-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DldA2HCnoh1ZB2cqjhpvViA8UdTkD4u/7LkfJuG5SK0KG90GPMy1HJo9fnxiN1gh X6xDMuwupdR7bzuZqHYrKQ== 0000898430-95-002711.txt : 19951226 0000898430-95-002711.hdr.sgml : 19951226 ACCESSION NUMBER: 0000898430-95-002711 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 6 REFERENCES 429: 033-49696 FILED AS OF DATE: 19951222 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE INC /CA CENTRAL INDEX KEY: 0000318380 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953551121 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64971 FILM NUMBER: 95603985 BUSINESS ADDRESS: STREET 1: 600 N BRAND BLVD STREET 2: SUITE 300 CITY: GLENDALE STATE: CA ZIP: 91203 BUSINESS PHONE: 8182448080 FORMER COMPANY: FORMER CONFORMED NAME: STORAGE EQUITIES INC DATE OF NAME CHANGE: 19920703 S-4/A 1 AMENDMENT NO. 1 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1995 REGISTRATION NO. 33-64971 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3551121 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION OF INCORPORATION OR NO.) ORGANIZATION) HUGH W. HORNE PUBLIC STORAGE, INC. 600 NORTH BRAND BOULEVARD 600 NORTH BRAND BOULEVARD GLENDALE, CALIFORNIA 91203- GLENDALE, CALIFORNIA 91203-1241 1241 (818) 244-8080 (818) 244-8080 (NAME, ADDRESS, INCLUDING ZIP (ADDRESS, INCLUDING ZIP CODE, CODE, AND TELEPHONE AND NUMBER, INCLUDING AREA CODE, OF TELEPHONE NUMBER, INCLUDING AGENT FOR SERVICE) AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- COPIES TO: DAVID GOLDBERG, ESQ. PUBLIC STORAGE, INC. 600 NORTH BRAND BOULEVARD, SUITE 300 GLENDALE, CALIFORNIA 91203-1241 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME 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, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] CALCULATION OF REGISTRATION FEE
============================================================================================================== AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE OR UNIT OFFERING PRICE FEE - -------------------------------------------------------------------------------------------------------------- Preferred Stock, $.01 par value per share.............................. (1)(3) (2) (1)(2)(3) N/A Depositary Shares................... (1)(3) (2) (1)(2)(3) N/A Common Stock, $.10 par value per share.............................. (1)(4) (2) (1)(2)(4) N/A Warrants............................ (1)(5) (2) (1)(2)(5) N/A Total............................. $274,634,539(6) (2) $274,634,539(6) $94,702(7) ==============================================================================================================
(1) In no event will the aggregate maximum offering price of all securities issued pursuant to this Registration Statement exceed $274,634,539. Any securities registered hereunder may be sold separately or as units with other securities registered hereunder. (2) The proposed maximum offering price per unit will be determined, from time to time, by the Registrant in connection with the issuance by the Registrant of the securities registered hereunder. No separate consideration will be received for any Depositary Shares representing shares of Preferred Stock of the Registrant. (3) Subject to Footnote 1, there is being registered hereunder an indeterminate number of shares of Preferred Stock, and Depositary Shares representing a fractional interest in a share of Preferred Stock, as may be sold, from time to time, by the Registrant. In the event Registrant elects to offer to the public fractional interests in shares of the Preferred Stock registered hereunder, Depositary Receipts will be distributed to those persons acquiring such fractional interests and the shares of Preferred Stock will be issued to a Depositary under a Deposit Agreement. There is also being registered hereunder an indeterminate number of shares of Preferred Stock as shall be issuable upon exercise of Warrants registered hereby. (4) Subject to Footnote 1, there is being registered hereunder an indeterminate number of shares of Common Stock as may be sold, from time to time, by the Registrant. There is also being registered hereunder an indeterminate number of shares of Common Stock as shall be issuable upon conversion of the Preferred Stock or exercise of Warrants registered hereby. (5) Subject to Footnote 1, there is being registered hereunder an indeterminate number of Warrants representing rights to purchase Preferred Stock or Common Stock, as the case may be, registered pursuant to this Registration Statement. (6) An additional $25,365,461 of securities were registered by Registrant under Registration Statement No. 33-49696 and remain unissued. (7) Calculated pursuant to Rule 457(o) of the rules and regulations under the Securities Act of 1933, as amended. An additional $8,747 registration fee was paid by Registrant in conection with Registration Statement No. 33- 49696 with respect to securities registered thereunder that remain unissued. -------------- PURSUANT TO RULE 429 OF THE RULES AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS WHICH IS A PART OF THIS REGISTRATION STATEMENT WILL ALSO BE USED IN CONNECTION WITH SECURITIES REGISTERED BY REGISTRANT'S REGISTRATION STATEMENT NO. 33-49696. IN THE EVENT ANY OF SUCH PREVIOUSLY REGISTERED SECURITIES ARE OFFERED PRIOR TO THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT, THEY WILL NOT BE INCLUDED IN SUCH PROSPECTUS. 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PUBLIC STORAGE, INC. CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY FORM S-4 REGISTRATION STATEMENT ITEM LOCATION IN PROSPECTUS --------------------------- ---------------------- A. Information About the Transaction 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus........ Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....... Inside Front and Outside Back Cover Pages 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information..................... Risk Factors and Summary--Ratio of Earnings to Fixed Charges 4. Terms of the Transaction......... The Offering 5. Pro Forma Financial Information.. Incorporation of Certain Documents by Reference 6. Material Contacts with the Company Being Acquired.......... * 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters.................... The Offering 8. Interests of Named Experts and Counsel.......................... Legal Opinions 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...... B. Information About the Registrant 10. Information with Respect to S-3 Registrants..................... Incorporation of Certain Documents by Reference 11. Incorporation of Certain Information By Reference........ Incorporation of Certain Documents by Reference 12. Information with Respect to S-2 or S-3 Registrants.............. Incorporation of Certain Documents by Reference 13. Incorporation of Certain Information By Reference........ Incorporation of Certain Documents by Reference 14. Information with Respect to Registrants Other than S-2 or S-3 Registrants................. Incorporation of Certain Documents by Reference C. Information About the Company Being Acquired 15. Information with Respect to S-3 Companies....................... Incorporation of Certain Documents by Reference 16. Information with Respect to S-2 or S-3 Companies................ Incorporation of Certain Documents by Reference 17. Information with Respect to Companies Other than S-2 or S-3 Companies....................... Incorporation of Certain Documents by Reference D. Voting and Management Information 18. Information if Proxies, Consents or Authorizations are to be Solicited....................... Incorporation of Certain Documents by Reference 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer........................... Incorporation of Certain Documents by Reference - -------- * Omitted as Inapplicable. PROSPECTUS PUBLIC STORAGE, INC. PREFERRED STOCK DEPOSITARY SHARES COMMON STOCK WARRANTS Public Storage, Inc. (the "Company") is registering an aggregate $300,000,000 stated amount of securities (including $25,365,461 stated amount of securities registered under a prior registration statement) consisting of (i) shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"), and depositary shares (the "Depositary Shares") representing a fractional interest in a share of Preferred Stock, (ii) shares of common stock, $.10 par value per share (the "Common Stock") and (iii) warrants for the purchase of Preferred Stock or Common Stock (the "Warrants") (collectively, the "Securities") which are being offered and sold by the Company in connection with the acquisition of interests in, or notes secured by, self-service facilities offering storage space for personal and business use ("mini-warehouses") and other real properties or interests in entities that own mini-warehouses and other real properties (collectively, the "Real Estate Investments"). This Prospectus will not be used in connection with "roll-up transactions." See "The Offering--Roll-Up Transactions." The terms under which the Securities would be issued with respect to a particular transaction or transactions are set forth in the accompanying Supplement to this Prospectus (the "Prospectus Supplement"). The Preferred Stock and the Notes may be offered in one or more series on terms to be determined at the time of issuance. The applicable Prospectus Supplement will also contain information, where applicable, about any listing on a securities exchange of the Securities covered by such Prospectus Supplement. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 4 IN THE PROSPECTUS. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------ December 27, 1995 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission in Washington, D.C. and at the Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material can also be inspected at the New York Stock Exchange ("NYSE"), 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-4 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, filed by the Company with the Commission pursuant to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") (File No. 1-8389), are incorporated herein by reference: (i) the Annual Report on Form 10-K for the year ended December 31, 1994, as amended byForm 10-K/As dated April 4, 1995 and April 21, 1995, (ii) the Quarterly Reports on Form 10- Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995 and (iii) the Current Reports on Form 8-K datedJanuary 24, 1995, April 25, 1995 and May 22, 1995, the Current Report on Form 8-K, as amended by aForm 8- K/A, each dated June 30, 1995, and the Current Report on Form 8-K dated November 16, 1995. The financial statements included in Registration Statement No. 33-58893, filed by the Company with the Commission pursuant to the Securities Act, are also incorporated herein by reference. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference in this Prospectus. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein (or in the applicable Prospectus Supplement) or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such information), will be provided without charge to any person, including any beneficial owner, to whom this Prospectus is delivered, upon written request. Requests for such copies should be directed to Investor Services Department, Public Storage, Inc., 600 North Brand Boulevard, Suite 300, Glendale, California 91203-1241. 2 THE COMPANY The Company is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") that acquires, develops, owns and operates self-service facilities offering space for personal and business use ("mini- warehouses"). The Company is the largest owner and operator of mini-warehouses in the United States. The Company also owns and operates, to a much smaller extent, business parks containing commercial and industrial rental space. At November 16, 1995, the Company had equity interests (through direct ownership, as well as general and limited partnership and capital stock interests) in 1,044 properties located in 37 states, consisting of 1,009 mini-warehouse facilities and 35 business parks. The Company also operates 77 properties in which it has no equity interest. In a series of mergers among Public Storage Management, Inc. and its affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger of PSMI into the Company (the "Merger"), the Company became self-administered and self-managed, acquired substantially all of PSMI's United States real estate interests and was renamed "Public Storage, Inc." The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders (the "Shareholders"). See "Certain Federal Income Tax Considerations." The Company was incorporated in California in 1980; its principal executive offices are located at 600 North Brand Boulevard, Suite 300, Glendale, California 91203-1241. Its telephone number is (818) 244-8080. 3 RISK FACTORS In evaluating the Securities, investors should consider the following factors, in addition to other matters set forth or incorporated in this Prospectus (and in the applicable Prospectus Supplement) and the Registration Statement. CONTROL AND INFLUENCE BY THE HUGHES FAMILY B. Wayne Hughes, the chief executive officer of the Company, and members of his family (collectively, the "Hughes Family") beneficially own approximately 53% of the outstanding shares of Common Stock (approximately 57% upon conversion of the Company's Class B common stock, par value $.10 per share (the "Class B Common Stock")). Consequently, the Hughes Family has the ability to control all matters submitted to a vote of Shareholders, including the election of directors, amendment of the Company's restated articles of incorporation (the "Articles of Incorporation"), dissolution and the approval of other extraordinary transactions. In addition, this concentration of ownership may have the effect of delaying or preventing a change in control of the Company. OWNERSHIP LIMITATIONS Public shareholders are further limited in their ability to change control of the Company due to restrictions in the Articles of Incorporation and the Company's bylaws (the "Bylaws") on beneficial ownership. Unless such limitations are waived by the Company's board of directors (the "Board of Directors"), no Shareholder may own more than (A) 2.0% of the outstanding shares of all common stock of the Company or (B) 9.9% of the outstanding shares of any class or series of shares of preferred stock of the Company. 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 capital stock to the extent that such shares of capital stock were beneficially owned by such person at the time of the Merger, which includes the Common Stock owned by the Hughes Family. The principal purpose of the foregoing limitations is to assist in preventing, to the extent practicable, a concentration of ownership that might jeopardize the ability of the Company to obtain the favorable tax benefits afforded a qualified REIT. An incidental consequence of such provisions is to make a change of control significantly more difficult (if not impossible) even if it would be favorable to the interests of the public shareholders. Such provisions will prevent future takeover attempts which the Board of Directors has not approved even if a majority of the public shareholders deem it to be in their best interests or in which the public shareholders may receive a premium for their shares over the then market value. See "Description of Common Stock and Class B Common Stock--Ownership Limitations." TAX RISKS Possible Treatment of the Merger as a Taxable Event. In connection with the Merger, Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to the Company, has delivered an opinion that for federal income tax purposes under current law, the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code. This opinion is based on certain representations made by the Company and by PSMI and its shareholders and on certain assumptions. Furthermore, this opinion is not binding on the IRS. Therefore, the IRS may contest the qualification of the Merger as a reorganization under Section 368(a) of the Code. If such a contest were successful, the Merger would be a taxable transaction and PSMI would recognize gain in an amount equal to the excess of the fair market value of the Common Stock and the Class B Common Stock issued in the Merger over the adjusted basis of the assets transferred to the Company. As the successor to PSMI, the Company would be primarily liable for this resulting tax liability. In addition, the Merger may impact the Company's ability to continue to qualify as a REIT, whether or not the Merger qualifies as a reorganization under the Code. See "--Increase in Nonqualifying Income," "--Elimination of Any Accumulated Earnings and Profits," "--Increased Risk of Violation of Ownership Requirements," and "Certain Federal Income Tax Considerations--Consequences of the Merger on the Company's Qualification as a REIT." Subject to certain limitations, Hughes has agreed to indemnify the Company for tax liabilities of PSMI, including any tax liabilities arising directly or indirectly as a result of the Merger or related transactions. 4 Increased Risk of Violation of Gross Income Requirements. As a result of the Merger, the Company performs property management services for properties in which it has no or only a partial interest. Some or all of the gross income received from these services will not be treated as income qualifying for certain REIT gross income tests applicable to the Company. In 1995 and future years, if the Company's nonqualifying income were to exceed 5% of its total gross income, the Company's REIT status may terminate for that year and future years unless the Company meets certain "reasonable cause" standards. Even if the Company meets such standards, however, it would be subject to a 100% excise tax on any excess nonqualifying net income. If there were no change in the Company's current revenues through acquisitions or otherwise and no other action by the Company to reduce its percentage of nonqualifying income, the Company estimates that it would not satisfy the 95% gross income test for 1996 because its nonqualifying income would represent approximately 7% of its total gross income for 1996. For a discussion of the Company's plans to reduce its percentage of nonqualifying income in 1996 and subsequent years, see "Certain Federal Income Tax Considerations--Consequences of the Merger on the Company's Qualification as a REIT--Nonqualifying Income." Increased Risk of Violation of Ownership Requirements. For the Company to qualify as a REIT under the Code, no more than 50% in value of its outstanding stock may be owned, directly or constructively under the applicable attribution rules of the Code, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year. The value of the outstanding capital stock of the Company held by the Hughes Family is currently estimated at approximately 45% (based upon the market price at November 16, 1995 of the Common Stock and SEI's preferred stock, no discount on the Class B Common Stock and no post-closing reduction in the number of shares issued in the Merger). Accordingly, no four individuals other than the Hughes Family may own directly or constructively, in the aggregate, more than 5% of the value of outstanding capital stock of the Company. In order to assist the Company in meeting these ownership restrictions, the Articles of Incorporation and Bylaws contain the ownership limitations described under "Description of Common Stock and Class B Common Stock-- Ownership Limitations." However, even with these ownership limitations, the Company could still be in violation of the ownership restrictions if four individuals unrelated to the Hughes Family were to own the maximum amount of capital stock permitted under the Articles of Incorporation and Bylaws. Therefore, to further assist the Company in meeting the ownership restrictions, the Hughes Family has entered into an agreement with the Company restricting the Hughes Family's acquisition of additional shares of capital stock of the Company and providing that if, at any time, for any reason, more than 50% in value of its outstanding capital stock otherwise would be considered owned by five or fewer individuals, a number of shares of Common Stock owned by Wayne Hughes necessary to prevent such violation will automatically and irrevocably be transferred to a designated charitable beneficiary. The provisions in the Articles of Incorporation and Bylaws and the agreement with Wayne Hughes are modeled after certain arrangements that the Internal Revenue Service (the "IRS") has ruled in private letter rulings will preclude a REIT from being considered to violate the ownership restrictions so long as such arrangements are enforceable as a matter of state law and the REIT seeks to enforce them as and when necessary. There can be no assurance, however, that the IRS might not seek to take a different position with respect to the Company (a private letter ruling is legally binding only with respect to the taxpayer to whom it was issued) or contend that the Company failed to enforce these various arrangements and, hence, there can be no assurance that these arrangements will necessarily preserve the Company's REIT status. No private letter ruling has been sought by the Company from the IRS with respect to the effect of these arrangements. Elimination of Any Accumulated Earnings and Profits. The accumulated earnings and profits, if any, of PSMI carried over to the Company in the Merger. To retain its REIT status, the Company will have to distribute all of these acquired earnings and profits, if any, on or before December 31, 1995. Accordingly, the Company will be required to accurately determine the amount of acquired earnings and profits and to increase its distributions to its shareholders in 1995 if necessary to eliminate any such earnings and profits. In connection with the Merger, a study of the earnings and profits showed that PSMI had no earnings and profits at the time of the Merger. The determination of earnings and profits depends on a number of factual matters related to the activities and operation of PSMI and its predecessors in years prior to the Merger. Accordingly, no assurances can be given that the IRS will not challenge such conclusion. If the IRS were subsequently to determine that such earnings and profits existed at the time of the Merger and the Company failed to distribute such earnings 5 and profits by December 31, 1995, the Company may lose its REIT qualification for the year of the Merger and, perhaps, for subsequent years unless certain relief provisions apply. See "Certain Federal Income Tax Considerations-- Consequences of the Merger on the Company's Qualification as a REIT-- Elimination of any Accumulated Earnings and Profits Attributable to Non-REIT Years." Consequences of Failure to Qualify as a REIT. The Company has elected to be taxed as a REIT under the Code. In order for the Company to continue to qualify as a REIT under the Code, certain detailed technical requirements must be met (including certain income tests, certain limitations on types of assets the Company can own, certain operational limitations, and certain stock ownership tests). Although the Company intends to operate so that it will continue to qualify as a REIT, the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the circumstances of the Company preclude any assurance that the Company will so qualify in any year. For any taxable year that the Company fails to qualify as a REIT and certain relief provisions do not apply, the Company 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 the Company for distribution to its shareholders or for reinvestment. As a result, failure of the Company to qualify during any taxable year as a REIT could have a material adverse effect upon the Company and its shareholders. Furthermore, unless certain relief provisions apply, the Company would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which the Company fails to qualify. Corporate Level Tax on Sale of Certain Built-in Gain Assets. The Company will be subject to a corporate level tax if it disposes of any of the assets acquired in the Merger at any time during the 10-year period beginning at the time of the Merger (the "Restriction Period"). This tax would be imposed at the top regular corporate rate (currently 35%) in effect at the time of the disposition on the excess of (i) the lesser of (a) the fair market value at the time of the Merger of the assets disposed of and (b) the selling price of such assets over (ii) the Company's adjusted basis at the time of the Merger in such assets (such excess being referred to as the "Built-in Gain"). The Company currently does not intend to dispose of any of the assets acquired in the Merger during the Restriction Period, but there can be no assurance that one or more such dispositions will not occur. See "Certain Federal Income Tax Considerations--Tax Treatment of the Merger--Built-in Gain Rules." OPERATING RISKS General Risks of Real Estate Ownership. The Company is subject to the risks generally incident to the ownership of real estate-related assets, including lack of demand for rental spaces in a locale, changes in general economic or local conditions, changes in supply of or demand for similar or competing facilities in an area, the impact of environmental protection laws, changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive and changes in tax, real estate and zoning laws. Competition Among Mini-Warehouses. Most of the Company's properties are mini-warehouses. Competition in the market areas in which the Company operates is significant and has affected the occupancy levels, rental rates and