,000,000 shares of Equity Stock ($.01 par value),
4,523,220.338 of which were issued and outstanding at September 30, 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, 1998, PSI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Financial Statements. The financial statements included in
PSI's SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSI as
of their respective dates, and the results of operations of PSI for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
5.8 Absence of Certain Changes or Events. Since January 1, 2000,
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
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
$6.62 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 $596 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 December 31, 2001 of the 33
improved properties in which PSP has an interest, as determined by appraisal by
The Nicholson Group, Ltd., (b) the book value of PSP's non-real estate assets
(excluding marketable securities) as of the date of determination and (c) the
fair value of PSP's partnership interests in PS Business Parks, L.P. based on
the average of the per share closing prices on the American Stock Exchange of
the shares of common stock of PS Business Parks, Inc. during the 20 consecutive
trading days ending on the fifth trading day prior to the Effective Time and
less (d) PSP's liabilities as of the date of determination. The determination of
book value and liabilities shall be from PSP's financial statements prepared in
accordance with generally accepted accounting principles on a basis consistent
with prior periods.
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 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 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.
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 V, 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.
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 V, 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 V MERGER CO., INC.
By: /s/ HARVEY LENKIN
-----------------
Harvey Lenkin
President
Appendix B
[Letterhead of The Nicholson Group, Inc]
February 22, 2002
PS Partners V, Ltd. and
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Re: PS Partners V, Ltd.
(a portfolio of 33 self storage properties)
Gentlemen:
We have completed a limited appraisal of the aggregate Market Value of the fee
simple estate in a portfolio of 33 self-storage properties owned by PS Partners
V, Ltd. and submit our findings in this brief letter appraisal report. We
understand that our valuation opinion will be utilized in conjunction with the
proposed acquisition of PS Partners V's ownership interest in the subject
portfolio of properties by Public Storage, Inc. The intended users of this
report are PS Partners V, Ltd. and Public Storage, Inc. (clients) as well as
Robert A. Stanger & Company, Inc. (in their capacity as advisor to PS Partners
V, Ltd. in this proposed transaction). We agree that this report may be included
in an information statement sent to partners of PS Partners V, Ltd. in
connection with the proposed transaction; however, no third parties are
authorized to rely upon our value opinion and appraisal report without the
express written consent of The Nicholson Group, LLC.
As agreed, this report is the result of a limited appraisal process in that
certain allowable departures from specific guidelines of the Uniform Standards
of Professional Appraisal Practice were invoked. This appraisal is limited in
that we have inspected ten of the thirty-three properties in order to ascertain
and verify reported physical condition, unit mix, and rental rates. Our
inspections indicated that the information provided by Public Storage, Inc.
regarding these properties was accurate and reliable. Our appraisal is further
limited in that we have relied primarily upon the Income Capitalization Approach
in arriving at our value opinion. Given the income-producing nature of the
subject properties, the Income Capitalization Approach, as described below, is
considered the most applicable approach to value.
Historical operating statements, unit mix, net rentable areas, rental rates,
capital expenditure estimates and other property-specific data for the portfolio
of properties appraised were furnished by Public Storage, Inc. This information
has been accepted as correctly representing operations and conditions of the
subject properties.
Market Value is defined as:
the most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this
definition are the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby:
1. buyer and seller are typically motivated;
2. both parties are well informed or well advised, and acting
in what they consider their best interests;
3. a reasonable time is allowed for exposure in the open
market;
4. payment is made in terms of cash in United States dollars or
in terms of financial arrangements comparable thereto; and
5. the price represents the normal consideration for the
property sold unaffected by special or creative financing or
sales concessions granted by anyone associated with the
sale.
Fee Simple Estate is defined as:
an absolute fee, free of limitations to any particular class of heirs
or restrictions, but subject to the limitations of eminent domain,
escheat, police power, and taxation.
Summary of Methodology:
-----------------------
In valuing the properties, we 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. We 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, that
is, 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
subject properties diminishes the validity of this approach.
While the appraisal was prepared for all of the properties as a whole, we
analyzed the individual properties by: (a) reviewing each property's previous
three years' operating statements that were provided by management; (b)
reviewing information submitted by on-site managers which included competitive
rental surveys, subject facility descriptions, rental rates, 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. We independently verified the
competitive property rental rates via telephone.
We performed site inspections for a representative number of the properties,
verifying physical condition (including necessary reserves for deferred
maintenance) and discussing maintenance requirements with property management.
Additionally we reviewed evaluations for each property and interviewed
management personnel responsible for the properties to ascertain competitive
conditions, area economic trends affecting the properties and historical
operating revenues and expenses and items of deferred maintenance.
We then estimated the value of each of the properties relying heavily upon the
Income Capitalization Approach. To define the occupancy and rental rate and
expense escalators to be used in developing cash flow projections, we 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, we reviewed other published surveys and information
concerning acquisition criteria in use by property investors.
Further, we gathered and reviewed sales of mini-warehouse properties throughout
the country 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. We also reviewed
information compiled by Public Storage management identifying sales and
acquisitions of mini-warehouses.
Following these reviews, a stabilized level of operating performance was
projected for each property. The value estimate by the Income Capitalization
Approach was made using direct capitalization and a discounted cash flow
analysis.
In applying the discounted cash flow analysis, cash flow projections for each
property (assuming no indebtedness) were developed for a ten-year period with a
residual value computed at the end of year ten. 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. We then analyzed each subject's
occupancy history, local market conditions and estimated a stabilized occupancy
level for each property.
Estimated expenses were based upon an analysis of each property's actual
operating history. The projected expenses were tested for reasonableness based
upon a comparison of operating expense ratios to market norms. Expenses were
deducted from effective gross income to derive a net operating income for each
property. Consideration was given, and adjustments made, to reflect replacement
reserves. Income and expense growth rates and terminal capitalization rates were
based on projection parameters currently being used by property investors as
well as upon local, regional and historical trends. We then capitalized each
property's eleventh year net operating income into a residual value at the end
of a ten-year holding period and assumed a normal cost of disposing of the
properties. The ten yearly cash flows were then discounted to present worth.
In applying the Sales Comparison Approach to the properties, we analyzed 72
mini-warehouse property sales that occurred throughout the nation during the
past two years. Using a regression analysis, a strong correlation was derived
between the comparable property net operating incomes and sale prices per square
foot.
In addition, we reviewed capitalization rates and purchase prices paid in recent
transactions of properties similar to the properties involving Public Storage
and others and have concluded that the subject properties are reasonably and
appropriately valued relative to these other portfolio transactions.
Based upon a correlation of these methodologies, we arrived at an opinion of
value for the subject portfolio of properties. An adjustment in value was
considered for each property and was made as appropriate for capital
expenditures necessary due to deferred maintenance items. Utilizing this
methodology, in our opinion, we have performed actions necessary to ensure a
fair valuation of the subject portfolio.
Assets included within the scope of our valuation include land, land
improvements, building improvements and all fixed building service equipment.
Assets excluded are furniture, fixtures, machinery and equipment, personal
property, inventory, and intangible or other business-related assets.
We have made no investigation of, nor assume any responsibility for, the
existence or impact of any deferred maintenance, structural repairs or hazardous
substances, which may or may not be present on the properties, in the
development of our limited appraisal opinion.
Based upon the investigations and analyses as described, it is our opinion, as
of December 31, 2001, that the aggregate market value of the fee simple estate
in the PS Partners V, Ltd. 33-property portfolio, is:
ONE HUNDRED EIGHT MILLION FOUR HUNDRED THOUSAND DOLLARS
($108,400,000)
The market value estimate set forth herein assumes that the portfolio of
properties would be disposed of in an orderly manner, allowing sufficient time
for exposure on the open market.
This brief appraisal letter report is also referred to as a Restricted Appraisal
Use Report and is intended to comply with the reporting requirements set forth
under Standards Rule 2-2(c) of the Uniform Standards of Professional Appraisal
Practice for a Restricted Use Appraisal Report. As such, it does not include
detailed discussions of the data, reasoning, and analyses that were used in the
appraisal process to develop the appraiser's opinion of value. Supporting
documentation concerning the data, reasoning, and analyses is retained in the
appraiser's file. The depth of discussion contained in this brief report is
specific to the needs of the client and for the intended use stated above. The
appraiser is not responsible for unauthorized use of this report.
Attached to this letter report please find the following exhibits:
Exhibit A - Assumptions and Limiting Conditions
B - Appraisal Certification
Respectfully submitted,
THE NICHOLSON GROUP LLC
/s/ Lawrence R. Nicholson
-------------------------
Lawrence R. Nicholson, CRE, MAI
Professional Assistance By:
Ann Loomans
Michael Axler, MAI
John Trabold, MAI
David Johnsen, MAI
Gilbert Weiger, MAI
attachments
01-099
EXHIBIT A
Assumptions and Limiting Conditions
As agreed upon with the clients prior to the preparation of this appraisal, this
is a Limited Appraisal; it invokes the Departure Provision of the Uniform
Standards of Professional Appraisal Practice ("USPAP"). The reliability of the
value conclusion provided may be impacted to the degree that there is departure
from specific guidelines of USPAP.
This is a Restricted Use Appraisal Report which is intended to comply with the
reporting requirements set forth under Standards Rule 2-2(c) of the Uniform
Standards of Professional Appraisal Practice for a Restricted Use Appraisal
Report. As such, it does not include detailed discussions of the data,
reasoning, and analyses that were used in the appraisal process to develop the
appraiser's opinion of value. Supporting documentation concerning the data,
reasoning, and analyses is retained in the appraiser's file. The depth of
discussion contained in this report is specific to the needs of the client and
for the intended use stated above. The appraiser is not responsible for
unauthorized use of this report.
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property appraised. The
appraisal presumes, unless otherwise noted, that the owner's claim is valid, the
property rights are good and marketable, and there are no encumbrances which
cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, coal, or other subsurface mineral and
use rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remediation cost.
Assumptions and Limiting Conditions, Continued
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance.
One or more of the signatories of this appraisal report is a member or candidate
of the Appraisal Institute. The Bylaws and Regulations of the Institute require
each member and candidate to control the use and distribution of each appraisal
report signed by them.
Except as specifically presented in the letter of transmittal, possession of
this report or any copy thereof does not carry with it the right of publication.
No portion of this report (especially any conclusion of value, the identity of
the appraiser or the firm with which he/she is connected, or any reference to
the Appraisal Institute or the designations awarded by this organization) shall
be disseminated to the public through prospectus, advertising, public relations,
news, or any other means of communication without the written consent and
approval of The Nicholson Group LLC.
EXHIBIT B
Appraisal Certification
I certify that, to the best of my knowledge and belief:
o the statements of fact contained in this report are true and
correct.
o the reported analyses, opinions and conclusions are limited only
by the reported assumptions and limiting conditions, and are my
personal, impartial and unbiased professional analyses, opinions
and conclusions.
o I have no present or prospective interest in the properties that
are the subject of this report, and no personal interest with
respect to the parties involved.
o I have no bias with respect to the properties that are the subject
of this report or the parties involved with the assignment.
o my engagement in this assignment was not contingent upon
developing or reporting predetermined results.
o my compensation for completing this assignment is not contingent
upon the development or reporting of a predetermined value or
direction in value that favors the cause of the client, the amount
of the value opinion, the attainment of a stipulated result, or
the occurrence of a subsequent event directly related to the
intended use of this appraisal.
o my analyses, opinions and conclusions were developed, and this
report has been prepared, in conformity with the requirements of
the Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute and in conformity
with the Uniform Standards of Professional Appraisal Practice.
o I certify that the use of this report is subject to the
requirements of the Appraisal Institute relating to review by its
duly authorized individuals.
o Ten of the thirty-three subject properties were inspected as part
of our appraisal process (PS #'s 24501, 24502, 24503, 24503,
24505, 24511, 24512, 24519, 24520, and 24521); the remaining
twenty-three properties were not inspected.
o Ann Loomans, Michael Axler, MAI, John Trabold, MAI, David Johnsen,
MAI and Gilbert Weiger, MAI provided significant real property
appraisal assistance to the person signing this certification.
o I certify that as of the date of this report, I have completed the
requirements under the continuing education program of the
Appraisal Institute.
/s/ Lawrence R. Nicholson
-------------------------
Lawrence R. Nicholson, CRE, MAI
Appendix C
[Letterhead of Robert A. Stanger & Co., Inc.]
PS Partners V, LTD.
701 Western Avenue, Suite 200
Glendale, CA 91201-2397
Gentlemen:
We have been advised that PS Partners V, 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 $596 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:
o 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;
o Reviewed the Partnership's and PSI's financial statements
contained in Form 10-K filed with the SEC for the years ending
December 31, 1998, 1999, and 2000, and the Form 10-Q for the
nine-month period ending September 30, 2001, which reports the
Partnership's management and PSI's management have indicated
to be the most current financial statements available;
o Reviewed the MAI-certified appraised value of the property
portfolio owned by the Partnership as of December 31, 2001
prepared by The Nicholson Group, Ltd. (the "Appraisal");
o Reviewed information regarding purchases and sales of
self-storage properties by PSI or any affiliated entities and
other information available relating to acquisition criteria
for self-storage properties;
o Reviewed internal financial analyses and forecasts prepared by
the Partnership, and based in part on the Appraisal, of the
current net liquidation value per Unit of the Partnership's
assets and projections of cash flow from operations, cash flow
distributions and going-concern values per Unit for the
Partnership, including the Partnership's calculation of the
allocation of such values between the joint venture partners
and between the limited and general partners;
o 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;
o Reviewed historical market prices, trading volume and
dividends for PSI Common Stock, and secondary market
transactions involving interests in the Partnership; and
o Conducted other studies, analyses, inquiries and
investigations as we deemed appropriate.