operating expenses of certain of the Company's properties. Competition may be accelerated by any increase in availability of funds for investment in real estate. Recent increases in plans for development of mini-warehouses is expected to further intensify competition among mini-warehouse operators in certain market areas. Risk of Environmental Liabilities. Under various federal, state and local laws, regulations and ordinances (collectively, "Environmental Laws"), an owner or operator of real estate interests may be liable for the costs of cleaning up, as well as certain damages resulting from, past or present spills, disposals or other releases of hazardous or toxic substances or wastes on, in or from a property. Certain Environmental Laws impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances or wastes at or from a property. An owner or operator of real estate or real estate interests also may be liable under certain Environmental Laws that govern activities or operations at a property having adverse 6 environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous or toxic wastes. In some cases, liability may not be limited to the value of the property. The presence of such substances or wastes, or the failure to properly remediate any resulting contamination, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. The Company has recently conducted preliminary environmental assessments of most of its properties (and intends to conduct such assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, such properties. Such assessments generally consist of an investigation of environmental conditions at the subject property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these recent property assessments, the Company's operations and recent property acquisitions, the Company 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. The Company has obtained with respect to recent acquisitions, and intends to obtain with respect to pending or future acquisitions, appropriate purchase price adjustments or indemnifications that it believes are sufficient to cover any such potential liabilities. Although there can be no assurance, based on the recent preliminary environmental assessments, the Company believes it has funds available to cover any liability from environmental contamination or potential contamination and the Company is not aware of any environmental contamination of its facilities material to its overall business or financial condition. Tenant Reinsurance. A corporation owned by the Hughes Family continues to reinsure policies insuring against losses to goods stored by tenants in the mini-warehouses operated by the Company. The Company believes that the availability of insurance reduces its potential liability to tenants for losses to their goods from theft or destruction. This corporation will continue to receive the premiums and bear the risks associated with the insurance. The Company has a right of first refusal to acquire the stock or assets of this corporation if the Hughes Family or the corporation agree to sell them, but the Company has no interest in its operations and no right to acquire the stock or assets of the corporation in the absence of a decision to sell. If the reinsurance business were owned directly by the Company, the insurance premiums would be nonqualifying income to the Company. The Company would be precluded from exercising its right of first refusal with respect to the stock of the reinsurance corporation if such exercise would cause the Company to violate any of the requirements for qualification as a REIT under the Code. Canadian Operations. The Hughes Family continues to own and operate mini- warehouses in Canada. The Company has a right of first refusal to acquire the stock or assets of the corporation engaged in these operations if the Hughes Family or the corporation agree to sell them, but the Company has no interest in its operations and no right to acquire the stock or assets in the absence of a decision to sell. PSCP. Prior to the Merger, Public Storage Commercial Properties Group, Inc. ("PSCP"), a subsidiary of PSMI, managed commercial properties for the Company and others. Because certain of the revenues generated by PSCP would be nonqualifying income to the Company, prior to the Merger, the common stock of PSCP held by PSMI was converted into nonvoting preferred stock (representing 95% of the equity) and the voting common stock of PSCP (representing 5% of the equity) was issued to the Hughes Family. While the Company acquired the preferred stock of PSCP in the Merger, the Hughes Family is able to continue to control the operations of PSCP by reason of their ownership of its voting stock. Merchandise Company. Prior to the Merger, PSMI sold locks, boxes and tape to tenants to use in securing their rented spaces and moving their goods. Because the revenues received from the sale of these items would be nonqualifying income to the Company, immediately prior to the Merger PSMI transferred this lock and box business to a separate corporation (the "Lock/Box Company"). In the Merger, the Company acquired the 7 nonvoting preferred stock of the Lock/Box Company (representing 95% of the equity). The voting common stock of the Lock/Box Company (representing 5% of the equity) was issued to the Hughes Family, who will be able to control the operations of the Lock/Box Company by reason of their ownership of its voting stock. Liabilities with Respect to Acquired General Partner Interests. Upon succeeding to substantially all of the properties and operations of PSMI in the Merger, there may be certain liabilities and associated costs suffered by the Company in its capacity as general partner of former PSMI limited partnerships arising out of facts and circumstances in existence prior to the Merger, and the Company will also have general partner liability for post- Merger activities of these partnerships, as it does for other partnership as to which it is a general partner. Subject to certain limitations, Hughes has agreed to indemnify the Company for pre-Merger activities and the Class B Common Stock will be placed in escrow to support such indemnification. FINANCING RISKS Dilution and Subordination. The interest of Shareholders, including persons who acquire Securities in this offering, can be diluted through the issuance of additional securities. Since October 1992 the Company has issued shares of Preferred Stock and intends to issue additional such shares. These issuances could involve certain risks to holders of shares of Common Stock. In the event of a liquidation of the Company, the holders of the Preferred Stock will be entitled to receive, before any distribution of assets to holders of Common Stock, liquidating distributions (an aggregate of approximately $538,850,000 in respect of Preferred Stock issued to date), plus any accrued and unpaid dividends. Holders of preferred stock are entitled to receive, when declared by the Board of Directors, cash dividends (an aggregate of approximately $50 million per year in respect of Preferred Stock issued to date, in preference to holders of Common Stock. As a REIT, the Company must distribute to its Shareholders (which include not only holders of Common Stock but also holders of Preferred Stock) for each taxable year at least 95% of its annual taxable income. Failure to pay full dividends on the Preferred Stock could jeopardize the Company's qualification as a REIT. See "Description of Preferred Stock" and "Certain Federal Income Tax Considerations--Tax Treatment of the Company." Risk of Leverage. In making real estate investments, the Company has incurred and may continue to incur indebtedness to the extent believed appropriate. The incurrence of indebtedness increases the risk of loss of the investment. RISKS TO INVESTORS IN AFFILIATED ENTITIES Securities may be issued under this Prospectus to investors in entities affiliated with the Company. Because of the affiliation between the Company and the affiliated entities, the terms of the transactions will not be negotiated at arms' length and may not be as favorable to the investors in the affiliated entities as could be obtained in transactions with unaffiliated parties. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Upon completion of certain post-Merger adjustments, it is estimated that there will be approximately 72 million shares of Common Stock and seven million shares of Class B Common Stock outstanding. Of these shares, approximately 42 million shares of Common Stock outstanding prior to the Merger are tradeable without restriction (except those applicable to affiliates of the Company) or further registration under the Securities Act. The remaining approximately 36.4 million shares of Common Stock and seven million shares of Class B Common Stock were issued in the Merger without registration under the Securities Act in reliance on an exemption from registration and are "restricted securities" within the meaning of Rule 144 adopted under the Act (the "Restricted Shares"). The beneficial owners of 15.5 million of the Restricted Shares 8 (including all of the Class B Common Stock) have agreed not to offer, sell or otherwise dispose (except for gifts and pledges) of any of their shares for a period of three years following the Merger, in the case of the Common Stock, or for seven years following the Merger, in the case of the Class B Common Stock. Upon expiration of such periods, each will be entitled to sell his or her shares in the public market subject to Rule 144, which contains certain public information, volume, holding period and manner of sale requirements. The remaining approximately 27.9 million Restricted Shares will be available for sale in the public market pursuant to Rule 144, subject to the foregoing requirements that include, as the Rule is currently in effect, a two-year holding period. Sales of substantial amounts of such Common Stock in the public market could adversely affect the market price of the Common Stock. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. The ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings by the sum of fixed charges and preferred stock dividends. Earnings consists of net income before minority interest in income, loss on early extinguishment of debt and gain on disposition of real estate plus fixed charges (other than preferred stock dividends) less the portion of minority interest in income which does not contribute to fixed charges.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ------------- ---------------------------------- 1995 1994 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ ------ ------ Ratio of earnings to combined fixed charges and preferred stock dividends............. 2.07 2.31 2.22 2.40 2.89 2.71 2.79
THE OFFERING The Securities that are being offered from time to time by this Prospectus consist of shares of Preferred Stock, issuable in series, Depositary Shares, shares of Common Stock, Warrants for the purchase of Preferred Stock and Common Stock, aggregating $300,000,000 stated amount (collectively, the "Securities"). SECURITIES TO BE ISSUED The Company is issuing the Securities in connection with the acquisition of Real Property Investments. The consideration for any acquisition may consist of cash, Securities, assumption of liabilities, or a combination thereof, as determined from time to time by negotiation. The Preferred Stock and Depositary Shares will be issued in one or more series with such terms, including dividend rates, maturity, security, subordination, terms of redemption and payment and conversion rights, as the Board of Directors of the Company determines by resolution prior to the issuance of shares of Preferred Stock of any particular series. See "Description of Common Stock and Class B Common Stock" and "Description of Preferred Stock." The terms under which the Securities would be issued with respect to a particular transaction or transactions are set forth in the accompanying Prospectus Supplement, other than in the transaction described below. The Company intends to issue 30,000 shares of convertible Preferred Stock pursuant to this Prospectus to Boston Safe Deposit and Trust Company, as Trustee of the Kodak Retirement Income Plan, in exchange for a limited partnership interest in Public Storage Institutional Fund, a partnership in which the Company is also a 9 general and limited partner. This convertible Preferred Stock (i) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the convertible Preferred Stock, as to payment of dividends, provides for dividends of $890,176 per quarter, (ii) is convertible at the option of the holder at any time into Common Stock at a conversion price computed by dividing (A) 35.088% of the "Adjusted Property Value" (as defined) by (B) the closing price of the Common Stock for a specified period (the "Conversion Price"), subject to the Company's right to pay cash in the amount of the Conversion Price, in lieu of issuing Common Stock and (iii) will automatically convert into Common Stock at the Conversion Price on the fourth anniversary of the issuance of the convertible Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the convertible Preferred Stock will be entitled to receive out of the Company's assets available for distribution to shareholders, before any distribution of assets is made to holders of Common Stock or any other shares of capital stock ranking as to such distributions junior to the convertible Preferred Stock, a liquidation preference equal to the greater of (i) $30,000,000 plus all accrued and unpaid dividends and (ii) the Conversion Price. The convertible Preferred Stock has the same voting rights, on a share for share basis, as the Common Stock and the approval of a majority of the outstanding shares of convertible Preferred Stock, voting separately as a class, is required for any amendment to the Articles of Incorporation that adversely affects the convertible Preferred Stock. In addition, if the equivalent of six quarterly dividends payable on the convertible Preferred Stock or any other series of preferred stock are in default (whether or not declared or consecutive), holders of the convertible Preferred Stock (voting as a class with all other series of preferred stock) will be entitled to elect two additional directors until all dividends in default have been paid or declared and set apart for payment. ROLL-UP TRANSACTIONS This Prospectus will not be used in connection with "roll-up transactions" (as defined in item 901(c) of Commission Regulation S-K). Accordingly, this Prospectus does not represent an offer or a solicitation in a roll-up transaction (as defined above). RESALE OF SECURITIES Unless the transaction is subject to the provisions of Rule 145 under the Securities Act as described below, a person who receives shares of Securities in exchange for Real Property Investments may publicly resell the securities, if he or she is not an affiliate (within the meaning of Rule 144 under the Securities Act) of the Company. If he or she is an affiliate of the Company, the resale of such securities must generally be accomplished only with a prospectus included in a registration statement filed under the Securities Act or under paragraphs (c), (e), (f), and (g) of Rule 144, as described below. Some of the Real Property Investments will be owned by limited partnerships and other entities. If the transfer of the Real Property Investments in exchange for the Securities requires the approval of the limited partners (or other holders of the entity's securities) of the selling entity, and if the transfer is part of a plan to distribute the Securities to the limited partners or other equity owners, the recipients of the Securities who are affiliates of the selling entity will be subject to certain resale restrictions under Rule 145 under the Securities Act. (Limited partners are generally not affiliates of a limited partnership.) During the two years following the issuance of the Securities, these affiliates may publicly resell those securities generally only in accordance with the requirements of paragraph (c), (e), (f) and (g) of Rule 144. These paragraphs generally require that there be available current public information about the Company, that aggregate sales not exceed certain volume limitations and that sales occur in unsolicited brokerage transactions. These restrictions may significantly limit the ability of the holder of the Securities to resell them during the two year period. After the Securities have been held for two years by the holder of the entity's securities (including the period during which the Securities are held by the entity before being distributed to the entity's holders), the Securities may be sold without limitation provided that the seller is not an affiliate of the Company and that there is available current public information about the Company. The holding period of any Common Stock that is issued on conversion of Securities that are convertible is deemed to include the period during which such Securities are held. However, the holding period of any Common or Preferred Stock that is purchased upon exercise of the Warrants does not include the holding period of the Warrants. 10 DESCRIPTION OF COMMON STOCK AND CLASS B COMMON STOCK The Company is authorized to issue 200,000,000 shares of Common Stock and 7,000,000 shares of Class B Common Stock. At December 20, 1995, the Company had outstanding 65,652,073 shares of Common Stock (exclusive of shares issuable upon conversion of the Company's convertible preferred stock and shares subject to options) and had agreed to issue (i) subject to certain conditions, 7,000,00 shares of Class B Common Stock and (ii) subject to resolution of certain post-Merger adjustments, an additional 6,412,210 shares of Common Stock. COMMON STOCK The following description of the Common Stock sets forth certain general terms and provisions of the Common Stock to which any Prospectus Supplement may relate, including a Prospectus Supplement providing that Common Stock will be issuable upon conversion of the Preferred Stock or upon the exercise of the Warrants. The statements below describing the Common Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Articles of Incorporation and the Company's Bylaws (the "Bylaws"). Holders of Common Stock will be entitled to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Payment and declaration of dividends on the Common Stock and purchases of shares thereof by the Company will be subject to certain restrictions if the Company fails to pay dividends on outstanding preferred stock. See "Description of Preferred Stock." Upon any liquidation, dissolution or winding up of the Company, holders of 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 the Company and the preferential amounts owing with respect to any outstanding preferred stock. Holders of Common Stock have no preemptive rights, which means they have no right to acquire any additional shares of Common Stock that may be issued by the Company at a subsequent date. Each outstanding share of Common Stock entitles the holder to one vote on all matters presented to such holders for a vote, with the exception that they have cumulative voting rights with respect to the election of the Board of Directors, in accordance with California law. Cumulative voting means that each holder of Common Stock is 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. A holder of Common Stock 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 he or she chooses. The outstanding shares of Common Stock are, and additional shares of Common Stock will be, when issued, fully paid and nonassessable. OWNERSHIP LIMITATIONS For the Company 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, the Articles of Incorporation provide certain restrictions on the shares of capital stock that any Shareholder may own. The 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 or (B) 9.9% of the outstanding shares of any class or series of shares of Preferred Stock. 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 capital stock to the extent that such shares of capital stock were beneficially owned by such person (including the Hughes Family) at the time of the Merger. However, in determining whether an acquisition of shares after the Merger violates the Articles of Incorporation or Bylaws, Shareholders will be subject to these ownership limitations. This ownership limitation is necessary in order to assist in preserving the Company's REIT status in view of the Hughes Family's substantial ownership interest in the Company. See "Risk Factors--Ownership Limitations" and "Certain Federal Income Tax Considerations--Tax Treatment of the Company." 11 The 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 the Company 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 capital stock of the Company (determined by value) beneficially own the maximum amount of capital stock of the Company permitted under the ownership limits (or any exceptions to the ownership limits granted with respect to such persons), the Company 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 the 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 the Company's capital stock if such ownership or acquisition (i) would cause more than 50% in value of the Company'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 the Company's capital stock being beneficially owned by less than 100 persons (determined without reference to any rules of attribution), or (iii) would otherwise result in the Company failing to qualify as a REIT. The Articles of Incorporation and Bylaws provide that, if any holder of the Company's capital stock purports to transfer shares to a person or there is a change in the capital structure of the Company or other event and either the transfer, the change in capital structure or such other event would result in the Company failing to qualify as a REIT, or such transfer, the change in capital structure or such other event 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 the Company 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. Within 20 days of receiving notice from the Company that shares of capital stock have been transferred to the trust, the trustee shall designate a transferee of such stock so long as such shares of stock would not violate the restrictions on ownership or transfer in the Articles of Incorporation 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. In addition, the Bylaws provide the Board of Directors with the power to prevent the transfer of shares of capital stock or to redeem shares of capital stock if the Board of Directors determines in good faith that such action is necessary to preserve Company's REIT status. CLASS B COMMON STOCK The Class B Common Stock (i) does not participate in distributions on the Common Stock until the later to occur of (x) funds from operations ("FFO") per Common Share (as defined below) aggregating $1.80 during any period of four consecutive calendar quarters or (y) January 1, 2000; thereafter, the Class B Common Stock 12 will participate in distributions (other than liquidating distributions) at the rate of 97% of the per share distributions on the Common Stock, provided that cumulative distributions of at least $.22 per quarter (beginning with the 4th quarter of 1995) per share have been paid on the Common Stock, (ii) does not participate in liquidating distributions, (iii) is not entitled to vote (except as expressly required by California law) and (iv) will automatically convert into Common Stock, on a share for share basis, upon the later to occur of (A) FFO per Common Share aggregating $3.00 during any period of four consecutive calendar quarters or (B) January 1, 2003. For these purposes: 1) FFO means net income (loss) (computed in accordance with GAAP) before (i) gain (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization (including the Company's pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in the Merger (including property management agreements and goodwill)), and (ii) less FFO attributable to minority interest. FFO is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). The NAREIT definition does not specifically address the treatment of minority interest in the determination of FFO or the treatment of the amortization of property management agreements and goodwill. In the case of the Company, FFO represents amounts attributable to Shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of property management agreements and goodwill. FFO does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, FFO is not a substitute for the Company's cash flow or net income as a measure of its liquidity or operating performance or ability to pay distributions. 2) FFO per Common Share means FFO less Preferred Stock dividends (other than dividends on convertible preferred stock) divided by the outstanding weighted average shares of Common Stock assuming conversion of all outstanding convertible securities and the Class B Common Stock. 