In rendering this fairness opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the Information Statement or that was
furnished or otherwise communicated to us by the Partnership and PSI. We have
not performed an independent appraisal of the assets and liabilities of 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 The
Nicholson Group, Ltd. We have also relied on the assurance of the Partnership
and PSI that any pro forma financial statements, projections, budgets, estimates
of deferred maintenance or environmental liability, or value estimates contained
in the Information Statement or otherwise provided to us, were reasonably
prepared on bases consistent with actual historical experience and reflect the
best currently available estimates and good faith judgments; that the allocation
of Consideration to the Limited Partners has been determined by the Partnership
in accordance with the provisions of the 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
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,
/s/ Robert A. Stanger & Co., Inc.
---------------------------------
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
March 7, 2002
Appendix D
Proposed Amendment to Partnership Agreement
Add a new section 13.5 to the partnership agreement of PS Partners V,
Ltd., a California Limited Partnership 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.
Appendix E
PS PARTNERS V, LTD.
a California Limited Partnership
FINANCIAL STATEMENTS OF THE PARTNERSHIP
Page
References
Financials at September 30, 2001
Condensed Balance Sheets at September 30, 2001 and December 31, 2000 1
Condensed Statements of Income for the Three and Nine Months Ended
September 30, 2001 and 2000 2
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 3
Notes to Condensed Financial Statements 4
Financials at December 31, 2000
PS Partners V, Ltd.
Report of Independent Auditors 5
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999 6 For the years ended
December 31, 2000, 1999 and 1998:
Statements of Income 7
Statements of Partners' Equity 8
Statements of Cash Flows 9
Notes to Financial Statements 10 - 15
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 V Joint Ventures
Report of Independent Auditors 16
Financial Statements:
Balance Sheets as of December 31, 2000 and 1999 17 For the Years
Ended December 31, 2000, 1999 and 1998:
Statements of Income 18
Statements of Partners' Equity 19
Statements of Cash Flows 20
Notes to Financial Statements 21 - 24
PS PARTNERS V, LTD.
CONDENSED BALANCE SHEETS
September 30, December 31,
2001 2000
-----------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $2,641,000 $2,300,000
Rent and other receivables 186,000 286,000
Real estate facility, at cost:
Land 574,000 574,000
Buildings and equipment 1,022,000 1,016,000
-----------------------------------
1,596,000 1,590,000
Less accumulated depreciation (632,000) (587,000)
-----------------------------------
964,000 1,003,000
Investment in real estate entities 31,547,000 30,704,000
Other assets 33,000 34,000
-----------------------------------
$35,371,000 $34,327,000
===================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $44,000 $78,000
Advance payments from renters 5,000 8,000
Partners' equity:
Limited partners' equity, $500 per unit, 148,000
units authorized, issued and outstanding 34,873,000 33,802,000
General partner's equity 449,000 439,000
-----------------------------------
Total partners' equity 35,322,000 34,241,000
-----------------------------------
$35,371,000 $34,327,000
===================================
See accompanying notes.
Appendix E - Page 1
PS PARTNERS V, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
2001 2000 2001 2000
----------------------------------------------------------------------
REVENUE:
Rental income $81,000 $79,000 $231,000 $219,000
Equity in earnings of real estate entities 1,453,000 1,273,000 4,278,000 3,560,000
Interest income 22,000 59,000 68,000 149,000
----------------------------------------------------------------------
1,556,000 1,411,000 4,577,000 3,928,000
----------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 26,000 24,000 85,000 75,000
Management fees 5,000 5,000 14,000 13,000
Depreciation and amortization 16,000 13,000 45,000 39,000
Administrative 27,000 25,000 105,000 132,000
----------------------------------------------------------------------
74,000 67,000 249,000 259,000
----------------------------------------------------------------------
NET INCOME $1,482,000 $1,344,000 $4,328,000 $3,669,000
======================================================================
Limited partners' share of net income
($26.78 per unit in 2001 and
$21.43 per unit in 2000) $3,963,000 $3,173,000
General partner's share of net income 365,000 496,000
-----------------------------------
$4,328,000 $3,669,000
===================================
See accompanying notes.
Appendix E - Page 2
PS PARTNERS V, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------
2001 2000
-------------------------------------
Cash flows from operating activities:
Net income $4,328,000 $3,669,000
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 45,000 39,000
Decrease in rent and other receivables 100,000 -
Decrease (increase) in other assets 1,000 (1,000)
Decrease in accounts payable (34,000) (44,000)
(Decrease) increase in advance payments from renters (3,000) 1,000
Equity in earnings of real estate entities (4,278,000) (3,560,000)
-------------------------------------
Total adjustments (4,169,000) (3,565,000)
-------------------------------------
Net cash provided by operating activities 159,000 104,000
-------------------------------------
Cash flows from investing activities:
Distributions from real estate entities 3,435,000 4,476,000
Additions to real estate facility (6,000) (4,000)
-------------------------------------
Net cash provided by investing activities 3,429,000 4,472,000
-------------------------------------
Cash flows from financing activities:
Distributions to partners (3,247,000) (4,640,000)
-------------------------------------
Net cash used in financing activities (3,247,000) (4,640,000)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 341,000 (64,000)
Cash and cash equivalents at the beginning of the period 2,300,000 2,295,000
-------------------------------------
Cash and cash equivalents at the end of the period $2,641,000 $2,231,000
=====================================
See accompanying notes.
Appendix E - Page 3
PS PARTNERS V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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, 2000.
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 September 30, 2001, the results of operations for the three
and nine months ended September 30, 2001 and 2000 and cash flows for
the nine months then ended.
3. The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the results to be expected
for the full year.
4. In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities," as amended in June 2000 by Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which
requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair
value. The Partnership adopted SFAS 133, as amended by SFAS 138, on
January 1, 2001, and the adoption had no material impact on the
Partnership's consolidated financial statements.
5. Summarized combined financial data with respect to the Real Estate
Entities is as follows:
Nine Months Ended September 30,
2001 2000
Total revenues.................... $137,168,000 $124,198,000
Minority interest in income....... $19,743,000 $18,391,000
Net income........................ $43,471,000 $39,348,000
Appendix E - Page 4
Report of Independent Auditors
The Partners
PS Partners V, Ltd.,
A California Limited Partnership
We have audited the balance sheets of PS Partners V, Ltd., a California Limited
Partnership as of December 31, 2000 and 1999 and the related statements of
income, partners' equity, and cash flows for each of the three years in the
period ended December 31, 2000. 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 V, Ltd., a
California Limited Partnership, at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
March 23, 2001
Los Angeles, California
Appendix E - Page 5
PS PARTNERS V, LTD.
a California Limited Partnership
BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
-------------------------------------
ASSETS
Cash and cash equivalents $ 2,300,000 $ 2,295,000
Rent and other receivables 286,000 1,000
Real estate facility, at cost:
Land 574,000 574,000
Buildings and equipment 1,016,000 978,000
-------------------------------------
1,590,000 1,552,000
Less accumulated depreciation (587,000) (534,000)
-------------------------------------
1,003,000 1,018,000
Investment in real estate entities 30,704,000 31,560,000
Other assets 34,000 2,000
-------------------------------------
$ 34,327,000 $ 34,876,000
=====================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 78,000 $ 120,000
Advance payments from renters 8,000 10,000
Partners' equity:
Limited partners' equity, $500 per unit, 148,000
units authorized, issued and outstanding 33,802,000 34,302,000
General partners' equity 439,000 444,000
-------------------------------------
Total partners' equity 34,241,000 34,746,000
-------------------------------------
$ 34,327,000 $ 34,876,000
=====================================
See accompanying notes.
Appendix E - Page 6
PS PARTNERS V, LTD.
a California Limited Partnership
STATEMENTS OF INCOME
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------------------------------------------------------
REVENUE:
Rental income $ 295,000 $ 290,000 $ 324,000
Equity in earnings of real estate entities 5,022,000 3,792,000 3,494,000
Interest income 188,000 117,000 112,000
--------------------------------------------------------
5,505,000 4,199,000 3,930,000
--------------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 95,000 104,000 102,000
Management fees 18,000 17,000 19,000
Depreciation and amortization 53,000 55,000 49,000
Administrative 158,000 137,000 139,000
--------------------------------------------------------
324,000 313,000 309,000
--------------------------------------------------------
NET INCOME $ 5,181,000 $ 3,886,000 $ 3,621,000
========================================================
Limited partners' share of net income
($30.85, $21.99 and $21.55 per unit in
2000, 1999 and 1998, respectively) $ 4,566,000 $ 3,254,000 $ 3,190,000
General partners' share of net income 615,000 632,000 431,000
--------------------------------------------------------
$ 5,181,000 $ 3,886,000 $ 3,621,000
========================================================
See accompanying notes.
Appendix E - Page 7
PS PARTNERS V, LTD.
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
Limited General
Partners Partners Total
--------------------------------------------------------
Balances at December 31, 1997 $ 36,743,000 $ 468,000 $ 37,211,000
Net income 3,190,000 431,000 3,621,000
Distributions (3,552,000) (434,000) (3,986,000)
--------------------------------------------------------
Balances at December 31, 1998 36,381,000 465,000 36,846,000
Net income 3,254,000 632,000 3,886,000
Distributions (5,333,000) (653,000) (5,986,000)
--------------------------------------------------------
Balances at December 31, 1999 34,302,000 444,000 34,746,000
Net income 4,566,000 615,000 5,181,000
Distributions (5,066,000) (620,000) (5,686,000)
--------------------------------------------------------
Balances at December 31, 2000 $ 33,802,000 $ 439,000 $ 34,241,000
========================================================
See accompanying notes.
Appendix E - Page 8
PS PARTNERS V, LTD.
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,181,000 $ 3,886,000 $ 3,621,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 53,000 55,000 49,000
Increase in rent and other receivables (285,000) - (1,000)
(Increase) decrease in other assets (32,000) 1,000 11,000
(Decrease) increase in accounts payable (42,000) 40,000 (2,000)
(Decrease) increase in advance payments from renters (2,000) 1,000 (4,000)
Equity in earnings of real estate entities (5,022,000) (3,792,000) (3,494,000)
-------------------------------------------------------
Total adjustments (5,330,000) (3,695,000) (3,441,000)
-------------------------------------------------------
Net cash (used in) provided by operating activities (149,000) 191,000 180,000
-------------------------------------------------------
Cash flows provided by investing activities:
Distributions from real estate entities 5,878,000 5,393,000 5,523,000
Additions to real estate facilities (38,000) (5,000) (17,000)
-------------------------------------------------------
Net cash provided by investing activities 5,840,000 5,388,000 5,506,000
-------------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (5,686,000) (5,986,000) (3,986,000)
-------------------------------------------------------
Net cash used in financing activities (5,686,000) (5,986,000) (3,986,000)
-------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,000 (407,000) 1,700,000
Cash and cash equivalents at the beginning of the period 2,295,000 2,702,000 1,002,000
-------------------------------------------------------
Cash and cash equivalents at the end of the period $ 2,300,000 $ 2,295,000 $ 2,702,000
========================================================
See accompanying notes.
Appendix E - Page 9
PS PARTNERS V, LTD.
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Summary of Significant Accounting Policies and Partnership Matters
Description of Partnership
PS Partners V, 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 33 properties in 14
states (collectively referred to as the "Mini-Warehouse Properties"),
which exclude two properties (one which was wholly owned by the
Partnership, the other owned by SEI/PSP V Joint Ventures) transferred
to PS Business Parks, L.P. ("PSBPLP") in January 1997. 32 of the
properties are owned by SEI/PSP V 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 70.6%.
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.
Appendix E - Page 10
1. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
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.
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 partnership agreements, for property
acquisitions in which PSI issued convertible securities to the sellers
for its interest, PSI's rights to receive cash flow distributions from
the partnerships for any year after the first year of operation are
subordinated to cash distributions to the Partnership equal to a
cumulative annual 7% of its cash investment (not compounded). These
agreements also specify that upon sale or refinancing of a property for
more than its original purchase price, distribution of proceeds to PSI
is subordinated to the return to the Partnership of the amount of its
cash investment and the 7% distribution described above.
Depreciation and amortization
The Partnership and the Joint Venture depreciate the buildings
and equipment on a straight-line method over estimated useful lives of
25 and 5 years, respectively.
Revenue Recognition
Property rents are recognized as earned.
Allocation of Net Income
The General Partners' share of net income consists of an
amount attributable to their 1% capital contribution and an additional
percentage of cash flow (as defined, see Note 4) which relates to the
General Partners' share of cash distributions as set forth in the
Partnership Agreement. All remaining net income is allocated to the
limited partners.
Per Unit Data
Per unit data is based on the number of limited partnership
units (148,000) outstanding during the year.
Appendix E - Page 11
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.
Cash Distributions
The Partnership Agreement provides for quarterly distributions
of cash flow from operations (as defined). Cash distributions per unit
were $34.23, $36.03 and $24.00 per year during 2000, 1999 and 1998,
respectively.
Cash and Cash Equivalents
For financial statement purposes, the Partnership considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
Appendix E - Page 12
1. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. As amended by Statement of Financial
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," the provisions of SFAS 133 will require
adoption by the Partnership on January 1, 2001. The Partnership adopted
SFAS 133, as amended by SFAS 138, on January 1, 2001, and the adoption
had no material impact on the Partnership's consolidated financial
statements.
2. Real Estate Facilities
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Statement 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the method of accounting for long-lived
assets that are expected to be disposed. The Partnership adopted
Statement 121 in 1996 and the adoption had no effect.
In January 1997, the Partnership, the Joint Venture 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 Partnership's and 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 2000, 1999, and 1998, the Partnership recognized
earnings from the Real Estate Entities of $5,022,000, $3,792,000 and
$3,494,000, respectively, and received cash distributions totaling
$5,878,000, $5,393,000, and $5,523,000, respectively from the Real
Estate Entities. In addition, 2000 equity in earnings includes
$208,000, representing the Partnership's share of a gain on sale of
real estate investments recorded by PSBPLP.