13 DESCRIPTION OF PREFERRED STOCK The Company is authorized to issue 50,000,000 shares of Preferred Stock. At December 20, 1995, the Company had outstanding 13,444,100 shares of Preferred Stock (of which 6,900 shares of Preferred Stock are represented by 6,900,000 depositary shares). The 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. Holders of Preferred Stock have no preemptive rights. The outstanding shares of Preferred Stock are, and additional shares of Preferred Stock will be, when issued, fully paid and nonassessable. The issuance of Preferred Stock with special voting rights (or Common Stock) could be used to deter attempts by a single Shareholder or group of Shareholders to obtain control of the Company in transactions not approved by the Board of Directors. The Company has no intention to issue the preferred stock (or Common Stock) for such purposes. OUTSTANDING PREFERRED STOCK At December 20, 1995, the Company had nine series of Preferred Stock outstanding: seven series of senior Preferred Stock (the "Senior Preferred Stock") and two series of convertible Preferred Stock. In all respects, each of the series of Senior Preferred Stock ranks on a parity with each other and is senior to both series of convertible Preferred Stock. Each of the series of Senior Preferred Stock (i) has a stated value of $25.00 per share or depositary share, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the Senior Preferred Stock as to payment of dividends (including both series of convertible Preferred Stock), provides for cumulative quarterly dividends calculated as a percentage of the stated value (ranging from 8 7/8% to 10% per year in the case of the eight series of fixed rate 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 Preferred Stock) and (iii) is subject to redemption, in whole or in part, at the option of the Company at a cash redemption price of $25.00 per share or depositary share, plus accrued and unpaid dividends (on and after June 30, 1999 in the case of the adjustable rate Preferred Stock and on or after various dates between December 31, 2000 and April 30, 2005 in the case of the series of fixed rate Preferred Stock). In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of each of the series of Senior Preferred Stock will be entitled to receive out of the Company's assets available for distribution to shareholders, before any distribution of assets is made to holders of Common Stock or any other shares of capital stock ranking as to such distributions junior to the Senior Preferred Stock (including both series of convertible Preferred Stock), liquidating distributions in the amount of $25.00 per share or depositary share, plus all accrued and unpaid dividends. Except as expressly required by law and in certain other limited circumstances, the holders of the Senior Preferred Stock are not entitled to vote. The consent of holders of at least 66 2/3% of the outstanding shares of the Senior Preferred Stock (and any other series of Preferred Stock ranking on a parity therewith), voting as a single class, is required to authorize another class of shares senior to such Preferred Stock. In all respects, each of the series of convertible Preferred Stock ranks on a parity with each other and is senior to the Common Stock. One of the series of the convertible Preferred Stock (i) has a stated value of $25.00 per share, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the convertible Preferred Stock as to payment of dividends, provides for cumulative quarterly dividends at an annual rate of 8.25% of the stated value thereof, (iii) is convertible at the option of the holder at any time into Common Stock at a conversion price of 1.6835 shares of Common Stock for each share of such convertible Preferred Stock (subject to adjustment in certain circumstances) and (iv) after July 1, 1998, under certain circumstances, is redeemable for Common Stock at the option of the Company, in whole or in part, at a redemption price of 1.6835 shares of Common Stock for each share of such convertible Preferred Stock (subject to adjustment in certain circumstances). 14 The other series of convertible Preferred Stock (i) has no stated value, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the convertible preferred stock as to payment of dividends, provides for dividends at a rate adjustable quarterly with a minimum annual rate of 5% per year of the minimum liquidation preference, (iii) is convertible at the option of the holder at any time into Common Stock at a conversion price adjustable quarterly and (iv) on June 30, 2002 will be automatically converted into Common Stock at a conversion price determined as of the time of conversion. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the convertible Preferred Stock will be entitled to receive out of the Company's assets available for distribution to shareholders, before any distribution of assets is made to holders of Common Stock or any other shares of capital stock ranking as to such distributions junior to the convertible Preferred Stock, liquidating distributions (i) in the amount of $25.00 per share, plus all accrued and unpaid dividends, in the case of one of the series of convertible Preferred Stock and (ii) a minimum liquidation preference of $31,200,000, plus all accrued and unpaid dividends, in the case of the other series of convertible Preferred Stock. Except as expressly required by law and in certain other limited circumstances, the holders of the convertible Preferred Stock are not entitled to vote. The consent of holders of at least 66 2/3% of the outstanding shares of one of the series of convertible Preferred Stock and at least 50% of the outstanding shares of the other series is required to authorize another class of shares senior to the convertible Preferred Stock and junior to the Senior Preferred Stock. OWNERSHIP LIMITATIONS For a discussion of the ownership limitations that apply to Preferred Stock, see "Description of Common Stock and Class B Common Stock--Ownership Limitations." FUTURE SERIES OF PREFERRED STOCK The following description of Preferred Stock sets forth certain general terms and provisions of the Preferred Stock to which any Prospectus Supplement may relate. The statements below describing the Preferred Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Articles of Incorporation (including the applicable form of Certificate of Determination) and Bylaws. Reference is made to the Prospectus Supplement relating to the Preferred Stock offered thereby for specific terms, including, where applicable, the following: (1) the title and stated value of such Preferred Stock; (2) the number of shares of such Preferred Stock offered, the liquidation preference per share and the offering price of such Preferred Stock; (3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Stock; (4) the date from which dividends on such Preferred Stock shall accumulate, if applicable; (5) the provision for a sinking fund, if any, for such Preferred Stock; (6) the provision for redemption, if applicable, of such Preferred Stock; (7) any listing of such Preferred Stock on any securities exchange; (8) the terms and conditions, if applicable, upon which such Preferred Stock will be convertible into Common Stock, including the conversion price (or manner of calculation thereof); (9) the voting rights, if any, of such Preferred Stock; (10) any other specific terms, preferences, rights, limitations or restrictions of such Preferred Stock; (11) the relative ranking and preferences of such Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; and (12) any limitations on issuance of any series of Preferred Stock ranking senior to or on a parity with such series of Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company. Ranking. The ranking of the Preferred Stock is set forth in the applicable Prospectus Supplement. Unless otherwise specified in the applicable Prospectus Supplement, such Preferred Stock will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company, rank (i) senior to the Common Stock, any additional class of common stock and any series of Preferred Stock expressly made junior 15 to such Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the affairs of the Company; (ii) on a parity with all Preferred Stock previously issued by the Company the terms of which specifically provide that such Preferred Stock rank on a parity with the Preferred Stock offered hereby with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company; and (iii) junior to all Preferred Stock previously issued by the Company the terms of which specifically provide that such Preferred Stock rank senior to the Preferred Stock offered hereby with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company. Dividends. Holders of shares of the Preferred Stock of each series offered hereby shall be entitled to receive, when, as and if declared by the Board of Directors, out of assets of the Company legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the stock transfer books of the Company on such record dates as shall be fixed by the Board of Directors. Dividends on any series of the Preferred Stock offered hereby may be cumulative or non-cumulative, as provided in the applicable Prospectus Supplement. Dividends, if cumulative, will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If the Board of Directors fails to declare a dividend payable on a dividend payment date on any series of the Preferred Stock for which dividends are noncumulative, then the holders of such series of the Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Company will have no obligation to pay the dividend accrued for such period, whether or not dividends on such series are declared payable on any future dividend payment date. No dividends (other than in Common Stock or other capital stock ranking junior to the Preferred Stock of any series as to dividends and upon liquidation) shall be declared or paid or set aside for payment, nor shall any other distribution be declared or made upon the Common Stock, or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for other capital stock of the Company ranking junior to the Preferred Stock of such series as to dividends and upon liquidation) unless (i) if such series of Preferred Stock has a cumulative dividend, full cumulative dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Stock does not have a cumulative dividend, full dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period. Any dividend payment made on shares of a series of Cumulative Preferred Stock offered hereby shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. Redemption. If so provided in the applicable Prospectus Supplement, the shares of Preferred Stock will be subject to mandatory redemption or redemption at the option of the Company, in whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Stock offered hereby that is subject to mandatory redemption will specify the number of shares of such Preferred Stock that shall be redeemed by the Company in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such Preferred Stock does not have a cumulative dividend, include any accumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash, securities or other property, as specified in the applicable Prospectus Supplement. 16 Notwithstanding the foregoing, no shares of any series of Preferred Stock offered hereby shall be redeemed and the Company shall not purchase or otherwise acquire directly or indirectly any shares of Preferred Stock of such series (except by conversion into or exchange for capital stock of the Company ranking junior to the Preferred Stock of such series as to dividends and upon liquidation) unless all outstanding shares of Preferred Stock of such series are simultaneously redeemed unless, in each case, (i) if such series of Preferred Stock has a cumulative dividend, full cumulative dividends on the Preferred Stock of such series shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Stock does not have a cumulative dividend, full dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Preferred Stock of such series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Preferred Stock of such series. If fewer than all of the outstanding shares of Preferred Stock of any series offered hereby are to be redeemed, the number of shares to be redeemed will be determined by the Company and such shares may be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid redemption of fractional shares) or any other equitable method determined by the Company. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of Preferred Stock of any series to be redeemed at the address shown on the stock transfer books of the Company. Each notice shall state: (i) the redemption date; (ii) the number of shares and series of the Preferred Stock to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such Preferred Stock are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holder's conversion rights, if any, as to such shares shall terminate. If fewer than all the shares of Preferred Stock of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of shares of Preferred Stock to be redeemed from each such holder and, upon redemption, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. In order to facilitate the redemption of shares of Preferred Stock, the Board of Directors may fix a record date for the determination of shares of Preferred Stock to be redeemed, such record date to be not less than 30 or more than 60 days prior to the date fixed for such redemption. Notice having been given as provided above, from and after the date specified therein as the date of redemption, unless the Company defaults in providing funds for the payment of the redemption price on such date, all dividends on the Preferred Stock called for redemption will cease. From and after the redemption date, unless the Company so defaults, all rights of the holders of the Preferred Stock as shareholders of the Company, except the right to receive the redemption price (but without interest), will cease. Subject to applicable law and the limitation on purchases when dividends on Preferred Stock are in arrears, the Company may, at any time and from time to time, purchase any shares of Preferred Stock in the open market, by tender or by private agreement. Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Stock or any other class or series of capital stock of the Company ranking junior to any series of the Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the holders of such series of Preferred Stock shall be entitled to receive out of assets of the Company legally available for distribution to stockholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such 17 Preferred Stock does not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Preferred Stock will have no right or claim to any of the remaining assets of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding shares of any series of Preferred Stock and the corresponding amounts payable on all shares of other classes or series of capital stock of the Company ranking on a parity with the Preferred Stock in the distribution of assets upon liquidation, dissolution or winding up, then the holders of such series of Preferred Stock and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of Preferred Stock, the remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to such series of Preferred Stock upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of the Company with or into any other corporation, or the sale, lease, transfer or conveyance of all or substantially all of the property or business of the Company, shall not be deemed to constitute a liquidation, dissolution or winding up of the Company. Voting Rights. Holders of the Preferred Stock offered hereby will not have any voting rights, except as set forth below or as otherwise expressly required by law or as indicated in the applicable Prospectus Supplement. If the equivalent of six quarterly dividends payable on any series of Preferred Stock are in default (whether or not declared or consecutive), the holders of all such series of Preferred Stock, voting as a single class with all other series of Preferred Stock upon which similar voting rights have been conferred and are exercisable, will be entitled to elect two additional directors until all dividends in default have been paid or declared and set apart for payment. Such right to vote separately to elect directors shall, when vested, be subject, always, to the same provisions for vesting of such right to elect directors separately in the case of future dividend defaults. At any time when such right to elect directors separately shall have so vested, the Company may, and upon the written request of the holders of record of not less than 20% of the total number of preferred shares of the Company then outstanding shall, call a special meeting of Shareholders for the election of directors. In the case of such a written request, such special meeting shall be held within 90 days after the delivery of such request and, in either case, at the place and upon the notice provided by law and in the Bylaws, provided that the Company shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual meeting of Shareholders, and the holders of all classes of outstanding preferred stock are offered the opportunity to elect such directors (or fill any vacancy) at such annual meeting of shareholders. Directors so elected shall serve until the next annual meeting of Shareholders or until their respective successors are elected and qualify. If, prior to the end of the term of any director so elected, a vacancy in the office of such director shall occur, during the continuance of a default by reason of death, resignation, or disability, such vacancy shall be filled for the unexpired term of such former director by the appointment of a new director by the remaining director or directors so elected. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of each series of Preferred Stock will be required to amend or repeal any provision of or add any provision to, the Articles of Incorporation, including the Certificate of Determination, if such action would materially and adversely alter or change the rights, preferences or privileges of such series of Preferred Stock. No consent or approval of the holders of any series of Preferred Stock offered hereby will be required for the issuance from the Company's authorized but unissued Preferred Stock of other shares of any series of Preferred Stock ranking on a parity with or junior to such series of Preferred Stock, or senior to a series of Preferred Stock expressly made junior to other series of Preferred Stock as to payment of dividends and distribution of assets, including other shares of such series of Preferred Stock. 18 The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption. Conversion Rights. The terms and conditions, if any, upon which shares of any series of Preferred Stock offered hereby are convertible into Common Stock will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include the number of shares of Common Stock into which the Preferred Stock is convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Preferred Stock or automatically upon the occurrence of certain events, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such Preferred Stock. DESCRIPTION OF THE DEPOSITARY SHARES The Company may, at its option, elect to offer Depositary Shares rather than full shares of Preferred Stock. In the event such option is exercised, each of the Depositary Shares will represent ownership of and entitlement to all rights and preferences of a fraction of a share of Preferred Stock of a specified series (including dividend, voting, redemption and liquidation rights). The applicable fraction will be specified in the Prospectus Supplement. The shares of Preferred Stock represented by the Depositary Shares will be deposited with a Depositary (the "Depositary") named in the applicable Prospectus Supplement, under a Deposit Agreement (the "Deposit Agreement"), among the Company, the Depositary and the holders of the Depositary Receipts. Certificates evidencing Depositary Shares ("Depositary Receipts") will be delivered to those persons purchasing Depositary Shares in the offering. The Depositary will be the transfer agent, registrar and dividend disbursing agent for the Depositary Shares. Holders of Depositary Receipts agree to be bound by the Deposit Agreement, which requires holders to take certain actions such as filing proof of residence and paying certain charges. The summary of terms of the Depositary Shares contained in this Prospectus does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Deposit Agreement, the Articles of Incorporation and the form of Certificate of Determination for the applicable series of Preferred Stock. DIVIDENDS The Depositary will distribute all cash dividends or other cash distributions received in respect of the series of Preferred Stock represented by the Depositary Shares to the record holders of Depositary Receipts in proportion to the number of Depositary Shares owned by such holders on the relevant record date, which will be the same date as the record date fixed by the Company for the applicable series of Preferred Stock. The Depositary, however, will distribute only such amount as can be distributed without attributing to any Depositary Share a fraction of one cent, and any balance not so distributed will be added to and treated as part of the next sum received by the Depositary for distribution to record holders of Depositary Receipts then outstanding. In the event of a distribution other than in cash, the Depositary will distribute property received by it to the record holders of Depositary Receipts entitled thereto, in proportion, as nearly as may be practicable, to the number of Depositary Shares owned by such holders on the relevant record date, unless the Depositary determines (after consultation with the Company) that it is not feasible to make such distribution, in which case the Depositary may (with the approval of the Company) adopt any other method for such distribution as it deems equitable and appropriate, including the sale of such property (at such place or places and upon such terms as it may deem equitable and appropriate) and distribution of the net proceeds from such sale to such holders. LIQUIDATION PREFERENCE In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of each Depositary Share will be entitled to the fraction of the liquidation preference accorded each share of the applicable series of Preferred Stock, as set forth in the Prospectus Supplement. 19 REDEMPTION If the series of Preferred Stock represented by the applicable series of Depositary Shares is redeemable, such Depositary Shares will be redeemed from the proceeds received by the Depositary resulting from the redemption, in whole or in part, of Preferred Stock held by the Depositary. Whenever the Company redeems any Preferred Stock held by the Depositary, the Depositary will redeem as of the same redemption date the number of Depositary Shares representing the Preferred Stock so redeemed. The Depositary will mail the notice of redemption promptly upon receipt of such notice from the Company and not less than 30 nor more than 60 days prior to the date fixed for redemption of the Preferred Stock and the Depositary Shares to the record holders of the Depositary Receipts. VOTING Promptly upon receipt of notice of any meeting at which the holders of the series of Preferred Stock represented by the applicable series of Depositary Shares are entitled to vote, the Depositary will mail the information contained in such notice of meeting to the record holders of the Depositary Receipts as of the record date for such meeting. Each such record holder of Depositary Receipts will be entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the number of shares of Preferred Stock represented by such record holder's Depositary Shares. The Depositary will endeavor, insofar as practicable, to vote such Preferred Stock represented by such Depositary Shares in accordance with such instructions, and the Company will agree to take all action which may be deemed necessary by the Depositary in order to enable the Depositary to do so. The Depositary will abstain from voting any of the Preferred Stock to the extent that it does not receive specific instructions from the holders of Depositary Receipts. WITHDRAWAL OF PREFERRED STOCK Upon surrender of Depositary Receipts at the principal office of the Depositary, upon payment of any unpaid amount due the Depositary, and subject to the terms of the Deposit Agreement, the owner of the Depositary Shares evidenced thereby is entitled to delivery of the number of whole shares of Preferred Stock and all money and other property, if any, represented by such Depositary Shares. Partial shares of Preferred Stock will not be issued. If the Depositary Receipts delivered by the holder evidence a number of Depositary Shares in excess of the number of Depositary Shares representing the number of whole shares of Preferred Stock to be withdrawn, the Depositary will deliver to such holder at the same time a new Depositary Receipt evidencing such excess number of Depositary Shares. Holders of Preferred Stock thus withdrawn will not thereafter be entitled to deposit such shares under the Deposit Agreement or to receive Depositary Receipts evidencing Depositary Shares therefor. AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT The form of Depositary Receipt evidencing the Depositary Shares and any provision of the Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary. However, any amendment which materially and adversely alters the rights of the holders (other than any change in fees) of Depositary Shares will not be effective unless such amendment has been approved by at least a majority of the Depositary Shares then outstanding. No such amendment may impair the right, subject to the terms of the Deposit Agreement, of any owner of any Depositary Shares to surrender the Depositary Receipt evidencing such Depositary Shares with instructions to the Depositary to deliver to the holder the Preferred Stock and all money and other property, if any, represented thereby, except in order to comply with mandatory provisions of applicable law. The Deposit Agreement may be terminated by the Company or the Depositary only if (i) all outstanding Depositary Shares have been redeemed or (ii) there has been a final distribution in respect of the Preferred Stock in connection with any dissolution of the Company and such distribution has been made to all the holders of Depositary Shares. 