Appendix E - Page 13
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:
2000 1999
--------------- ---------------
For the year ended December 31,
Total revenues $ 166,721,000 $ 144,013,000
Minority interest in income 26,741,000 16,110,000
Net income 58,843,000 48,380,000
At December 31,
Total assets, net of accumulated
depreciation $ 988,414,000 $ 961,360,000
Total liabilities 63,097,000 59,471,000
Total minority interest 306,478,000 289,949,000
Total equity 618,839,000 611,940,000
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, 2000 and at December 31, 1999, respectively, as
compared to prior periods, is the result of additional properties
purchased by PSBPLP during 1999 and 2000.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K for 2000, in Item 14. PS Business Parks, Inc.
is a registrant with the Securities and Exchange Commission, and its
filings can be accessed through the Securities and Exchange Commission.
4. General Partners' Equity
The General Partners have a 1% interest in the Partnership. In
addition, the General Partners have a 10% interest in cash
distributions attributable to operations, exclusive of distributions
attributable to sales and refinancing proceeds. Proceeds from sales and
refinancings will be distributed entirely to the limited partners until
the limited partners recover their investment plus a cumulative 8%
annual return (not compounded); thereafter, the General Partners have a
15% interest in remaining proceeds.
5. Related Party Transactions
The Partnership has a management agreement with PSI whereby
PSI operates the Mini-Warehouse Properties for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In January 1997, the Partnership and the Joint Venture
transferred their 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 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.
Appendix E - Page 14
7. Taxes Based on Income
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do
not reflect a provision for such taxes.
Unaudited taxable net income was $5,671,000, $4,223,000 and
$3,668,000 for the years ended December 31, 2000, 1999 and 1998,
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, 2000 June 30, 2000 September 30, 2000 December 31, 2000
---------------- ---------------- ---------------- ----------------
Revenues $ 1,150,000 $ 1,367,000 $ 1,411,000 $ 1,577,000
Net Income $ 1,077,000 $ 1,248,000 $ 1,344,000 $ 1,512,000
Net Income Per Unit $ 6.54 $ 7.68 $ 7.21 $ 9.42
Three Months Ended
------------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
---------------- ---------------- ---------------- ----------------
Revenues $ 902,000 $ 1,023,000 $ 1,162,000 $ 1,112,000
Net Income $ 831,000 $ 933,000 $ 1,076,000 $ 1,046,000
Net Income Per Unit $ 3.55 $ 5.58 $ 6.53 $ 6.33
Appendix E - Page 15
Report of Independent Auditors
The Partners
SEI/PSP V Joint Ventures
We have audited the balance sheets of the SEI/PSP V Joint Ventures as of
December 31, 2000 and 1999 and the related statements of income, partners'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 V Joint Ventures at
December 31, 2000 and 1999, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
March 23, 2001
Los Angeles, CA
Appendix E - Page 16
SEI/PSP JOINT VENTURES
a California Limited Partnership
BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
--------------------------------------
ASSETS
Cash and cash equivalents $ 306,000 $ 321,000
Rent and other receivables 141,000 108,000
Real estate facilities, at cost:
Land 15,525,000 15,525,000
Buildings and equipment 59,233,000 57,036,000
--------------------------------------
74,758,000 72,561,000
Less accumulated depreciation (34,827,000) (32,006,000)
--------------------------------------
39,931,000 40,555,000
Investment in real estate entity 17,150,000 16,512,000
Other assets 130,000 123,000
--------------------------------------
$ 57,658,000 $ 57,619,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 947,000 $ 805,000
Accrued construction costs 1,794,000 -
Advance payments from renters 421,000 405,000
Partners' equity:
PS Partners V, Ltd. 23,655,000 24,663,000
Public Storage, Inc. 30,841,000 31,746,000
--------------------------------------
Total partners' equity 54,496,000 56,409,000
--------------------------------------
$57,658,000 $ 57,619,000
======================================
See accompanying notes.
Appendix E - Page 17
SEI/PSP V JOINT VENTURES
a California Limited Partnership
STATEMENTS OF INCOME
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-----------------------------------------------------
REVENUE:
Rental income $ 14,798,000 $ 14,349,000 $ 13,932,000
Equity in earnings of real estate entity 1,289,000 1,051,000 931,000
-----------------------------------------------------
16,087,000 15,400,000 14,863,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 4,716,000 4,552,000 4,316,000
Management fees 888,000 861,000 836,000
Depreciation and amortization 2,821,000 2,862,000 2,658,000
-----------------------------------------------------
8,425,000 8,275,000 7,810,000
-----------------------------------------------------
NET INCOME $ 7,662,000 $ 7,125,000 $ 7,053,000
=====================================================
Partners' share of net income:
PS Partners V, Ltd.'s share $ 4,653,000 $ 3,492,000 $ 3,229,000
Public Storage Inc.'s share 3,009,000 3,633,000 3,824,000
-----------------------------------------------------
$ 7,662,000 $ 7,125,000 $ 7,053,000
=====================================================
See accompanying notes.
Appendix E - Page 18
SEI/PSP V JOINT VENTURES
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
PS Partners Public Storage
V, Ltd. Inc. Total
-------------------------------------------------------------
Balances at December 31, 1997 $ 28,471,000 $ 31,335,000 $ 59,806,000
Net income 3,229,000 3,824,000 7,053,000
Distributions (5,321,000) (3,478,000) (8,799,000)
-------------------------------------------------------------
Balances at December 31, 1998 26,379,000 31,681,000 58,060,000
Net income 3,492,000 3,633,000 7,125,000
Distributions (5,208,000) (3,568,000) (8,776,000)
-------------------------------------------------------------
Balances at December 31, 1999 24,663,000 31,746,000 56,409,000
Net income 4,653,000 3,009,000 7,662,000
Distributions (5,661,000) (3,914,000) (9,575,000)
-------------------------------------------------------------
Balances at December 31, 2000 $ 23,655,000 $ 30,841,000 $ 54,496,000
=============================================================
See accompanying notes.
Appendix E - Page 19
SEI/PSP V JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------------------------------------------
Cash flows from operating activities:
Net income $ 7,662,000 $ 7,125,000 $ 7,053,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,821,000 2,862,000 2,658,000
Increase in rent and other receivables (33,000) (19,000) (7,000)
(Increase) decrease in other assets (7,000) 2,000 (2,000)
Increase (decrease) in accounts payable 142,000 (61,000) 162,000
Increase (decrease) in advance payments from renters 16,000 (10,000) 22,000
Equity in earnings of real estate entity (1,289,000) (1,051,000) (931,000)
-------------------------------------------------
Total adjustments 1,650,000 1,723,000 1,902,000
-------------------------------------------------
Net cash provided by operating activities 9,312,000 8,848,000 8,955,000
-------------------------------------------------
Cash flows provided by (used in) investing activities:
Distributions from real estate entity 651,000 649,000 714,000
Additions to real estate facilities (403,000) (712,000) (794,000)
-------------------------------------------------
Net cash provided by (used in) investing activities 248,000 (63,000) (80,000)
-------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (9,575,000) (8,776,000) (8,799,000)
-------------------------------------------------
Net cash used in financing activities (9,575,000) (8,776,000) (8,799,000)
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents (15,000) 9,000 76,000
Cash and cash equivalents at the beginning of the period 321,000 312,000 236,000
-------------------------------------------------
Cash and cash equivalents at the end of the period $ 306,000 $ 321,000 $ 312,000
=================================================
See accompanying notes.