20 CHARGES OF DEPOSITARY The Company will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. The Company will pay charges of the Depositary in connection with the initial deposit of the Preferred Stock and the initial issuance of the Depositary Shares, and redemption of the Preferred Stock and all withdrawals of Preferred Stock by owners of Depositary Shares. Holders of Depositary Receipts will pay transfer, income and other taxes and governmental charges and certain other charges as are provided in the Deposit Agreement to be for their accounts. In certain circumstances, the Depositary may refuse to transfer Depositary Shares, may withhold dividends and distributions and sell the Depositary Shares evidenced by such Depositary Receipt if such charges are not paid. MISCELLANEOUS The Depositary will forward to the holders of Depositary Receipts all reports and communications from the Company which are delivered to the Depositary and which the Company is required to furnish to the holders of the Preferred Stock. In addition, the Depositary will make available for inspection by holders of Depositary Receipts at the principal office of the Depositary, and at such other places as it may from time to time deem advisable, any reports and communications received from the Company which are received by the Depositary as the holder of Preferred Stock. Neither the Depositary nor the Company assumes any obligation or will be subject to any liability under the Depositary Agreement to holders of Depositary Receipts other than for its negligence or willful misconduct. Neither the Depositary nor the Company will liable if it is prevented or delayed by law or any circumstance beyond its control in performing its obligations under the Deposit Agreement. The obligations of the Company and the Depositary under the Deposit Agreement will be limited to performance in good faith of their duties thereunder, and they will not be obligated to prosecute or defend any legal proceeding in respect of any Depositary Shares or Preferred Stock unless satisfactory indemnity is furnished. The Company and the Depositary may rely on written advice of counsel or accountants, on information provided by holders of Depositary Receipts or other persons believed in good faith to be competent to give such information and on documents believed to be genuine and to have been signed or presented by the proper party or parties. RESIGNATION AND REMOVAL OF DEPOSITARY The Depositary may resign at any time by delivering to the Company notice of its election to do so, and the Company may at any time remove the Depositary, any such resignation or removal to take effect upon the appointment of a successor Depositary and its acceptance of such appointment. Such successor Depositary must be appointed within 60 days after delivery of the notice for resignation or removal and must be a bank or trust company having its principal office in the United States of America and having a combined capital and surplus of at least $150,000,000. FEDERAL INCOME TAX CONSEQUENCES Owners of the Depositary Shares will be treated for Federal income tax purposes as if they were owners of the Preferred Stock represented by such Depositary Shares. Accordingly, such owners will be entitled to take into account, for Federal income tax purposes, income and deductions to which they would be entitled if they were holders of such Preferred Stock. In addition, (i) no gain or loss will be recognized for Federal income tax purposes upon the withdrawal of Preferred Stock in exchange for Depositary Shares, (ii) the tax basis of each share of Preferred Stock to an exchanging owner of Depositary Shares will, upon such exchange, be the same as the aggregate tax basis of the Depositary Shares exchanged therefor, and (iii) the holding period for Preferred Stock in the hands of an exchanging owner of Depositary Shares will include the period during which such person owned such Depositary Shares. 21 DESCRIPTION OF WARRANTS The Company has no Warrants outstanding (other than options issued under the Company's stock option plans). The Company may issue Warrants for the purchase of Preferred Stock or Common Stock. Warrants may be issued independently or together with any other Securities offered by any Prospectus Supplement and may be attached to or separate from such Securities. Each series of Warrants will be issued under a separate warrant agreement (each, a "Warrant Agreement") to be entered into between the Company and a warrant agent specified in the applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent of the Company in connection with the Warrants of such series and will not assume any obligation or relationship of agency or trust for or with any holders or beneficial owners of Warrants. The following sets forth certain general terms and provisions of the Warrants offered hereby. Further terms of the Warrants and the applicable Warrant Agreement will be set forth in the applicable Prospectus Supplement. The applicable Prospectus Supplement will describe the terms of the Warrants in respect of which this Prospectus is being delivered, including, where applicable, the following: (1) the title of such Warrants; (2) the aggregate number of such Warrants; (3) the price or prices at which such Warrants will be issued; (4) the designation, number and terms of the shares of Preferred Stock or Common Stock purchasable upon exercise of such Warrants; (5) the designation and terms of the other Securities, if any, with which such Warrants are issued and the number of such Warrants issued with each such Security; (6) the date, if any, on and after which such Warrants and the related Preferred Stock or Common Stock, if any, will be separately transferable; (7) the price at which each share of Preferred Stock or Common Stock purchasable upon exercise of such Warrants may be purchased; (8) the date on which the right to exercise such Warrants shall commence and the date on which such right shall expire; (9) the minimum or maximum amount of such Warrants which may be exercised at any one time; and (10) any other terms of such Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Warrants. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following summary of certain federal income tax considerations to the Company is based on current law, is for general information only, and is not tax advice. The tax treatment of a holder of any of the Securities will vary depending upon the terms of the specific securities acquired by such holder, as well as his or her particular situation, and this discussion does not attempt to address any aspects of federal income taxation relating to holders of Securities, except as discussed under "--Taxation of Shareholders." Certain federal income tax considerations relevant to holders of the Securities may be provided in the applicable Prospectus Supplement relating thereto. EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS WELL AS HIS OR HER TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAX TREATMENT OF THE COMPANY If certain detailed conditions imposed by the Code and the related Treasury regulations are met, an entity, such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT for federal income tax purposes is that this enables the Company to deduct dividend distributions to its shareholders, thus effectively eliminating the "double taxation" (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends. 22 The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Code, beginning with its fiscal year ending December 31, 1981. That election will continue in effect until it is revoked or terminated. The Company believes that it has qualified during each of the fiscal years for which an election has been in effect, and currently qualifies, as a REIT, and the Company expects to continue to be taxed as a REIT for federal income tax purposes. While the Company intends to operate so that it will continue to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the circumstances of the Company, no assurance can be given by the Company that the Company will qualify as a REIT in any particular year. Technical Requirements for Taxation as a REIT. The following is a very brief overview of certain of the technical requirements that the Company must meet on an ongoing basis in order to continue to qualify as a REIT. This summary is qualified in its entirety by the applicable Code provisions, Treasury regulations and administrative and judicial interpretations thereof. 1. The capital stock must be widely-held and not more than 50% of the value of the capital stock may be held by five or fewer individuals (determined after giving effect to various ownership attribution rules). See "-- Consequences of Merger on the Company's Qualification as a REIT--Violation of Ownership Requirements." 2. The Company's gross income must meet three income tests: (a) at least 75% of the gross income must be derived from specified real estate sources (including "rents from real property" and, in certain circumstances, interest); (b) at least 95% of the gross income must be from the real estate sources includable in the 75% income test, and/or from dividends, interest, or gains from the sale or disposition of stock or securities not held for sale in the ordinary course of business; and (c) less than 30% of the gross income may be derived from the sale of real estate assets held for less than four years, from the sale of certain "dealer" property, or from the sale of stock or securities held for less than one year. Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts of sales. The Company anticipates that none of its gross annual income will be attributable to rents that are based in whole or in part on the income of any person (excluding rents based on a percentage of receipts or sales, which, as described above, are permitted). Second, the Code provides that rents received from a tenant will not qualify as "rents from real property" if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant (a "Related Party Tenant"). The Company does not anticipate that it will receive income from Related Party Tenants. Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." The Company does not anticipate deriving rent attributable to personal property leased in connection with real property that exceeds 15% of the total rents. Finally, for rents received to qualify as "rents from real property," the Company generally must not operate or manage the property or furnish or render services to tenants, other than through an "independent contractor" which is adequately compensated and from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by the Company are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant." Any services with respect to certain Properties that the Company believes may not be provided by the Company directly without jeopardizing the qualification of rent as "rents from real property" will be performed by "independent contractors." 23 See "--Consequences of the Merger on the Company's Qualification as a REIT-- The Company's Assumption of Management Activities With Respect to its Properties," "--Consequences of the Merger on the Company's Qualification as a REIT--Nonqualifying Income," and "--Consequences of the Merger on the Company's Qualification as a REIT--Acquisition of Affiliated Partnership Interests in the Merger" for a discussion of specific aspects of the Merger that may impact upon the Company's ability to satisfy the 95% gross income test. 3. Generally, 75% of the value of the Company's total assets must be represented by real estate, mortgages secured by real estate, cash, or government securities (including its allocable share of real estate assets held by any partnerships in which the Company owns an interest). Not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. Of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities. The 5% test generally must be met for any quarter in which the Company acquires securities of an issuer. The Company believes that it satisfies these tests. In this regard, however, the 10% voting stock prohibition will preclude the Company from controlling the operations of PSCP and the Lock/Box Company (in which the Company will own 95% of the equity in the form of non-voting stock and the Hughes Family will own 5% of the equity but 100% of the voting stock) or PSCC (in which the Company will own a less than 10% equity interest) and may preclude the Company from exercising its rights of first refusal with respect to the corporations owning the Canadian operations and the reinsurance business. 4. The Company must distribute to its shareholders in each taxable year an amount at least equal to 95% of the Company's "REIT Taxable Income" (which is generally equivalent to net taxable ordinary income). Under certain circumstances, the Company can rectify a failure to meet the 95% distribution test by paying dividends after the close of a particular taxable year. In years prior to 1990, the Company made distributions in excess of its REIT Taxable Income. During 1990, the Company reduced its distribution to its shareholders to permit the Company to make an optional reduction in short-term borrowings (which previously had been used to fund distributions to its shareholders). As a result, distributions paid by the Company in 1990 were less than 95% of the Company's REIT Taxable Income for 1990. The Company has satisfied the REIT distribution requirements for 1990, 1991, 1992, 1993 and 1994 by attributing distributions in 1991, 1992, 1993, 1994 and 1995 to the prior year's taxable income. The Company may be required, over each of the next several years, to make distributions after the close of a taxable year and to attribute those distributions to the prior year, but shareholders will be treated for federal income tax purposes as having received such distributions in the taxable years in which they were actually made. The extent to which the Company will be required to attribute distributions to the prior year will depend on the Company's operating results and the level of distributions as determined by the Board of Directors. Reliance on subsequent year distributions could cause the Company to be subject to certain penalty taxes. In that regard, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such calendar year, (ii) 95% of its REIT capital gain net income for such calendar year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed during such calendar year (not taking into account distributions made in subsequent years but attributed to such calendar year). The Company intends to comply with this 85% distribution requirement in an effort to minimize any excise tax. Any distributions required to be made by the Company in order to eliminate any accumulated earnings and profits of PSMI would not be counted in determining whether the Company satisfies the 95% distribution test and could adversely impact upon the Company's ability to satisfy the 95% distribution test. See "--Consequences of the Merger on the Company's Qualification as a REIT-- Elimination of Any Accumulated Earnings and Profits Attributable to Non-REIT Years." For purposes of applying the income and asset tests mentioned above, a REIT is considered to own a proportionate share of the assets of any partnership in which it holds a partnership interest. See "--Consequences of the Merger on the Company's Qualification as a REIT--Acquisition of Affiliated Partnership Interests in the Merger". 24 Applicable Federal Income Tax. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on net income that it distributes currently to shareholders. However, the Company will be subject to federal income tax in the following circumstances. First, the Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" (which is, in general, property acquired by foreclosure or otherwise on default of a lease or a loan secured by the property) which is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed above), and has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test. Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, the Company will be subject to a corporate level tax if it disposes of any of the assets acquired in the Merger at any time during the 10-year period beginning on the closing date of the Merger (the "Restriction Period"), assuming the Company makes the election pursuant to the Built-in Gain Rules (or applicable future administrative rules or Treasury regulations) to have the 10-year rule apply. This tax would be imposed on the Company at the top regular corporate rate (currently 35%) in effect at the time of the disposition on the excess of (i) the lesser of (a) the fair market value at the time of the Merger of the assets disposed of and (b) the selling price of such assets over (ii) the Company's adjusted basis in such assets at the time of the Merger (such excess being referred to as the "Built-in Gain"). The Company currently does not intend to dispose of any of the assets acquired in the Merger during the Restriction Period, but there can be no assurance that one or more such dispositions will not occur. If the Company does not make the election to have the 10-year rule apply, PSMI would be taxed on the Built-in Gain at the time of the Merger at regular corporate tax rates and the Company, as the successor to PSMI in the Merger, would succeed to the liability for that tax. Failure to Qualify as a REIT. For any taxable year that the Company fails to qualify as a REIT and the relief provisions do not apply, the Company would be taxed at the regular corporate rates on all of its taxable income, whether or not it makes any distribution to its shareholders. Those taxes would reduce the amount of cash available to the Company for distributions to its shareholders or for reinvestment. As a result, failure of the Company to qualify during any taxable year as a REIT could have a material adverse effect upon the Company and its shareholders. Termination of REIT Election. The Company's election to be treated as a REIT will terminate automatically if the Company fails to meet the REIT qualification requirements described above. If a termination (or a voluntary revocation) occurs, unless certain relief provisions apply, the Company would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which the Company's election was terminated (or revoked). If the Company loses its REIT status, but later qualifies and elects to be taxed as a REIT again, the Company may face significant adverse tax consequences. Immediately prior to the effectiveness of the election to return to REIT status, the Company would be treated as if its disposed of all of its assets in a taxable transaction, triggering taxable gain with respect to the Company's appreciated assets. (The Company would, however, be permitted to elect an alternative treatment under which the gains would be taken into account only as and when they actually are recognized upon sales of the appreciated property occurring within the 10-year period after return to REIT status. The Company would not receive the benefit of a dividends paid deduction to reduce any such taxable gains. Thus, any such gains on appreciated assets would be subject to double taxation, at the corporate as well as the shareholder level. 25 CONSEQUENCES OF THE MERGER ON THE COMPANY'S QUALIFICATION AS A REIT In light of the complex federal income tax requirements applicable to REITs, the Merger could have adverse consequences on the Company's continued qualification as a REIT, as discussed in greater detail below. Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to the Company, is of the opinion that the Company will continue to qualify as a REIT following the Merger so long as (A) the Company has met at all times since the Merger and continues to meet the stock ownership and gross income requirements applicable to REITs and (B) either PSMI at the time of (and giving effect to) the Merger was not considered to have any current or accumulated earnings and profits for tax purposes or the Company makes distributions prior to the end of 1995 in an amount sufficient to eliminate such earnings and profits. See "--Nonqualifying Income", "--Violation of Ownership Requirements," and "--Elimination of Any Accumulated Earnings and Profits Attributable to Non-REIT Years." Hogan & Hartson, however, has not opined that the Company will continue to meet the stock ownership and gross income requirements applicable to REITs following the Merger or that PSMI did not have current or accumulated earnings and profits at the time of the Merger, due to the numerous factual determinations and future events that bear on those conclusions. The Company's Assumption of Management Activities With Respect to its Properties. Because of the complex federal income tax requirements attributable to REITs, a number of federal income tax issues must be addressed in connection with the Merger that are unique to the Company's status as a REIT. One issue is whether the Company is permitted to perform property management functions internally with respect to the mini-warehouse and business park properties ("Properties") it owns. Generally, a REIT is permitted to perform services with respect to properties it rents to tenants so long as such services are usually and customarily rendered in connection with the rental of space for occupancy only and are not considered to be "rendered to the occupant." If a REIT performs services beyond this extent, the rental income received for the use of its property will not qualify as "rental income" for purposes of the REIT gross income tests. See "--Tax Treatment of the Company--Technical Requirements for Taxation as a REIT." Failure of the rental income received for properties that the Company owns to qualify as "rental income" would result in the disqualification of the Company as a REIT. See "--Tax Treatment of the Company--Termination of REIT Election." As a result of the Merger, the Company "self-manages" the Properties it owns. The Company received a private letter ruling from the IRS to the effect that, should the Company acquire PSMI and assume and perform the management activities of its Properties, such property management activities by the Company would not adversely affect the characterization of the Company's rents from the Properties as rents from real property. The ruling is based on the Company's description of those management activities to be performed in connection with Properties it owns, including maintenance, repair, lease administration and accounting, and security. The ruling also considers the ancillary activities to be directly performed by the Lock/Box Company, such as the sale of inventory products such as locks, boxes, and packing materials. Nonqualifying Income. The Company must meet several annual gross income tests to retain its REIT qualification. See "--Tax Treatment of the Company-- Technical Requirements for Taxation as a REIT." Under the 95% gross income test, the Company must derive at least 95% of its total gross income from specified classes of income related to real property, dividends, interest or gains from the sale or other disposition of stock or other securities that do not constitute "dealer property." Income related to real property includes: (i) proceeds from the rental of mini-warehouse facilities; (ii) interest on obligations secured by mortgages on real property; and (iii) gains from the sale or other disposition of real property (other than real property held by the Company as a dealer). After the Merger, the Company assumed and performs property management activities for the various partnerships and REITs in which the Company has an interest that own Properties, as well as for various other entities that own mini-warehouse properties and/or business parks. The Company will receive management fees from such partnerships, REITs, and other owners in exchange for the performance of such management activities. The gross income received by the Company from these property management activities with respect to Properties owned by other entities (including the REITs in which the Company has an ownership interest) and advisory 26 services rendered to such other entities will be treated as income not qualifying under the 95% gross income test ("Nonqualifying Income"). See "-- Acquisition of Affiliated Partnership Interests in the Merger." If there were no change in current revenues of the Company through acquisitions or otherwise and no other action by the Company to reduce its nonqualifying income (for example, through the prepayment of management fees described below), the Company estimates that it would not satisfy the 95% gross income test for 1996 because its nonqualifying income would represent approximately 7% of its total gross income for 1996. However, the percentage of Nonqualifying Income may be reduced in a variety of ways. First, the Company could reduce the actual dollar amount of its Nonqualifying Income. Second, because the income tests are based on a percentage of total gross income, increases in overall gross income that result from increases in qualifying rents will reduce the percentage of Nonqualifying Income. Pursuant to the Company's existing