Appendix E - Page 20
SEI/PSP V POINT VENTURES
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Description of Partnership
SEI/PSP V Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 22 separate
general partnerships between Public Storage Inc. ("PSI") and PS
Partners V, Ltd. ("PSP V"). 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 32 properties (referred to hereinafter
as the "Mini-Warehouses"), which excludes a property which was
transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP
V is the managing general partner of the Joint Venture, with its
ownership interests in the properties of the Joint Venture ranging from
50% to 70.6%.
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation
The financial statements include the accounts of the Joint
Venture.
Under the terms of the general partnership agreement of the
Joint Venture, for property acquisitions in which PSI issued
convertible securities to the sellers for its interest, PSI's right to
receive cash flow distributions for any year after the first year of
operation are subordinated to cash distributions to PSP V 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 V of the amount of its cash
investment and the 7% distribution described above.
Depreciation and amortization
The Joint Venture depreciates the buildings and equipment on a
straight-line method over estimated useful lives of 25 and 5 years,
respectively.
Revenue and Expense Recognition
Property rents are recognized as earned. Advertising costs of
$585,000, $486,000 and $393,000 in 2000, 1999 and 1998, respectively,
are expensed as incurred.
Allocation of Net Income to PSP V and PSI
Net income prior to depreciation is allocated to PSP V 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 V 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 V and PSI in proportion to their ownership
percentages.
Appendix E - Page 21
2. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Accrued Construction Costs
During 2000, the Joint Venture expanded its San Antonio -
Hackberry St. real estate facility for a cost of $1,794,000. The
construction costs were paid to an affiliate in the first quarter of
2001, and were presented as "Accrued Construction Costs" at December
31, 2000. Concurrent with the payment of construction costs in the
first quarter of 2001, PSI made a capital contribution (unaudited) of
$603,000 and the Partnership made a capital contribution of $1,191,000
(unaudited), representing their respective ownership interest in the
property.
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.
Appendix E - Page 22
2. Summary of Significant Accounting Policies and Partnership Matters
(Continued)
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. As amended by Statement of Financial
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," the provisions of SFAS 133 will require
adoption by the Partnership on January 1, 2001. The Partnership adopted
SFAS 133, as amended by SFAS 138, on January 1, 2001, and the adoption
had no material impact on the Partnership's consolidated financial
statements.
3. Real Estate Facilities
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Statement 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the method of accounting for long-lived
assets that are expected to be disposed. The Joint Venture adopted
Statement 121 in 1996 and the adoption had no effect.
In January 1997, the Joint Venture and PSI and other
affiliated partnerships of PSI transferred a total of 35 business parks
to PSBPLP, an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the
properties transferred was the Joint Venture's business park in
exchange for a partnership interest in PSBPLP. The general partner of
PSBPLP is PS Business Parks, Inc. ("PSBP").
4. Investment in Real Estate Entity
In 2000, 1999, and 1998, the Joint Venture recognized
$1,289,000, $1,051,000, and $931,000, 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 $172,000, representing the Joint Venture's share of PSBPLP's
gains on sales of real estate investments.
Appendix E - Page 23
4. Investment in Real Estate Entity (Continued)
The accounting policies of PSBPLP are similar to that of the
Joint Venture. Summarized combined financial data with respect to
PSBPLP is as follows:
2000 1999
-------------- --------------
For the year ended December 31,
Total revenues $ 150,634,000 $ 128,613,000
Minority interest in income 26,741,000 16,110,000
Net income 51,181,000 41,255,000
At December 31,
Total assets, net of accumulated
depreciation $ 930,756,000 $ 903,741,000
Total liabilities 59,935,000 58,261,000
Total minority interest 306,478,000 289,949,000
Total equity 564,343,000 555,531,000
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, 2000 and at December 31, 1999, respectively, as
compared to prior periods, is the result of additional properties
purchased by PSBPLP during 1999 and 2000.
PS Business Parks, Inc., which owns PSBPLP, is a registrant
with the Securities and Exchange Commission, and its filings can be
accessed through the Securities and Exchange Commission.
5. Related Party Transactions
The Joint Venture has a management agreement with PSI whereby
PSI operates the Mini-Warehouses for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In January 1997, the Joint Venture transferred its business
park facility to PSBPLP in exchange for a partnership interest in
PSBPLP. PSI has a significant economic interest in PSBPLP and PSBP.
6. Leases
The Joint Venture has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
7. Taxes Based on Income
Taxes based on income are the responsibility of PSP V and PSI
and, accordingly, the Joint Venture's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $6,215,000, $5,711,000 and
$5,784,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
Appendix E - Page 24
Appendix F
PS PARTNERS V, LTD.
a California Limited Partnership
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page
References
1
Forward Looking Statements
Results of Operations - Financials at September 30, 2001
Three Months Ended September 30, 2001 Compared to Three Months
Ended September 30, 2000 1
Nine Months Ended September 30, 2001 Compared to Nine Months
Ended September 30, 2000 2
Supplemental Property Data 3
Liquidity and Capital Resources 3
Results of Operations - Financials at December 31, 2000
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 4
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 4
Supplemental Property Data 5
PS PARTNERS V, LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
When use.0d within this document, the words "expects," "believes,"
"anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Act of 1933, as amended, and in Section 21F of the
Securities Exchange Act of 1934, as amended. 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 impact of competition from new and existing real estate
facilities which could impact rents and occupancy levels at the real estate
facilities in which the Partnership has an interest; the Partnership's ability
to effectively compete in the markets in which it does business; 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 in which the Partnership has an interest.
Results of Operations - Financials at September 30, 2001
Three months ended September 30, 2001 compared to three months ended September
30, 2000:
Our net income for the three months ended September 30, 2001 was
$1,482,000 compared to $1,344,000 for the three months ended September 30, 2000,
representing an increase of $138,000 or 10.3%. The increase was primarily due to
our share of improved operations at the real estate facilities in which we have
an interest and a decrease in depreciation expense allocated to the Partnership
with respect to the Joint Venture.
Property Operations
Rental income for our wholly-owned mini-warehouse property was $81,000
compared to $79,000 for the three months ended September 30, 2001 and 2000,
respectively, representing an increase of $2,000 or 2.5%. Cost of operations
(including management fees) increased $2,000 or 6.9%, to $31,000 from $29,000
for the three months ended September 30, 2001 and 2000, respectively.
Accordingly, for our wholly-owned mini-warehouse property, property net
operating income remained stable at $50,000 for the three months ended September
30, 2001 and 2000, respectively.
Equity in Earnings of Real Estate Entities
Equity in earnings of real estate entities was $1,453,000 in the three
months ended September 30, 2001 as compared to $1,273,000 during the three
months ended September 30, 2000, representing an increase of $180,000, or 14.1%.
This increase was primarily due to our share of improved property operations at
the real estate facilities in which we have an interest and a decrease in
depreciation expense allocated to the Partnership with respect to the Joint
Venture.
Interest Income
Interest income decreased by $37,000, from $59,000 for the three months
ended September 30, 2000 to $22,000 for the three months ended September 30,
2001, due to lower invested cash balances and lower interest rates.
Depreciation and Amortization
Depreciation and amortization increased by $3,000, from $13,000 to
$16,000 for the three months ended September 30, 2000 and 2001, respectively.
Appendix F - Page 1
Administrative
Administrative expense increased by $2,000, to $27,000 for the three
months ended September 30, 2001 as compared to $25,000 for the same period in
2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000:
Our net income for the nine months ended September 30, 2001 was
$4,328,000 compared to $3,669,000 for the nine months ended September 30, 2000,
representing an increase of $659,000, or 18.0%. The increase was primarily due
to our share of improved property operations at the real estate facilities in
which we have an interest and a decrease in depreciation expense allocated to
the Partnership with respect to the Joint Venture.
Property Operations
Rental income for our wholly-owned mini-warehouse property was $231,000
compared to $219,000 for the nine months ended September 30, 2001 and 2000,
respectively, representing an increase of $12,000, or 5.5%. Cost of operations
(including management fees) increased $11,000, or 12.5%, to $99,000 from $88,000
for the nine months ended September 30, 2001 and 2000, respectively.
Accordingly, for our wholly-owned mini-warehouse property, property net
operating income increased $1,000, or 0.8%, to $132,000 from $131,000 for the
nine months ended September 30, 2001 and 2000, respectively.
Equity in Earnings of Real Estate Entities
Equity in earnings of real estate entities was $4,278,000 in the nine
months ended September 30, 2001 as compared to $3,560,000 during the nine months
ended September 30, 2000, representing an increase of $718,000, or 20.2%. The
increase was primarily due to our share of improved property operations at the
real estate facilities in which we have an interest and a decrease in
depreciation expense allocated to the Partnership with respect to the Joint
Venture.
Interest Income
Interest income decreased by $81,000, from $149,000 for the nine months
ended September 30, 2000 to $68,000 for the nine months ended September 30, 2001
due to lower invested cash balances and lower interest rates.
Depreciation and Amortization
Depreciation and amortization increased $6,000, from $39,000 to $45,000
for the nine months ended September 30, 2000 and 2001, respectively.
Administrative
Administrative expense decreased $27,000, to $105,000 in the nine
months ended September 30, 2001 as compared to $132,000 in the same period in
2000.
Appendix F - Page 2
Supplemental Property Data
Most of the Partnership's net income is from our share of the operating
results of the Mini-Warehouse Properties. Therefore, in order to evaluate our
operating results, the General Partners analyze the operating performance of the
Mini-Warehouse Properties.
Three months ended September 30, 2001 compared to three months ended September
30, 2000:
Rental income for the Mini-Warehouse Properties was $4,153,000 compared
to $3,859,000 for the three months ended September 30, 2001 and 2000,
respectively, representing an increase of $294,000 or 7.6%. The increase in
rental income was primarily attributable to an increase in rental rates at the
Mini-Warehouse Properties. The annual average realized rent per square foot for
the Mini-Warehouse Properties was $10.00 compared to $9.30 for the three months
ended September 30, 2001 and 2000, respectively. The weighted average occupancy
levels at the Mini-Warehouse Properties remained stable at 91% for the three
months ended September 30, 2000 and 2001, respectively. Cost of operations
(including management fees) increased $45,000 or 3.2%, to $1,468,000 from
$1,423,000 for the three months ended September 30, 2001 and 2000, respectively.
This increase is primarily attributable to increases in advertising and
promotion expenses, offset partially by lower repairs and maintenance expenses.
Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $249,000 or 10.2%, from $2,436,000 to $2,685,000 for the three
months ended September 30, 2000 and 2001, respectively.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000:
Rental income for the Mini-Warehouse Properties was $12,063,000
compared to $11,267,000 for the nine months ended September 30, 2000 and 1999,
respectively, representing an increase of $796,000 or 7.1%. The increase in
rental income was primarily attributable to an increase in rental rates at the
Mini-Warehouse Properties. The annual average realized rent per square foot for
the Mini-Warehouse Properties was $9.78 compared to $9.08 for the nine months
ended September 30, 2001 and 2000, respectively. The weighted average occupancy
levels at the Mini-Warehouse Properties decreased from 92% to 90% for the nine
months ended September 30, 2000 and 2001, respectively. Cost of operations
(including management fees) increased $85,000 or 2.0%, to $4,292,000 from
$4,207,000 for the nine months ended September 30, 2001 and 2000, respectively.
This increase is primarily attributable to increases in advertising and
promotion expenses, offset partially by lower repairs and maintenance expenses.
Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $711,000 or 10.1%, from $7,060,000 to $7,771,000 for the nine
months ended September 30, 2000 and 2001, respectively.
Liquidity and Capital Resources
We have adequate sources of cash to finance our 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 ($3,594,000 for the nine months ended
September 30, 2001) has been sufficient to meet all our current obligations.
During 2001, we do not anticipate incurring significant costs for
capital improvements for the Partnership's wholly-owned property. Total capital
improvements for the nine months ended September 30, 2001 with respect to our
wholly-owned property was $6,000.
We paid distributions to the limited and general partners totaling
$2,892,000 ($19.54 per unit) and $355,000, respectively, during the first nine
months of 2001. Future distribution rates may be adjusted to levels which are
supported by operating cash flow after capital improvements and any other
necessary obligations.
Appendix F - Page 3
Results of Operations - Financials at December 31, 2000
Year ended December 31, 2000 compared to year ended December 31, 1999:
The Partnership's net income was $5,181,000 in 2000 compared to
$3,886,000 in 1999, representing an increase of $1,295,000, or 33.3%. 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'), the Partnership's share of increased operating
results of PSBPLP 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 property was $295,000
in 2000 compared to $290,000 during 1999, representing a increase of $5,000, or
1.7%. Cost of operations (including management fees) decreased $8,000, or 6.6%,
to $113,000 during 2000 from $121,000 in 1999. Accordingly, for the
Partnership's mini-warehouse operations, property net operating income increased
by $13,000, or 7.7%, to $182,000 in 2000 from $169,000 in 1999.
Equity in earnings of real estate entities
Equity in earnings of real estate entities was $5,022,000 in 2000 as
compared to $3,792,000 during 1999, representing an increase of $1,230,000, or
32.4%. The increase was due primarily to the Partnership's share of improved
operating results at the Joint Venture's mini-warehouse properties, the
Partnership's share of increase operating results of PSBPLP and a decrease in
depreciation allocated to the Partnership with respect to the joint venture. The
increase also includes $208,000 representing the Partnership's share of a gain
on sale of real estate investments recorded by PSBPLP in 2000.
Year ended December 31, 1999 compared to year ended December 31, 1998:
The Partnership's net income was $3,886,000 in 1999 compared to
$3,621,000 in 1998, representing an increase of $265,000, or 7.3%. 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'), the Partnership's share of increase operating
results of PSBPLP 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 property was $290,000
in 1999 compared to $324,000 during 1998, representing a decrease of $34,000, or
10.5%. Cost of operations (including management fees) remained stable at
$121,000 during 1999 and 1998. Accordingly, for the Partnership's mini-warehouse
operations, property net operating income decreased by $34,000, or 16.7%, to
$169,000 in 1999 from $203,000 in 1998.