acquisition program, the Company believes that additional assets that are expected to be acquired by it during 1995 and 1996 would generate additional qualifying income, thereby lowering the percentage of total Nonqualifying Income recognized by it. Finally, to the extent that the Company acquires properties following the Merger for which it assumed management responsibilities in connection with the Merger, the management fees received with respect to such properties would cease to be Nonqualifying Income. Nevertheless, there can be no assurance that future acquisitions will be made in amounts or at such times to permit the Company to satisfy these gross income requirements. Moreover, increases in other Nonqualifying Income may similarly affect these calculations. If the Company determines at any time during the year that the receipt of third-party management fees could adversely affect its ability to satisfy the 95% gross income test, it will notify the third-party property owners to which it provides property management services and request that management fees be paid at reduced rates for the remainder of the year. The Company will, to the extent possible under existing tax guidelines, defer receipt of such fees to a succeeding year in which recognition of the Nonqualifying Income would not jeopardize its qualification as a REIT. If such deferral is not possible, however, the Company would reduce the fees without condition or deferral. Although this measure would reduce the Company's gross income (and correspondingly its net profits), it would effectively reduce the Company's overall Nonqualifying Income in order to preserve its REIT status. The Company anticipates that this measure will be taken only as necessary and intends to pursue less costly alternatives when appropriate. In addition, in order to reduce the amount of Nonqualifying Income, before December 31, 1995 the Company expects to have certain Properties pre-pay to the Company all or a portion of the management fees that the Company otherwise would be expected to receive for 1996, discounted to compensate for early payment (payment estimated at approximately $4.5 million). Pre-payment of management fees will reduce the percentage of Nonqualifying Income received by the Company in taxable years subsequent to such prepayment. Hogan & Hartson is of the opinion that it is more likely than not that the IRS would respect the inclusion of the prepaid management fees in the gross income of the Company when they are received. Hogan & Hartson's opinion is based on numerous cases where courts have upheld the IRS's position that fees should be included in income when they are received, rather than when the services to which such fees relate are performed. There are, however, several contrary authorities where courts, over the IRS's objections, have held that prepaid amounts are not included in income in advance of performance. Because of these contrary authorities, there can be no assurance that the IRS might not assert that such management fees should be included in the gross income of the Company as the related management services are provided, rather than being included in the gross income when they are received. If the IRS were to successfully challenge the treatment of such management fees and the inclusion of such fees in the Company's gross income resulted in it failing the 95% gross income test for a taxable year ending after the Merger, the Company's REIT status may terminate for such year and future years unless it meets the "good cause" exception described above. For years subsequent to 1996, assuming that there were no changes in current revenues of the Company and assuming no acquisition or development of additional assets, the Company estimates that it would not be able to satisfy the 95% gross income test unless it were to take further steps to reduce its percentage of Nonqualifying Income for those years (for example by deferring the payment of management fees until later years or by disposing of a portion of its management business, including possibly to a taxable corporation in which the Company would own substantially all of the economic interests but none of the voting stock). 27 Finally, the Company and the various other owners of mini-warehouses and business parks for which the Company performs management activities (the "Owners") have entered into an agreement (the "Administrative and Cost-Sharing Agreement") with PSCC, Inc. ("PSCC") pursuant to which PSCC provides the Owners and the Company certain administrative and cost-sharing services in connection with the operation of the Properties and the performance of certain administrative functions. Each of the Owners and the Company pay the PSCC directly for services rendered by PSCC in connection with the Administrative and Cost Sharing Agreement. That payment is separate from and in addition to the compensation paid to the Company under the management agreement for the management of the Properties owned by the Owners. The Company has received a private letter ruling from the IRS to the effect that the reimbursements and other payments made to PSCC by the Owners will not be treated as revenues of the Company for purposes of the 95% gross income test. If the Company fails to meet the 95% gross income test during any taxable year, its REIT status would terminate for that year and future years unless it qualifies for the "good cause" exception. In order to qualify for the "good cause" exception, the Company would have to satisfy each of the following: (i) it reported the source and nature of each item of its gross income in its federal income tax return for such year; (ii) the inclusion of any incorrect information in its return is not due to fraud with intent to evade tax; and (iii) the failure to meet such test is due to a reasonable cause and not to willful neglect. The Company intends to conduct its operations and affairs so that it meets the 95% gross income test for each taxable year. The Company also intends to operate so that, in the event it were to fail to meet the 95% gross income test, it would satisfy the "reasonable cause" requirement of the "good cause" exception because it exercised ordinary business care and prudence in attempting to satisfy the 95% gross income test (including by receiving opinions of counsel where appropriate). There can be no assurance, however, that if the Company were unable to satisfy the 95% gross income test, the IRS would necessarily agree that the Company had operated in a manner that qualifies for the "good cause" exception. Furthermore, even if the Company's REIT status were not terminated because of the "good cause" exception, the Company still would be subject to an excise tax on any excess nonqualifying income. Generally, if the Company fails the 95% gross income test but still retains its qualification as a REIT under the "good cause" exception, it would be subject to a 100% excise tax on the amount of the excess nonqualifying income multiplied by a fraction, the numerator of which would be the Company's taxable income (computed without its distribution deduction) and the denominator of which would be the Company's gross income from all sources. This excise tax would have the general effect of causing the Company to pay all net profits generated from this excess nonqualifying income to the IRS. Acquisition of Affiliated Partnership Interests in the Merger. In the Merger, the Company acquired interests in various partnerships that own and operate Properties. The Company, for purposes of satisfying the REIT asset and gross income tests, will be treated as if it directly owns a proportionate share of each of the assets of these partnerships. For these purposes, under current Treasury regulations the Company's interest in each of the partnerships must be determined in accordance with its "capital interest" in such partnership. The character of the various assets in the hands of the partnership and the items of gross income of the partnership will retain their same character in the hands of the Company for these purposes. Accordingly, to the extent the partnership receives real estate rentals and holds real property, a proportionate share of such qualified income and assets will be treated as qualified rental income and real estate assets of the Company for purposes of determining its REIT qualification. The Company expects that substantially all of the properties of the partnerships will constitute real estate assets and will generate qualifying rental income for purposes of the REIT gross income tests. The acquisition of these partnership interests in the Merger creates several issues regarding the Company's satisfaction of the 95% gross income test. First, the Company will earn property management fees from these partnerships. Existing Treasury regulations do not address the treatment of management fees derived by a REIT from a partnership in which the REIT holds a partnership interest, but the IRS has issued a number of private letter rulings holding that the portion of the management fee that corresponds to the REIT interest in the partnership in effect is disregarded in applying the 95% gross income test where the REIT holds a "substantial" interest in the partnership. The Company expects to disregard the portion of management fees derived from partnerships in which it is a partner that corresponds to its interest in these partnerships in determining the amount of its Nonqualifying Income, and the estimate of the Company's prepayment of management fees set 28 forth above was computed based upon this approach. There can be no assurance, however, that the IRS would not take a contrary position with respect to the Company, either rejecting the approach set forth in the private letter rulings mentioned above or contending that the Company's situation is distinguishable from those addressed in the private letter rulings (for example, because the Company does not have a "substantial" interest in the partnerships). Second, the Company will acquire interests in certain of these partnerships that entitles the Company to a percentage of profits (either from operations, or upon a sale, or both) in excess of the percentage of total capital originally contributed to the partnership with respect to such interest. Existing Treasury Regulations do not specifically address this situation, and it is uncertain, based on existing authority, how the Company's "capital interest" in these partnerships will 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 the Company and the percentage of the management fees paid to the Company that are disregarded in determining the Company's Nonqualifying Income. For example, if the Company takes the position that it has a 25% "capital interest" in a partnership (because it would receive 25% of the partnership's assets upon a sale and liquidation) but the IRS determines it only has a 1% "capital interest" (because the original holder of the Company's interest only contributed 1% of the total capital contributed to the partnership), the Company's share of the qualifying income from the partnership would be reduced and the portion of the management fee from the partnership that would be treated as Nonqualifying Income would be increased, thereby adversely affecting the Company's ability to satisfy the 95% gross income test. In determining its "capital interest" in the various partnerships in which the Company acquired an interest in the Merger, the Company will determine the percentage of the partnership's assets that would be distributed to it if those assets were sold and distributed among the partners in accordance with the applicable provisions of the partnership agreements. There can be no assurance, however, that the IRS will agree with this methodology and not contend that another, perhaps less favorable, method must be used for purposes of determining the Company "capital interests." If that were to occur, it could adversely affect the Company's ability to satisfy the 95% gross income test following the Merger. Violation of Ownership Requirements. For the Company to qualify as a REIT under the Code, no more than 50% in value of its outstanding stock may be owned, directly or constructively under certain 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. The value of the outstanding capital stock held by the Hughes Family is currently estimated to be approximately 45%. Accordingly, no four individuals other than the Hughes Family may own directly or constructively, in the aggregate, more than 5% of the value of outstanding stock of the Company. In order to assist the Company in meeting these ownership restrictions, the Articles of Incorporation and Bylaws prohibit the actual or constructive ownership of more than 2.0% of the outstanding shares of all common stock of the Company or more than 9.9% of the outstanding shares of each class or series of shares of preferred stock of the Company. (The Articles of Incorporation and Bylaws provide, however, that no person is deemed to exceed this ownership limitation solely by reason of the beneficial ownership of shares of any class of stock to the extent that such shares of stock were beneficially owned by such person at the time of the Merger.) However, even with these ownership limitations, the Company could still be in violation of the ownership restrictions if four individuals unrelated to the Hughes Family were to own the maximum amount of capital stock permitted under the Articles of Incorporation and Bylaws. Therefore, to further assist the Company in meeting the ownership restrictions, the Hughes Family entered into an agreement with the Company for the benefit of the Company and certain designated charitable beneficiaries restricting their acquisition of additional shares of the Company's capital stock and providing that if, at any time, for any reason, more than 50% in value of the Company's outstanding stock otherwise would be considered owned by five or fewer individuals, then a number of shares of Common Stock of the Company owned by Wayne Hughes necessary to cure such violation will automatically and irrevocably be transferred to a designated charitable beneficiary. These provisions are modeled after certain arrangements that the IRS has ruled in private letter rulings will preclude a REIT from being considered to violate the ownership restrictions so long as such arrangements are enforceable as a matter of state law and the REIT seeks to enforce them as and when necessary. There can be no assurance, however, that the IRS might not seek to take a different position with respect to the Company (a private letter ruling is legally binding only with 29 respect to the taxpayer to whom it was issued) or contend that the Company failed to enforce these various arrangements and, hence, there can be no assurance that these arrangements will necessarily preserve the Company's REIT status. No private letter ruling has been sought by the Company from the IRS with respect to the effect of these arrangements. Elimination of Any Accumulated Earnings and Profits Attributable to Non- REIT Years. A REIT is not allowed to have accumulated earnings and profits attributable to non-REIT years. A REIT has until the close of its first taxable year in which it has non-REIT earnings and profits to distribute any such accumulated earnings and profits. In a corporate reorganization qualifying as a tax free statutory merger, the acquired corporation's current and accumulated earnings and profits are carried over to the surviving corporation. Any earnings and profits treated as having been acquired by a REIT through such a merger will be treated as accumulated earnings and profits of a REIT attributable to non- REIT years. Accordingly, the accumulated earnings and profits, if any, of PSMI and its predecessors (including earnings and profits resulting from transactions undertaken in contemplation of the Merger or from the Merger itself) carried over to the Company in the Merger and the Company is required to distribute any such accumulated earnings and profits prior to the close of 1995 (the year in which the Merger occurred). Failure to do so would result in disqualification of the Company as a REIT (unless the "deficiency dividend" procedures described below apply and the Company complies with those procedures). The amount of the accumulated earnings and profits of PSMI acquired by the Company will be based on the consolidated earnings and profits of PSMI (including each of its predecessors) through and including the date of the Merger ("Consolidated Accumulated Earnings"). In connection with the Merger, the Company received a study prepared by PSMI of the earnings and profits of PSMI and its subsidiaries, taking into account projected income of PSMI and its predecessors to and including the time of the Merger and distributions to the PSMI shareholders made at or prior to the time of the Merger, that showed that PSMI had no Consolidated Accumulated Earnings at the time of the Merger. The determination of accumulated earnings and profits acquired by the Company in the Merger ("Acquired Earnings") depends upon a number of factual matters related to the activities and operations of PSMI and its predecessors during their entire corporate existence and is subject to review and challenge by the IRS. There can be no assurance that the IRS will not examine the tax returns of PSMI and its predecessors for years prior to and including the Merger and propose adjustments to increase their taxable income. Because the earnings and profits study used to calculate the amount of Acquired Earnings is based on these returns, any such adjustments could increase the amount of the Acquired Earnings. In this regard, the IRS can consider all taxable years of PSMI and its predecessors as open for review for purposes of determining the amount of earnings and profits. Although not free from doubt, "deficiency dividend" procedures may be available for the Company to distribute any Acquired Earnings that were subsequently determined to exist as a result of an IRS audit. In order to use this "deficiency dividend" procedure, the Company would have to make an additional dividend distribution to its shareholders (in addition to distributions made for purposes of satisfying the normal REIT distribution requirements), in the form of cash, notes, other property, or stock in a taxable stock dividend, within 90 days of the IRS determination. In addition, the Company would have to pay to the IRS an interest charge on 50% of the Acquired Earnings that were not distributed prior to December 31, 1995, from the date on which its 1995 tax return was due to the date the IRS determination was made. The statute and Treasury regulations related to the application of the "earnings and profits distribution" requirement to a REIT that acquires a "non-REIT" in a reorganization and the availability of the "deficiency dividend" procedure in those circumstances are not entirely clear, and there can be no assurance that the IRS would not take the position either that the "deficiency dividend" procedure is not available (in which case, the Company would cease to qualify as a REIT effective for its taxable year in which the Merger occurred) or, alternatively, that even if the procedure is available, the Company cannot qualify as a REIT for the taxable year in which the Merger occurred (but it could qualify as a REIT for subsequent years). 30 TAXATION OF SHAREHOLDERS Distributions will generally be taxable to Shareholders as ordinary income to the extent of the Company's earnings and profits. For this purpose, earnings and profits of the Company will first be allocated to distributions paid on preferred stock until an amount equal to such distributions has been allocated thereto. As a result, it is likely that any distributions paid on preferred stock will be taxable in full as dividends to the holders of preferred stock. Dividends declared during the last quarter of a calendar year and actually paid during January of the immediately following calendar year generally are treated as if received by the shareholders on December 31 of the calendar year during which they were declared. Distributions paid to Shareholders will not constitute passive activity income and as a result, generally cannot be offset by losses from passive activities of Shareholders subject to the passive activity rules. Distributions designated by the Company as capital gain dividends generally will be taxed as long-term capital gain to Shareholders, to the extent that the distributions do not exceed the Company's actual net capital gain for the taxable year. Corporate Shareholders may be required to treat up to 20% of any such capital gain dividends as ordinary income. Distributions by the Company, whether characterized as ordinary income or as capital gain, are not eligible for the 70% dividends received deduction for corporations. If the Company should realize a loss, Shareholders will not be permitted to deduct any share of that loss. Future regulations may require that Shareholders take into account, for purposes of computing their individual alternative minimum tax liability, certain tax preference items of the Company. The Company may distribute cash in excess of its net taxable income. Upon distribution of such cash by the Company to Shareholders (other than as a capital gain dividend), if all of the Company's current and accumulated earnings and profits have been distributed, the excess cash will be deemed to be a non-taxable return of capital to each Shareholder to the extent of the adjusted tax basis of the Shareholder's capital stock. Distributions in excess of the adjusted tax basis will be treated as gain from the sale or exchange of the capital stock. A Shareholder who has received a distribution in excess of current and accumulated earnings and profits of the Company may, upon the sale of the capital stock, realize a higher taxable gain or a smaller loss because the basis of the Common Stock as reduced will be used for purposes of computing the amount of the gain or loss. Generally, gain or loss realized by a Shareholder upon the sale of capital stock will be reportable as capital gain or loss. If a Shareholder receives a long-term capital gain dividend from the Company and has held the capital stock for six months or less, any loss incurred on the sale or exchange of the capital stock is treated as a long- term capital loss, to the extent of the corresponding long-term capital gain dividend received. If a Shareholder is subject to "backup withholding," the Company will be required to deduct and withhold from any dividends payable to such Shareholder a tax of 31%. These rules may apply when a Shareholder fails to supply a correct taxpayer identification number, or when the IRS notifies the Company that a Shareholder is subject to the rules or has furnished an incorrect taxpayer identification number. The Company is required to demand annual written statements from the record holders of designated percentages of its capital stock disclosing the actual owners of the capital stock and to maintain permanent records showing the information it has received as to the actual ownership of such capital stock and a list of those persons failing or refusing to comply with such demand. In any year in which the Company does not qualify as a REIT, distributions by the Company to Shareholders will be taxable in the same manner discussed above, except that no distributions can be designated as capital gain dividends, distributions will be eligible for the corporate dividends received deduction, and Shareholders will not receive any share of the Company's tax preference items. Tax Exempt Investors. In general, a tax exempt entity that is a Shareholder is not subject to tax on distributions from the Company or gain realized on the sale of capital stock, provided that the tax exempt entity has not financed the acquisition of its capital stock with "acquisition indebtedness" within the meaning of the Code. Special rules apply to organizations exempt under Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), and such prospective investors should consult their own tax advisors concerning the applicable "set aside" and reserve requirements. In addition, certain distributions by a REIT to a tax-exempt employee's pension trust that owns more than 10% of the REIT will, in certain circumstances, be treated as "unrelated business taxable income." 31 SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS The rules governing U.S. Federal income taxation of non-U.S. stockholders (as defined below) are complex, and the following discussion is intended only as a summary of such rules. Prospective non-U.S. stockholders should consult with their tax advisors to determine the impact of U.S. Federal, state, and local income tax laws on an investment in the REIT, including any reporting requirements, as well as the tax treatment of such an investment under their home country laws. For purposes of this discussion, a non-U.S. stockholder is a holder of Securities that, for U.S. Federal income tax purposes, is not a "United States person." A "United States person," in turn, means a citizen or resident of the United States; a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; or an estate or trust whose income is includible in gross income for U.S. Federal income tax purposes regardless of its source. The following discussion assumes that the Securities are held as "capital assets" under the Code. Distributions to a non-U.S. stockholder will generally be subject to tax as ordinary income to the extent of the Company's current and accumulated earnings and profits as determined for U.S. Federal income tax purposes. Such distributions will generally be subject to withholding of such income tax at a 30% rate, unless reduced by an applicable tax treaty or unless such dividends are treated as effectively connected with a United States trade or business. If the amount distributed exceeds a non-U.S. stockholder's allocable share of such earnings and profits, the excess will be treated as a tax-free return of capital to the extent of such stockholder's adjusted basis in the Securities. To the extent that such distributions exceed the adjusted basis of a non-U.S. stockholder's Securities, such distributions will generally be subject to tax if such stockholder would otherwise be subject to tax on any gain from the sale or disposition of its Securities, as described below. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distribution will be subject to withholding at the same rate as dividends. Amounts so withheld, however, are refundable or creditable against U.S. Federal tax liability if it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Company, unless the non-U.S. stockholder is otherwise subject to U.S. Federal income tax. For any year in which the Company qualifies as a REIT, distributions to a non-U.S. stockholder that are attributable to gain from the sales or exchanges by the Company of "United States real property interests" will be treated as if such gain were effectively connected with a United States trade or business and will thus be subject to tax at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax) under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to a treaty exemption. The Company is required to withhold 35% of any distribution that could be designated by the Company as a capital gains dividend. This amount may be credited against the non-U.S. stockholder's FIRPTA tax liability. Gain recognized by a non-U.S. stockholder upon a sale of its Securities will generally not be subject to tax under FIRPTA if the Company is a "domestically controlled REIT," which is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of its shares were held directly or indirectly by non-U.S. persons. Because only a minority of the Shareholders are non-U.S. stockholders, the Company expects to qualify as a "domestically controlled REIT." Accordingly, a non-U.S. stockholder should not be subject to U.S. tax from gains recognized upon disposition of the Securities, provided that such gain is not effectively connected with the conduct of a United States trade or business and, in the case of an individual stockholder, such holder is not present in the United States for 183 days or more during the year of sale and certain other requirements are met. Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Securities to a non-U.S. stockholder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Securities is subject to both backup withholding at a rate of 31% and information reporting unless the holder 32 certifies its non-U.S. stockholder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Securities by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a non-U.S. stockholder and certain other conditions are met, or the holder otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the non-U.S. stockholder's U.S. Federal income tax liability, provided that the required information is furnished to the IRS. These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Securities could be changed by future regulations. STATE AND LOCAL TAXES The tax treatment of the Company and the Shareholders in states having taxing jurisdiction over them may differ from the federal income tax treatment. Accordingly, no discussion of state taxation of the Company and the Shareholders is provided nor is any representation made as to the tax status of the Company in such states. All investors should consult their tax advisors as to the treatment of the Company under the respective state tax laws applicable to them. LEGAL OPINIONS David Goldberg, senior vice president and general counsel of the Company, has delivered an opinion to the effect that the securities offered by this Prospectus will be validly issued, fully paid and nonassessable. Hogan & Hartson L.L.P., Washington, D.C., has delivered an opinion as to the status of the Company as a REIT. Mr. Goldberg owns 67,229 shares of Common Stock, 1,000 shares of convertible preferred stock and 500 shares of Senior Preferred Stock, and has options to acquire an additional 62,500 shares of Common Stock. See "Certain Federal Income Tax Considerations." EXPERTS The consolidated financial statements of the Company for the year ended December 31, 1994 incorporated by reference in this Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report with respect thereto. The following have also been audited by Ernst & Young LLP as set forth in their reports with respect thereto: (i) the financial statements of Public Storage Properties VII, Inc. which is included in the Registration Statement on Form S-4 (No. 33-58893) of Storage Equities, Inc., (ii) the combined statements of assets, liabilities and deficit of the property management and advisory businesses of Public Storage, Inc. as of December 31, 1994 and 1993 and the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1994, and our report dated July 10, 1995 on the combined summaries of historical information relating to real estate interests to be acquired for each of the three years in the period ended December 31, 1994 which are included in the Current Report on Form 8-K, as amended by a Form 8-K/A, each dated June 30, 1995, of Storage Equities, Inc., and (iii) the combined statements of assets, liabilities and equity of the property management and advisory businesses and real estate assets of Public Storage, Inc. as of December 31, 1994 and 1993 and the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1994 which are included in the Current Report on Form 8-K dated November 16, 1995, of Public Storage, Inc. Such financial statements are incorporated herein in reliance upon such reports given upon the authority of such form as experts in accounting and auditing. 33 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 3.13) 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, 1994 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: (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 this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; provided, however, that subparagraphs (i) and (ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in the 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. II-1 (2) That, for the purpose of determining any liability under the Securities Act, 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) That, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) To remove from registration by means of a post-effective amendment any of the Securities being registered which remains unsold at the termination of the offering. (6) The undersigned registrant hereby undertakes as follows: 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. (7) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities 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, 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. (8) The undersigned registrant hereby undertakes 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 data of the registration statement through the date of responding to the request. (9) Except as permitted by General Instruction H to Form S-4 (in a transaction not covered by General Instruction I), the undersigned registrant hereby undertakes 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 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions described under Item 15 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 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 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 21st day of December, 1995. PUBLIC STORAGE, INC. By: /s/ B. WAYNE HUGHES __________________________________ B. Wayne Hughes, Chairman of the Board Each person whose signature appears below hereby authorizes B. Wayne Hughes and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on his behalf, individually and in each capacity stated below, any amendment, including post-effective amendments to this Registration Statement, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ B. WAYNE HUGHES Chairman of the Board, Chief December 21, 1995 ____________________________________ Executive Officer and B. Wayne Hughes Director (principal executive officer) /s/ HARVEY LENKIN President and Director December 21, 1995 ____________________________________ Harvey Lenkin /s/ RONALD L. HAVNER, JR. Senior Vice President and December 21, 1995 ____________________________________ Chief Financial Officer Ronald L. Havner, Jr. (principal financial officer and principal accounting officer) /s/ ROBERT J. ABERNETHY Director December 21, 1995 ____________________________________ Robert J. Abernethy /s/ DANN V. ANGELOFF Director December 21, 1995 ____________________________________ Dann V. Angeloff /s/ WILLIAM C. BAKER Director December 21, 1995 ____________________________________ William C. Baker /s/ URI P. HARKHAM Director December 21, 1995 ____________________________________ Uri P. Harkham /s/ BERRY HOLMES Director December 21, 1995 ____________________________________ Berry Holmes /s/ MICHAEL M. SACHS Director December 21, 1995 ____________________________________ Michael M. Sachs
II-3 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement.(1) 2.1 Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and the registrant dated as of June 30, 1995.(2) 2.2 Amendment to Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and the registrant dated as of November 13, 1995.(3) 3.1 Restated Articles of Incorporation.(4) 3.2 Certificate of Determination for the 10% Cumulative Preferred Stock, Series A.(4) 3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B.(4) 3.4 Amendment to Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B.(5) 3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock.(4) 3.6 Certificate of Determination for the Adjustable Rate Cumulative Preferred Stock, Series C.(4) 3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock, Series D.(6) 3.8 Certificate of Determination for the 10% Cumulative Preferred Stock, Series E.(7) 3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock, Series F.(8) 3.10 Certificate of Determination for the Convertible Participating Preferred Stock.(9) 3.11 Certificate of Amendment of Articles of Incorporation.(9) 3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock, Series G.(10) 3.13 Bylaws, as amended. 4.1 Form of Certificate of Determination for additional series of Preferred Stock.(1) 4.2 Form of Deposit Agreement.(1) 4.3 Form of Warrant Agreement.(1) 5.1 Opinion of David Goldberg as to the legality of the securities being registered. 8.1 Opinion of Hogan & Hartson L.L.P. re tax matters. 10.1 Loan Agreement between the registrant and Aetna Life Insurance Company dated as of July 11, 1988.(11) 10.2 Amendment to Loan Agreement between the registrant and Aetna Life Insurance Company dated as of September 1, 1993.(12) 10.3 Credit Agreement by and among the registrant, Wells Fargo Bank National Association, as agent, and the financial institutions party thereto dated as of May 22, 1995.(13) 10.4 Note Assumption and Exchange Agreement by and among Public Storage Management, Inc., Public Storage, Inc., the registrant and the holders of the notes dated as of November 13, 1995. *10.5 Registrant's 1990 Stock Option Plan.(14) *10.6 Registrant's 1994 Stock Option Plan.(14) 12.1 Statement on computation of ratio of earnings to fixed charges.(15) 23.1 Consent of Independent Auditors. 23.2 Consent of David Goldberg (included in Exhibit 5.1). 23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).
II-4 - -------- (1) To be filed by amendment or incorporated by reference in connection with the offering of Securities. (2) Filed as Appendix A to the registrant's Proxy Statement dated October 11, 1995 (filed October 13, 1995) and incorporated herein by reference. (3) Filed with the Registrant's Current Report on Form 8-K dated November 16, 1995 and incorporated herein by reference. (4) Filed with the registrant's Registration Statement No. 33-54557 and incorporated herein by reference. (5) Filed with the registrant's Registration Statement No. 33-56925 and incorporated herein by reference. (6) Filed with the registrant's Form 8-A/A Registration Statement relating to the 9.50% Cumulative Preferred Stock, Series D and incorporated herein by reference. (7) Filed with the registrant's Form 8-A/A Registration Statement relating to the 10% Cumulative Preferred Stock, Series E and incorporated herein by reference. (8) Filed with the registrant's Form 8-A/A Registration Statement relating to the 9.75% Cumulative Preferred Stock, Series F and incorporated herein by reference. (9) Filed with registrant's Registration Statement No. 33-63947 and incorporated herein by reference. (10) Filed with the registrant's Form 8-A/A Registration Statement relating to the 8 7/8% Cumulative Preferred Stock, Series G and incorporated herein by reference. (11) Filed with the registrant's Current Report on Form 8-K dated July 14, 1988 and incorporated herein by reference. (12) Filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (13) Filed with the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 and incorporated herein by reference. (14) Filed with the registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (15) Filed with registrant's Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference. *Compensatory Benefit Plan. II-5 EX-3.13 2 BYLAWS AS AMENDED EXHIBIT 3.13 REVISED BYLAWS OF STORAGE EQUITIES, INC. ---------------------------------------- ARTICLE I Definitions ----------- For the purpose of these Bylaws: Section 1. "Adviser" shall mean Public Storage Advisers, Inc. or any other entity entering into an agreement to provide Investment advice to and to administer the day-to-day affairs of the corporation. Section 2. "Advisory Contract" shall mean the contract with the Adviser. Section 3. "Affiliate" shall mean (a) any person directly or indirectly controlling, controlled by or under common control with another person, (b) any person owning or controlling 10% or more of the outstanding voting securities of such other person, (c) any officer, director or partner of such person, and (d) if such person is an officer, director or partner, any company for which such person acts in any such capacity. Section 4. "Asset Coverage" shall mean the ratio (expressed as a percentage) which the value of the Total Assets of the corporation less the corporation's liabilities (except liabilities for unsecured borrowings), determined in accordance with generally accepted accounting principles, bears to the aggregate amount of all unsecured borrowings of the corporation. Section 5. "Bylaws" shall mean these bylaws as amended, restated or modified from time to time. References in these bylaws to "hereof", "herein" and "hereunder" shall be deemed to refer to these bylaws and shall not be limited to the particular article or section in which such words appear. Section 6. "Corporation Property" shall mean as of any particular time any and all property, real, personal or otherwise, tangible or intangible, which is owned by, or on behalf of, the corporation. Section 7. "Initial Shareholders" shall mean B. Wayne Hughes and Kenneth Q. Volk, Jr. Section 8. "Mortgages" shall mean mortgages, deeds of trusts or other instruments creating liens on or security interests in real property or on rights or interests, including leasehold interests, in real property. Section 9. "Property Management Fee" shall mean that percentage of gross revenues from properties which is payable as compensation for managing some or all of the properties in which the corporation invests. 1 Section 10. "REIT Provisions of the Internal Revenue Code" shall mean Sections 856 through 860 of the Internal Revenue Code of 1954, as now enacted or hereafter amended, or successor statutes and regulations promulgated thereunder. Section 11. "Securities" shall mean any stock, shares, voting trust certificates, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, interest or participation in a profit-sharing agreement, investment contract, or in general any instruments commonly known as "securities", or any certificates of interest, shares or participations in, temporary or interim certificates for, or any option, warrant or right to subscribe to, purchase or acquire any of the foregoing. Section 12. "securities of the corporation" shall mean any securities issued by the corporation. Section 13. "shareholders" shall mean, as of any particular time, all holders of record of outstanding shares at such time. Section 14. "shares" shall mean shares of the common stock of the corporation. Section 15. "Total Assets" of the corporation shall mean the value of the Corporation Property appearing on the most recent balance sheet of the corporation, prepared in accordance with generally accepted accounting practices, without deduction for Mortgages or other security interests to which such assets are subject, or liabilities of the corporation (as shown on such balance sheet) and without deduction for accumulated depreciation, depletion, and amortization, but after provision for bad debt loss and any other similar reserves. Section 16. General. Whenever a term is defined in these bylaws in the ------- singular, the plural of such term may also be used in these bylaws as a defined term and, similarly, whenever a term is defined in the plural, the singular of such term may also be used as a defined term hereunder. ARTICLE II Offices ------- Section 1. Principal Executive Office. The principal executive office for -------------------------- the transaction of the business of the corporation is hereby fixed and located at 94 South Los Robles Avenue, in the City of Pasadena, County of Los Angeles, State of California. The board of directors may change the principal executive office from one location to another. Any such change shall be noted on the bylaws opposite this section, or this section may be amended to state the new location. 2 Section 2. Other Offices. The board of directors may at time establish ------------- branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE III Meetings of Shareholders ------------------------ Section 1. Place of Meetings. Meetings of shareholders shall be held at ----------------- any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. Annual Meeting. The annual meeting of shareholders shall be -------------- held each year on a date and at a time designated by the board of directors. The date so designated shall be within five (5) months after the end of the fiscal year of the corporation and within fifteen (15) months after the last annual meeting. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 3. Special Meeting. A special meeting of the shareholders may be --------------- called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholder holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article III, that a meeting will be held at the time requested by the person or persons calling the meeting but not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 4. Notice of Shareholders' Meetings. All notices of meetings of -------------------------------- shareholders shall be sent or otherwise given in accordance with Section 5 of this Article III not less than ten (10) (or thirty (30) if given by third class mail) nor more than sixty (60) days before the date of the meeting. The 3 notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect material financial interest within the meaning of Section 310 of the California General Corporation Law, (ii) an amendment of the articles of incorporation pursuant to Section 902 of that Law, (iii) a reorganization of the corporation pursuant to Section 1201 of that Law, (iv) a voluntary dissolution of the corporation pursuant to Section 1900 of that Law, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of that Law, the notice shall also state the general nature of that proposal. Section 5. Manner of Giving Notice; Affidavit of Notice. Notice of any -------------------------------------------- meeting of shareholders shall be given either personally or by first-class mail, or if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting, it may be given by third class mail, or such notice may be given by telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is so given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder 4 at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. Section 6. Quorum. The presence in person or by proxy of the holders of a ------ majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. Adjourned Meeting; Notice. Any shareholders' meeting, annual ------------------------- or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article III. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article III. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. Voting. Unless a record date set for voting purposes be fixed ------ as provided in Section 11 of this Article III, then subject to the provisions of Section 702 to Section 704, inclusive, of the California General Corporation Law (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership), only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice is given (or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held) shall be entitled to vote at such meeting. Each outstanding share of common stock entitles the holder to one vote on all matters presented to shareholders for a vote with the exception that shareholders have 5 cumulative voting rights with respect to the election of the corporation's board of directors in accordance with the California General Corporation Law, as described in the following paragraph of this Section 8. The shareholders' vote may be by voice vote or by ballot; provided, however, that any election of directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. Waiver of Notice or Consent by Absent Shareholders. The -------------------------------------------------- transactions of any meeting of shareholders, either annual or special, however called and noticed and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote who was not present in person or by proxy, or who, though present, has at the beginning of the meeting properly objected to the transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice but not so included, signs a written waiver of notice or a consent to a holding of the meeting or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken 6 or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article III, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. Shareholder Action by Written Consent Without a Meeting. Any ------------------------------------------------------- action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent, in writing, setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has not been filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder or their respective proxy holders may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article III. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect material financial interest pursuant to Section 310 of the California General Corporation Law, (ii) indemnification of agents of the corporation pursuant to Section 317 of that Law, (iii) a reorganization of the corporation pursuant to Section 1201 of that Law, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of that Law, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 11. Record Date for Shareholder Notice, Voting, and Giving ------------------------------------------------------ Consents. For purposes of determining the shareholders entitled to notice of - -------- any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date which 7 shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 12. Proxies. Every person entitled to vote for directors or on ------- any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the California General Corporation Law. Section 13. Inspectors of Election. Before any meeting of shareholders, ---------------------- the board of directors may appoint any 8 persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE IV Directors --------- Section 1. Powers. Subject to the provisions of the California General ------ Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers and subject to the same limitations, the directors shall have the power to: 9 (a) select and remove all officers, agents and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation and with these bylaws; fix their compensation; and require from them security for faithful service; (b) change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting or meetings, including annual meetings; (c) adopt, make and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates; (d) authorize the issuance of securities of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received; (e) subject to Section 2, borrow money and incur indebtedness on behalf of the corporation and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, Mortgages, pledges, hypothecations and other evidences of debt and securities; (f) enter into any Property Management Agreements necessary in the sole judgment of the directors; and (g) enter into an Advisory Contract, which must be terminable by the corporation upon 60 days' written notice, with an Adviser for an initial term of not to exceed two years, which term may be extended for successive one year terms. So long as it is in the best interests of the corporation and the shareholders, the directors shall endeavor to cause investments to be made in such a manner as to comply with the REIT provisions of the Internal Revenue Code with respect to composition of the corporation's investments, derivation of its income, and method of its operations. In the exercise of their powers, the directors shall have full authority and power (without liability for loss) to authorize any and all investments within the limitations of these bylaws, that they, in their absolute discretion, shall determine. Section 2. Limitation on Directors' Authority. The directors shall not ---------------------------------- authorize or permit the incurrence of any 10 obligation by the corporation which would cause the corporation's Asset Coverage to become less than three hundred percent (300%). Section 3. Number and Qualification of Directors. The number of directors ------------------------------------- of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; subject, however, to such additional voting requirement or limitation as is imposed under applicable law in the case of an amendment reducing the number of directors to a number less than five (5). Section 4. Election and Term of Office of Directors. Directors shall be ---------------------------------------- elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 5. Vacancies. Vacancies in the board of directors may be filled --------- by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that the directors may not fill a vacancy created by the removal of a director. Each director elected to fill a vacancy shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent, other than to fill a vacancy created by removal, shall require the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires unanimous consent of the shareholders. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the 11 board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 6. Place of Meetings and Meetings by Telephone. Regular meetings ------------------------------------------- of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or, if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 7. Annual Meeting. Immediately following each annual meeting of -------------- shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required. Section 8. Other Regular Meetings. Other regular meetings of the board of ---------------------- directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 9. Special Meetings. Special meetings of the board of directors ---------------- for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the 12 meeting is to be held at the principal executive office of the corporation. Section 10. Quorum. A majority of the authorized number of directors ------ shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 12 of this Article IV. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the California General Corporation Law (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Law (as to appointment of committees), and Section 317(e) of that Law (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 11. Waiver of Notice. The transactions of any meeting of the ---------------- board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present or who though present has prior to the meeting or at its commencement protested the lack of proper notice to him, signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 12. Adjournment. A majority of the directors present, whether or ----------- not constituting a quorum, may adjourn any meeting to another time and place. Section 13. Notice of Adjournment. Notice of the time and place of --------------------- holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting in the manner specified in Section 9 of this Article IV to the directors who were not present at the time of the adjournment. Section 14. Action Without Meeting. Any action required or permitted to ---------------------- be taken by the board of directors may be taken without a meeting if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. 13 Section 15. Fees and Compensation of Directors. Directors and members of ---------------------------------- committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. The compensation for directors other than the Initial Shareholders during the first fiscal year shall be $6,000 per year plus $200 per meeting per director. This Section 15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services. All directors will be reimbursed for reasonable expenses. Section 16. Relation of Directors to the Adviser. No more than 49% of the ------------------------------------ total number of directors may be Affiliates of the Adviser; provided, however, that if at any time the percentage of the directors who are Affiliates of the Adviser becomes, by reason of one or more vacancies in the office of director or otherwise, more than 49% of the total number of directors then in office, then within 60 days of the occurrence of such event the remaining director or directors in office shall appoint, pursuant to Section 5 of this Article IV, a sufficient number of other individuals as directors so that there is again no more than 49% of the total number of directors then in office who are Affiliates of the Adviser. ARTICLE V Committees ---------- Section 1. Committees of Directors. The board of directors may, by ----------------------- resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; 14 (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of these committees. Section 2. Meetings and Action of Committees. Meetings and action of --------------------------------- committees shall be governed by, and held and taken in accordance with, the provisions of Article IV of these bylaws, Sections 6 (place of meetings), 8 (regular meetings), 9 (special meetings and notice), 10 (quorum), 11 (waiver of notice), 12 (adjournment), 13 (notice of adjournment), and 14 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE VI Officers -------- Section 1. Officers. The officers of the corporation shall include a -------- president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, a treasurer, one or more assistant secretaries, one or more assistant treasurers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article VI. If there is a treasurer, he shall be the chief financial officer unless some other person is so appointed by the board of directors. Any number of offices may be held by the same person. Section 2. Election of Officers. The officers of the corporation, except -------------------- such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article VI, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. 15 Section 3. Subordinate Officers. The board of directors may appoint, and -------------------- may empower the chairman of the board or president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4. Removal and Resignation of Officer. Subject to the rights, if ---------------------------------- any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. Vacancies in Offices. A vacancy in any office because of -------------------- death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 6. Chairman of the Board. The chairman of the board, if such an --------------------- officer be elected, shall, if present, preside at meetings of the board of directors and meetings of the shareholders and shall exercise such other powers and perform such other duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article VI. The chairman of the board may be the chief executive officer of the corporation, notwithstanding that there is a president, if the board of directors so determines. Section 7. President. Subject to such supervisory powers, if any, as may --------- be given by the board of directors to the chairman of the board, if there be such an officer, the president shall, subject to the control of the board of directors, have the powers of general supervision, direction and control of the business and the officers of the corporation. In the absence of the chairman of the board, or if there be none, he shall preside at all meetings of the shareholders and at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. The 16 president shall be the chief executive officer of the corporation unless the chairman of the board, if any, is so designated. Section 8. Vice Presidents. In the absence or disability of the --------------- president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws and the president or the chairman of the board, if any. Section 9. Secretary. The secretary shall keep or cause to be kept, at --------- the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 10. Chief Financial Officer. The chief financial officer shall ----------------------- keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the 17 board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. ARTICLE VII Indemnification of Directors, Officers, Employees and Other Agents ------------------------------------ Section 1. Agents, Proceedings and Expenses. For the purposes of this -------------------------------- Article, "agent" means any person who is or was a director, officer, employee or other agent of this corporation, or is or was serving at the request of this corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(c) of this Article. Section 2. Actions Other Than by the Corporation. This corporation shall ------------------------------------- indemnify any person who was or is a party, or is threatened to be made a party, to any proceedings (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner that person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. Actions by the Corporation. This corporation shall indemnify -------------------------- any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that that person is or was an agent of this corporation, against expenses 18 actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this Section 3: (a) in respect of any claim, issue or matter as to which that person shall have been adjudged to be liable to this corporation in the performance of that person's duty to this corporation, unless and only to the extent that the court in which that action is or was pending shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; (b) of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (c) of expenses incurred in defending threatened or pending action which is settled or otherwise disposed of without court approval. Section 4. Successful Defense by Agent. To the extent that an agent of --------------------------- this corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article, or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 5. Required Approval. Except as provided in Section 4 of this ----------------- Article, any indemnification under this Article shall be made by this corporation only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article, by: (a) a majority vote of a quorum consisting of directors who are not parties to the proceeding; (b) approval by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (c) the court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering services in connection 19 with the defense, whether or not such application by the agent, attorney or other person is opposed by this corporation. Section 6. Advances of Expenses. Expenses incurred in defending any -------------------- proceeding may be advanced by this corporation before the final disposition of the proceeding on receipt of an undertaking by or on behalf of the agent to repay the amount of the advance unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article. Section 7. Other Contractual Rights. Nothing contained in this Article ------------------------ shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise. Section 8. Limitations. No indemnification or advance shall be made under ----------- this Article, except as provided in Section 4 or Section 5(c), in any circumstance where it appears: (a) that it would be inconsistent with a provision of the articles, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 9. Insurance. Upon and in the event of a determination by the --------- board of directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not this corporation would have the obligation to indemnify the agent against that liability under the provisions of this Article. Section 10. Fiduciaries of Corporate Employee Benefit Plan. This Article ---------------------------------------------- does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law. 20 ARTICLE VIII Investment Policy ----------------- Section 1. Statement of Investment Policy. Subject to the ------------------------------ prohibitions contained in Section 2 of this Article, the general investment policy of the corporation shall be to invest the assets of the corporation in existing mini-warehouses. Up to ten percent (10%) of the net assets of the corporation may also be invested in improved property used for other commercial or industrial purposes. Section 2. Investment Prohibitions. The corporation may not: ----------------------- (a) Invest in commodities; (b) Invest in non-income-producing property, provided that the corporation is not limited in the extent to which it may invest in (i) property being developed, (ii) property scheduled to be developed within one year, or (iii) property which is incidental to income-producing real property owned by, or securing a Mortgage held by, the corporation; (c) Make loans secured by junior Mortgages unless (i) the indebtedness is convertible into, or accompanied by a right to convert it into, an equity interest in the property at a conversion rate based upon its fair market value at the time the loan is made as determined by an independent appraisal, and (ii) the total indebtedness on the property, including the corporation's junior loan, does not exceed 85% of the fair market value of the property at the time the junior Mortgage loan is made by the corporation, as determined by an independent appraisal; (d) Engage in short sales or trading activities in securities, except for purposes of hedging the corporation's short-term investments; (e) Engage in underwriting or agency distribution of securities issued by others; (f) Acquire securities in any company whose primary business is holding investments or engaging in activities prohibited by this Section 2; (g) Acquire investments in any property in which the Initial Shareholders, their Affiliates, or any of the corporation's officers and directors have an interest or sell property to any of such persons unless the transaction (i) is approved by a majority of disinterested directors, and (ii) is fair to the corporation, based on an independent appraisal; provided that either of the Initial Shareholders or any of their Affiliates may purchase an interest in its own name and 21 temporarily hold title thereto for purposes of facilitating the acquisition of such interest for the corporation. If the Adviser or any of its Affiliates has an interest in a property, any director of the corporation who is an Affiliate of the Adviser shall not be deemed to be disinterested; (h) Issue debt securities in a public offering unless the Company's "cash flow" (which for this purpose shall mean net income, exclusive of extraordinary items, plus depreciation) for the most recent twelve months for which financial statements are available, adjusted to give effect to the anticipated use of the proceeds from the proposed sale of debt securities would be sufficient to service the interest on such securities; (i) Issue "redeemable securities" as defined in the Investment Company Act of 1940 or assessable securities, provided that the corporation's right to recover the unpaid purchase price of securities or the remainder of the consideration to be paid therefor shall not be limited; or (j) Issue warrants, options or similar evidences of a right to purchase the corporation's securities (i) to the Adviser or any of its Affiliates, (ii) at exercise prices less than the fair market value of such securities on the date of the grant of the option or other right; provided that the foregoing shall not apply to options granted under an employee stock option or similar plan if (A) the plan is approved by the vote of the holders of a majority of the shares, (B) the number of shares subject to options under such a plan shall not exceed 10% of the then outstanding shares and (C) any such option will have an exercise price of not less than 85% of the fair market value of the share on the date of grant of the option or other right. Section 3. Fees. The Initial Shareholders and their Affiliates shall ---- not be paid by the corporation or by any person or entity acting on its behalf, any finder's fees or real estate commissions in connection with the acquisition or disposition of the corporation's real property investments. ARTICLE IX Independent Activities ---------------------- Section 1. Statement re Independent Activities. ----------------------------------- (a) Except as otherwise prohibited or limited by this Section, the Initial Shareholders, any director, officer, employee or agent of the corporation, and any Affiliate of the foregoing, may have business interests and engage in business activities in addition to those relating to the corporation, which interests and activities may be similar to, or in competition with, those of the corporation, provided that so 22 long as the Initial Shareholders are affiliated with the corporation, neither they nor any of their Affiliates will invest, or offer to others the opportunity to invest, in any improved mini-warehouses unless the opportunity to invest in such property has been presented to, and rejected by (or not accepted within a reasonable period of time), the corporation. This restriction is not applicable to any properties as to which any of the Initial Shareholders or their Affiliates have entered into before November 18, 1980, a contract, agreement in principle or letter of intent. The Initial Shareholders, any director, officer, or agent of the corporation, and any Affiliate of the foregoing, may invest in other types of improved property, and in unimproved property acquired for mini- warehouse construction, without obligation to make such opportunities available to the corporation. (b) Subject to the other provisions of these bylaws, any director, officer, employee or agent of the corporation may be interested as an officer, director, stockholder, partner, trustee, member, adviser or employee of, or otherwise have a direct or indirect interest in, any entity which may be engaged to render advice or services to the corporation of every nature, kind and description, including but not limited to real estate brokerage, mortgage brokerage, property management, mortgage or property investigation or appraisal, investment selection, administrative, managerial, record keeping and agency services of all kinds and may receive compensation from any or all of the entities referred to, as well as compensation as a director, officer, employee or agent of the corporation. None of the activities referred to in this paragraph shall be deemed to conflict with the duties or powers of a director, officer, employee or agent of the corporation in such capacity. (c) Any director, officer, employee or agent of the corporation may acquire, own, hold and dispose of securities of the corporation, for his individual account, and may exercise all rights of a holder of such securities to the same extent and in the same manner as if he were not such a director, officer, employee or agent. ARTICLE X Records and Reports ------------------- Section 1. Maintenance and Inspection of Share Register. The -------------------------------------------- corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate 23 of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 2. Maintenance and Inspection of Bylaws. The corporation ------------------------------------ shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 3. Maintenance and Inspection of Other Corporate Records. ----------------------------------------------------- The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation, if any. 24 Section 4. Inspection by Director. Every director shall have the ---------------------- absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. Annual Report to Shareholders. The board of directors ----------------------------- shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) (or if sent by third-class mail, thirty-five (35)) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article III of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, prepared in accordance with generally accepted accounting principles applied on a consistent basis and accompanied by any report of independent accountants. Section 6. Disclosure on Distribution. Any distribution of income or -------------------------- capital assets of the corporation to holders of securities of the corporation other than its promissory notes shall be accompanied by a written statement disclosing the source of the funds distributed. If, at the time of distribution, this information is not available, a written explanation of the relevant circumstances shall accompany the distribution and the written statement disclosing the source of the funds distributed shall be sent to such holders not later than sixty (60) days after the close of the fiscal year in which the distribution was made. Section 7. Financial Statements. If the holder or holders of at -------------------- least five percent (5%) of the outstanding shares of any class of stock of the corporation make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year within one hundred twenty (120) days after the close of such fiscal year, the statements which were to be contained in such annual report shall likewise be delivered or mailed to any shareholder or shareholders requesting such statements within thirty (30) days after receipt by the corporation of a written request for such statements. A copy of such statements shall be kept on file 25 in the principal executive office of the corporation for twelve (12) months, and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 8. Annual Statement of General Information. The corporation --------------------------------------- shall, during the period commencing on March 1st and ending on August 31st in each year, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the number of vacancies, if any, on the board of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the chief executive officer, secretary and chief financial officer, the street address of its principal executive office or, if the principal executive office is not in California, its principal business office in California, and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. ARTICLE XI General Corporate Matters ------------------------- Section 1. Record Date for Purposes Other than Notice and Voting. ----------------------------------------------------- For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 26 Section 2. Checks, Drafts, Evidence of Indebtedness. All checks, ---------------------------------------- drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as from time to time shall be determined by resolution of the board of directors. Section 3. Corporate Contracts and Instruments; How Executed. The ------------------------------------------------- board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 4. Certificates for Shares. A certificate or certificates ----------------------- for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates for shares which are partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board, or the president or vice president, and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. Section 5. Lost Certificates. Except as provided in this Section 5, ----------------- no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 27 Section 6. Representation of Shares of Other Corporations. The ---------------------------------------------- chairman of the board, the president or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 7. Redemption and Stop Transfer for Tax Purposes. If the --------------------------------------------- directors shall, at any time and in good faith, be of the opinion that ownership of securities of the corporation has or may become concentrated to an extent that may prevent the corporation from qualifying as a real estate investment trust under the REIT Provisions of the Internal Revenue Code, then the directors shall have the power, by lot or other means deemed equitable by them to prevent the transfer of and/or to call for redemption a number of securities of the corporation sufficient, in the opinion of the directors, to maintain or bring the direct or indirect ownership thereof into conformity with the requirements of such a real estate investment trust under the REIT Provisions of the Internal Revenue Code. The redemption price to be paid for securities of the corporation so called for redemption, on the date fixed for redemption, shall be the average of the highest bid and the lowest asked quotations on the last business day prior to the redemption date as reported by the National Quotation Bureau, Incorporated or a similar organization selected from time to time by the corporation or if there be no such bid and asked quotations, as determined by the board of directors in good faith. From and after the date fixed for redemption by the directors, the holder of any securities of the corporation so called for redemption shall cease to be entitled to any distributions, voting rights and other benefits with respect to such securities of the corporation, other than the right to payment of the redemption price determined as aforesaid. Section 8. Provisions in Conflict with Law or Regulations. The ---------------------------------------------- provisions of these bylaws are severable, and if the directors shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT Provisions of the Internal Revenue Code or with other applicable federal or California laws and regulations, the Conflicting Provisions shall be deemed never to have constituted a part of these bylaws; provided, however, that such determination by the directors shall not affect or impair any of the remaining provisions of these bylaws or render invalid or improper any action taken or omitted (including but not limited to the election of directors) prior to such determination. Such determination shall become effective when a certificate signed by a majority of the directors setting forth any such determination and reciting that it was duly 28 adopted by the directors, shall be filed with the books and records of the corporation. The directors shall not be liable for failure to make any determination under this Section. Nothing in this Section shall in any way limit or affect the right of the directors or the shareholders to amend these bylaws. Section 9. Construction. Unless the context requires otherwise, the ------------ general provisions, rules of construction and definitions in the California General Corporation Law shall govern the construction of these bylaws. ARTICLE XII Amendments ---------- Section 1. Amendment by Shareholders. New bylaws may be adopted or ------------------------- these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 2. Amendment by Directors. Subject to the rights of the ---------------------- shareholders as provided in Section 1 of this Article XII, to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors, provided, however, that the board of directors may adopt a bylaw or amend a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3 of Article IV of these bylaws, and provided further that bylaws relating to the corporation's permissible Asset Coverage (Article IV, Section 2), to the corporation's investment policy (Article VIII), to the independent activities of the Initial Shareholders, directors, officers, employees and agents of the corporation and of Affiliates of the foregoing, (Article IX, Section 1), and to the corporation's qualification as a real estate investment trust (Article XI, Section 7), may not be amended or repealed without the vote or written consent of holders of a majority of the outstanding shares entitled to vote. 29 Amendment to Section 2 of Article III of the Bylaws of Storage Equities, Inc. Adopted by the Board of Directors of Storage Equities, Inc. on May 31, 1983: Section 2. Annual Meeting. The annual meeting of shareholders shall -------------- be held each year on a date and at a time designated by the Board of Directors. The date so designated shall be within fifteen (15) months after the last annual meeting. At each annual meeting directors shall be elected and any other business may be transacted. 