Equity in earnings of real estate entities
Equity in earnings of real estate entities was $3,792,000 in 1999 as
compared to $3,494,000 during 1998, representing an increase of $298,000, or
8.5%. The increase was due primarily to the Partnership's share of improved
operating results at the Joint Venture's mini-warehouse properties, the
Partnership's share of increased operating results of PSBPLP and a decrease in
depreciation allocated to the Partnership with respect to the joint venture.
Appendix F - Page 4
Supplemental Property Data
During 2000 and 1999, a majority of the Partnership's net income was
from the Partnership's share of the operating results of the Mini-Warehouse
Properties. Therefore, in order to evaluate the Partnership's operating results,
the General Partners analyze the operating performance of the Mini-Warehouse
Properties.
Year ended December 31, 2000 compared to the year ended December 31, 1999
Rental income for the Mini-Warehouse Properties was $15,093,000 in 2000
compared to $14,639,000 during 1999, representing an increase of $454,000, or
3.1%. The increase in rental income was primarily attributable to increased
rental rates. The annual average realized rent per square foot was $9.16 in 2000
compared to $8.89 in 1999. The weighted average occupancy level was 91% in 2000
and 92% in 1999. Cost of operations (including management fees) increased
$183,000, or 3.3%, to $5,717,000 during 2000 from $5,534,000 in 1999. This
increase was primarily attributable to increases in advertising, property tax,
and repairs and maintenance. Accordingly, for the Mini-Warehouse Properties,
property net operating income increased by $271,000, or 3.0%, from $9,105,000 in
1999 to $9,376,000 during 2000.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Rental income for the Mini-Warehouse Properties was $14,639,000 in 1999
compared to $14,256,000 during 1998, representing an increase of $383,000, or
2.7%. The increase in rental income was primarily attributable to increased
rental rates. The annual average realized rent per square foot was $8.89 in 1999
compared to $8.64 in 1998. The weighted average occupancy level remained stable
at 92% during 1999 and 1998. Cost of operations (including management fees)
increased $261,000, or 4.9%, to $5,534,000 during 1999 from $5,273,000 in 1998.
This increase was primarily attributable to increases in advertising, property
tax, and management fees. Accordingly, for the Mini-Warehouse Properties,
property net operating income increased by $122,000, or 1.4%, from $8,983,000 in
1998 to $9,105,000 during 1999.
Appendix F - Page 5
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, 2000 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.
II-1
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement. Provided, however, that paragraphs 1.(i)
and 1.(ii) do not apply if the registration statement is on Form
S-3 or Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
4. That, for purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
5. That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
6. That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
7. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
8. Except as permitted by General Instruction H to Form S-4 (in a transaction
not covered by General Instruction I), to supply by means of a post-
effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
II-2
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 7th day of March, 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 March 7, 2002
------------------------------------ Director (principal executive officer)
B. Wayne Hughes
/s/ Harvey Lenkin President and Director March 7, 2002
------------------------------------
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Vice President and Director March 7, 2002
------------------------------------
B. Wayne Hughes, Jr.
/s/ Marvin M. Lotz Senior Vice President and Director March 7, 2002
------------------------------------
Marvin M. Lotz
/s/ John Reyes Senior Vice President and Chief Financial Officer March 7, 2002
------------------------------------ (principal financial officer and principal accounting
John Reyes officer)
/s/ Robert J. Abernethy Director March 7, 2002
------------------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director March 7, 2002
------------------------------------
Dann V. Angeloff
II-3
Signature Capacity Date
------------------------------------ -------------------------------------------------- -------------
/s/ William C. Baker Director March 7, 2002
------------------------------------
William C. Baker
Director March 7, 2002
------------------------------------
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director March 7, 2002
------------------------------------
Uri P. Harkham
/s/ Daniel C. Staton Director March 7, 2002
------------------------------------
Daniel C. Staton
II-4
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization among Registrant, PS Partners V
Merger Co., Inc. and PS Partners V, 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 1/1,000th 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 1/1,000th 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 Amendment to Certificate of Determination for Equity Stock, Series A.
Filed with Registrant's Quarterly Report on From 10-Q for the quarterly
period ended June 30, 2001 and incorporated herein by reference.
3.33 Certificate of Determination for 8.000% Cumulative Preferred Stock,
Series R. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8.000% Cumulative Preferred Stock, Series R and incorporated herein
by reference.
3.34 Certificate of Determination for 7.875% Cumulative Preferred Stock,
Series S. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.875% Cumulative Preferred Stock, Series S and incorporated herein
by reference.
3.35 Certificate of Determination for 7.625% Cumulative Preferred Stock,
Series T. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.625% Cumulative Preferred Stock, Series T and incorporated herein
by reference.
3.36 Certificate of Determination for 7.625% Cumulative Preferred Stock,
Series U. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.625% Cumulative Preferred Stock, Series U and incorporated herein
by reference.
3.37 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.38 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.39 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.40 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.41 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.
3.42 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.
3.43 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrant's
Form 10-Q for the quarterly period ended March 31, 1999 and
incorporated herein by reference.
5.1 Opinion of David Goldberg. Filed herewith.
8.1 Opinion of A. Timothy Scott. 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 1/1000th 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 1/1000th 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 1/1000th 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.
10.32 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.
10.33* Registrant's 2001 Non-Executive/Non-Director Stock Option and Incentive
Plan. Filed with Registrant's Registration Statement No. 333-59218 and
incorporated herein by reference.
10.34* Registrant's 2001 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-59218 and incorporated
herein by reference.
10.35 Deposit Agreement dated as of September 28, 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 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's
Form 8-A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock,
Series R and incorporated herein by reference.
10.36 Deposit Agreement dated as of October 31, 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 7.875%
Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock,
Series S and incorporated herein by reference.
10.37 Credit Agreement by and among Registrant, Wells Fargo Bank, National
Association, as agent, and the financial institutions party thereto
dated as of November 1, 2001. Filed with Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference.
10.38 Deposit Agreement dated as of January 18, 2002 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 7.625%
Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock,
Series T and incorporated herein by reference.
10.39 Deposit Agreement dated as of February 19, 2002 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 7.625%
Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock,
Series U and incorporated herein by reference.
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of A. Timothy Scott (included in Exhibit 8.1).
23.4 Consent of The Nicholson Group, Ltd. Filed herewith.
23.5 Consent of Robert A. Stanger & Co., Inc. Filed herewith.
99.1 Cash Election Form. Filed herewith.
99.2 Real Estate Appraisal Report by The Nicholson Group, Ltd. dated
February 22, 2002 (filed as Appendix B to the Information Statement and
Prospectus).
99.3 Opinion of Robert A. Stanger & Co., Inc. dated March 7, 2002 (filed as
Appendix C to the Information Statement and Prospectus).
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* Compensatory benefit plan.
** Management contract.