30 Amendment to Bylaws of Storage Equities, Inc. Adopted by the Shareholders of Storage Equities, Inc. on August 19, 1983: RESOLVED: That Section 1 of Article VIII of the corporation's bylaws is hereby amended to read as follows: "Section 1. Statement of Investment Policy. Subject to the ------------------------------ prohibitions contained in Section 2 of this Article, the general investment policy of the corporation shall be to invest the assets of the corporation in existing miniwarehouses. The corporation may also invest in improved property to be used for other purposes provided, however, that no investment shall be made in any such non-miniwarehouse property if it would cause the corporation's total investment in all non-miniwarehouse properties, as of the time of acquisition, to equal more than 40% of the corporation's total assets." RESOLVED FURTHER: That paragraph (c) of Section 2 of Article VIII of the bylaws of this corporation is hereby deleted in its entirety. RESOLVED FURTHER: That Section 1 of Article IX of the bylaws of this corporation is hereby amended to read as follows: "Section 1. Statement re Independent Activities. ----------------------------------- (a) Except as otherwise prohibited or limited by law or by contract, the Initial Shareholders, any director, officer, employee or agent of the corporation, and any Affiliate of the foregoing, may have business interests and engage in business activities in addition to those relating to the corporation, which interests and activities may be similar to, or in competition with, those of the corporation." 31 RESOLVED FURTHER: That Section 2 of Article XII of the bylaws of this corporation is hereby amended to read as follows: "Section 2. Amendment by Directors. Subject to the rights of ---------------------- the shareholders as provided in Section 1 of this Article XII, to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors, provided, however, that the board of directors may adopt a bylaw or amend a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3 of Article IV of these bylaws, and provided further that bylaws relating to the corporation's permissible Asset Coverage (Article IV, Section 2), to the corporation's investment policy (Article VIII), and to the corporation's qualification as a real estate investment trust (Article XI, Section 7) may not be amended or repealed without the vote or written consent of holders of a majority of the outstanding shares entitled to vote." 32 Amendments to Bylaws of Storage Equities, Inc. Adopted by the Board of Directors on October 7, 1983. WHEREAS: The Board of Directors of this corporation considers it to be in the best interests of the corporation to increase the authorized number of directors of the corporation from seven (7) to eight (8); and WHEREAS: The corporation's bylaws permit the Board of Directors to designate the number of directors of the corporation provided that such number is within the range of not less than five (5) nor more than nine (9). NOW, THEREFORE, BE IT RESOLVED: That the second sentence of Section 3 of Article IV of the corporation's bylaws is hereby amended to read as follows: "The exact number of directors shall be eight (8) until changed within the limits specified above, by a bylaw amending this Section 3, duly adopted by the board of directors or by the shareholders." 33 Amendment to Bylaws of Storage Equities, Inc. Adopted by the Shareholders of Storage Equities, Inc. on May 15, 1985: RESOLVED: That Article VI of the corporation's bylaws is hereby amended to add Section 11 which shall read as follows: "Section 11. Officer Loans and Guaranties. Without limiting any ---------------------------- other powers of the corporation or the board of directors with respect to loans, guaranties or employee benefit plans, if the corporation has outstanding shares held of record by 100 or more persons (determined as provided in the California General Corporation Law) on the date of approval by the board of directors, the corporation may make loans to limited partnerships or other entities affiliated with any officer of the corporation, whether or not the officer is also a director, upon the approval of the board of directors alone (by a vote sufficient without counting the vote of any interested director or directors) if the board of directors determines that such a loan may reasonably be expected to benefit the corporation and considers that the loan is a favorable investment opportunity for the corporation." 34 Amendment to Bylaws of Storage Equities, Inc. Adopted by the Shareholders of Storage Equities, Inc. on July 11, 1989. RESOLVED: That Section I of Article VIII of the corporation's bylaws is hereby amended to read as follows: "Section 1. Statement of Investment Policy. Subject to the ------------------------------ prohibitions contained in Section 2 of this Article, the general investment policy of the corporation shall be to engage in any lawful activity for which a corporation may be organized under applicable law." 35 Amendment to Bylaws of Storage Equities, Inc. Adopted by the Board of Directors on May 14, 1992 WHEREAS: The Board of Directors of this corporation considers it to be in the best interests of the corporation to decrease the authorized number of directors of the corporation from eight (8) to seven (7); and WHEREAS: The corporation's Bylaws permit the Board of Directors to designate the number of directors of the corporation provided that such number is within the range of not less than five (5) or more than nine (9). NOW, THEREFORE, BE IT RESOLVED: That the second sentence of Section 3 of Article IV of the corporation's Bylaws is hereby amended to read as follows: "The exact number of directors shall be seven (7) until changed within the limits specified above, by a bylaw amending this section 3, duly adopted by the board of directors or by the shareholders." 36 AMENDMENT TO BYLAWS OF STORAGE EQUITIES, INC. ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 31, 1993 WHEREAS: The Board of Directors of this corporation considers it to be in the best interests of the corporation to increase the authorized number of directors of the corporation from seven (7) to eight (8); and WHEREAS: The corporation's Bylaws permit the Board of Directors to designate the number of directors of the corporation provided that such number is within the range of not less than five (5) or more than nine (9). NOW, THEREFORE, BE IT RESOLVED: That the second sentence of Section 3 of Article IV of the corporation's Bylaws is hereby amended to read as follows: "The exact number of directors shall be eight (8) until changed within the limits specified above, by a bylaw amending this section 3, duly adopted by the board of directors or by the shareholders." 37 AMENDMENT TO BYLAWS OF PUBLIC STORAGE, INC. (FORMERLY KNOWN AS STORAGE EQUITIES, INC.) ADOPTED BY BOARD OF DIRECTORS ON DECEMBER 7, 1995 Resolved: That Section 7 of Article XI of the corporation's bylaws is hereby amended to add the following at the end of such Section 7: "[subsections (a) through (k) are deliberately omitted] (l) OWNERSHIP LIMITATIONS - PREFERRED STOCK --------------------------------------- (i) Except as provided in subparagraph (n) of this Section 7 of Article XI and the last sentence of this subparagraph (l), no Person shall Acquire or Beneficially Own shares of any series of Preferred Stock in excess of the Ownership Limit set forth in this subparagraph (l)(i). In the case of any series of Preferred Stock, the Ownership Limit is 9.9% of the outstanding shares of such series of Preferred Stock. The limitation set forth in this subparagraph (l)(i) of this Section 7 of Article XI shall apply only to an Acquisition or Transfer of Stock or other event with respect to Stock occurring subsequent to the effective date of the merger of Public Storage Management, Inc. with and into this corporation. Notwithstanding anything to the contrary in this Section 7 of Article XI, no Person shall be deemed to exceed the Ownership Limit set forth in this subparagraph (l)(i) solely by reason of the Beneficial Ownership of shares of any class of Stock to the extent such shares of Stock were Beneficially Owned by such Person on the effective date of the merger of Public Storage Management, Inc. with and into this corporation (but the Beneficial Ownership of any such shares of Stock shall be taken into account in determining whether any subsequent Transfer, Acquisition or other event violates this subparagraph (l)(i)). (ii) Notwithstanding any other provisions contained in the corporation's Articles of Incorporation or bylaws, no Person shall Acquire or Beneficially Own shares of any class of Stock of this corporation to the extent that, if effective, such Acquisition or Beneficial Ownership would result in this corporation being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the purported Acquisition, Transfer or other event takes place during the second half of a taxable year) or otherwise would result in this corporation failing to qualify as a REIT. (m) REMEDIES -------- (i) If, notwithstanding the other provisions contained in this Section 7 of Article XI, at any time after the effective date of the merger of Public Storage Management, Inc. with and into this corporation, there is a purported Transfer, Acquisition, change in the capital structure of this corporation 38 or other event (including, without limitation, a change in the relationship between two or more Persons that causes the application of Section 544 of the Code, as modified by Section 856(h)), that, if effective, would result in the violation of one or more of the restrictions on ownership and transfer described in subparagraph (l) of the Section 7 of Article XI, then (1) in the case of a Transfer or Acquisition, that number of shares of Stock purported to be Transferred or Acquired that otherwise would cause such Person to violate subparagraph (l) (rounded up to the next whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in subparagraph (t) of this Section 7 of Article XI, effective as of the close of business on the day immediately prior to the date of such purported Transfer or Acquisition, and such Person shall acquire no rights in such shares of Stock; (2) in the case of any event other than a Transfer or Acquisition ("Beneficial Ownership Event"), that number of shares of Stock that would be owned by Persons (the "Affected Persons") as a result of such Beneficial Ownership Event that otherwise would violate subparagraph (l) of this Section 7 of Article XI (rounded up to the next whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in subparagraph (t) of this Section 7 of Article XI, effective as of the close of business on the day immediately prior to such Beneficial Ownership Event, and such Affected Persons shall acquire no rights (or have no continuing rights) in such shares of Stock; or (3) if the transfer to the Trust described in either clause (1) or clause (2) hereof would not be effective for any reason to prevent any Person from Beneficially Owning Stock in violations of subparagraph (l) of this Section 7 of Article XI, then the Transfer, Acquisition, or other Beneficial Ownership Event that would otherwise cause such Person to violate subparagraph (l) of this Section 7 of Article XI shall be void ab initio. (ii) Notwithstanding the other provisions hereof, any Transfer or Acquisition of shares of Stock that, if effective, would result in the Stock being beneficially owned by less than 100 persons (determined without reference to any rules of attribution) shall be void ab initio, and the intended transferee shall acquire no rights in such shares of Stock. (iii) In addition to, and without limitation by, subparagraphs (m)(i) and (m)(ii) above, if the Board of Directors or its designees shall at any time determine in good faith that a Transfer, Acquisition or other event has taken place in violation of subparagraph (l) of this Section 7 of Article XI or that a Person intends to Acquire, has attempted to Acquire, or may Acquire direct ownership, beneficial ownership (determined without reference to any rules of attribution) or Beneficial Ownership of any Stock in violation of subparagraph (l) of this Section 7 of Article XI, the Board of Directors or its designees shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, but not limited to, causing this corporation to refuse to give effect to such Transfer or other event on the books of this 39 corporation or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfer or Acquisition (or, in the case of events - -------- ------- other than a Transfer or Acquisition, ownership or Beneficial Ownership) in violation of subparagraph (l) of this Section 7 of Article XI shall automatically result in the transfer to the Trust described in subparagraph (m)(i), irrespective of any action (or non-action) by the Board of Directors. (iv) Nothing contained in this subparagraph (m) shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect this corporation and the interests of its stockholders by preservation of this corporation's status as a REIT. (n) WAIVERS AND EXCEPTIONS ---------------------- (i) Subject to subparagraph (l)(ii) of this Section 7 of Article XI, the Board of Directors, in its sole and absolute discretion, may grant to any Person who makes a request therefor an exception to the Ownership Limit with respect to any series of Preferred Stock set forth in subparagraph (l)(i), subject to the following conditions and limitations: (A) the Board of Directors shall have determined that, after giving effect to (x) an acquisition by such Person of Beneficial Ownership of the maximum amount of Preferred Stock 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 purposes of Section 542(a)(2) for of the Code and who would Beneficially Own the largest amounts of the Stock of this corporation (determined by value) Beneficially Own the maximum amount of Preferred Stock permitted under subparagraph (l) of this Section 7 of Article XI (or if greater, any exception granted under this subparagraph (n)(i) to (or with respect to) such Persons), this corporation would not be "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the purported Acquisition, Transfer or other event takes place during the second half of a taxable year) and would not otherwise fail to qualify as a REIT; and (B) such Person provides to the Board of Directors such representations and undertakings as the Board of Directors may, in its sole and absolute discretion, require (including, without limitation, an agreement as to a reduced Ownership Limit for such Person with respect to the Beneficial Ownership of one or more other classes of Stock not subject to the exception), and such Person agrees that any violation of such representations and undertakings or attempted violation thereof will result in the application of the remedies set forth in subparagraph (m)(i) with respect to shares of Stock held in excess of the Ownership Limit with respect to such Person (determined without regard to the exception granted such Person under this subparagraph (n)(i)). If a member of the Board of Directors requests that the Board of Directors grant an exception to the Ownership Limit with respect to such member or with respect to any other Person if such Board member would be considered to be the Beneficial Owner of shares of Stock owned by such Person, such member of the Board of 40 Directors shall not participate in the decision of the Board of Directors as to whether to grant any such exception. (ii) Subject to subparagraph (l)(ii) of this Section 7 of Article XI, in addition to exceptions permitted under subparagraph (n)(i) above, the Board of Directors, in its sole and absolute discretion, may exempt a Person from the Ownership Limit if such Person is not an individual for purposes of Section 542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A) of the Code) and such Person provides to the Board of Directors such representations and undertakings as the Board of Directors may, in its sole and absolute discretion, require, and such Person agrees that any violation of such representations and undertakings or attempted violation thereof will result in the application of the remedies set forth in subparagraph (m)(i) with respect to shares of Stock held in excess of the Ownership Limit with respect to such Person (determined without regard to the exemption granted under this subparagraph (n)(ii)). (iii) Prior to granting any exception or exemption pursuant to subparagraph (n)(i) or (n)(ii), the Board of Directors may require a ruling from the IRS or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors, in its sole and absolute discretion as it may deem necessary or advisable in order to determine or ensure this corporation's status as a REIT, provided, however, that obtaining a favorable -------- ------- ruling or opinion shall not be required for the Board of Directors to grant an exception hereunder. (o) CERTAIN DEFINITIONS ------------------- Unless the context otherwise requires, the terms defined in this subparagraph (o) shall have, for all purposes of subparagraphs (l) through (v) of this Section 7 of Article XI, the meaning specified herein (with terms defined in the singular having comparable meanings when used in the plural). Acquire. The term "Acquire" shall mean the acquisition of Beneficial ------- Ownership of shares of Stock by any means, including, without limitation, a Transfer, the exercise of or right to exercise any rights under any option, warrant, convertible security, pledge or other security interest or similar right to acquire shares, but shall not include the acquisition of any such rights unless, as a result, the acquiror would be considered a Beneficial Owner (if the acquisition would have been effective), as defined below. The term "Acquisition" shall have the correlative meaning. Beneficial Ownership. The term "Beneficial Ownership" shall mean ownership -------------------- of Preferred Stock by a Person who is or would be treated as an owner of such Stock either directly, indirectly or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. 41 Charitable Beneficiary. The term "Charitable Beneficiary" shall mean one ----------------------- or more beneficiaries of the Trust as determined pursuant to subparagraph (t) of this Section 7 of Article XI, each of which shall be an organization described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as ---- amended from time to time. IRS. The term "IRS" shall mean the United States Internal Revenue Service. --- Market Price. The term "Market Price" shall mean, with respect to any ------------ class of Stock, the last reported sales price on the NYSE of shares of such class of Stock on the day immediately preceding the relevant date, or if such class of Stock is not then traded on the NYSE, the last reported sales price of shares of such class of Stock on the day immediately preceding the relevant date as reported on any exchange or quotation system or for which such class of Stock may be traded, provided, however, that if the Board of Directors determines in -------- ------- good faith that a lower price is appropriate, then the Market Price shall be such lower price as determined in good faith by the Board of Directors, or if such class of Stock is not then traded over any exchange or quotation system, the Market Price shall be the price determined in good faith by the Board of Directors of this corporation as the fair market value of shares of such class of Stock on the relevant date. NYSE. The term "NYSE" shall mean the New York Stock Exchange. ---- Ownership Limit. The term "Ownership Limit" shall mean the maximum amount --------------- of Preferred Stock that may be Beneficially Owned by a Person under subparagraph (l)(i) of this Section 7 of Article XI, determined without regard to any exception or waiver that may be granted under subparagraph (n) of this Section 7 of Article XI (but taking into account the last sentence of subparagraph (l)(i) of this Section 7 of Article XI). Person. The term "Person" shall mean an individual, corporation, ------ partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity; but does not include an underwriter which participates in a public offering of Stock provided that the ownership of Stock by such underwriter would not result in this corporation being "closely held" within the meaning of Section 856(h) of the Code and would not otherwise result in this corporation failing to qualify as a REIT. 42 Purported Beneficial Transferee. The term "Purported Beneficial ------------------------------- Transferee" shall mean, with respect to any purported Transfer which would result in a violation of the limitations in subparagraph (l) of this Section 7 of Article XI, the Purported Beneficial Transferee or owner for whom the Purported Record Transferee would have acquired or owned shares of Stock if such Transfer had been valid under subparagraph (l) of this Section 7 of Article XI. Purported Record Transferee. The term "Purported Record Transferee" shall --------------------------- mean with respect to any Purported Transfer which would result in a violation of the limitations in subparagraph (l) of this Section 7 of Article XI, the record holder of the Stock if such Transfer had been valid under subparagraph (l) of this Section 7 of Article XI. REIT. The term "REIT" shall mean a Real Estate Investment Trust under ---- Section 856 of the Code. Stock. The term "Stock" shall mean shares of stock of this corporation ----- that are Preferred Stock. Transfer. The term "Transfer" shall mean any sale, transfer, gift, -------- assignment, devise or other disposition of Stock, including (i) the granting of any option or entering into any agreement or the sale, transfer or other disposition of Stock or (ii) the sale, transfer, assignment or other disposition of any securities (or rights convertible into exchangeable Stock), whether voluntarily or involuntarily, whether of record or beneficially or Beneficially (including, but not limited to, transfers of interests in other entities which result in changes in Beneficial Ownership of Stock), and whether by operation of law or otherwise. Trust. The term "Trust" shall mean the trust created pursuant to ----- subparagraph (t)(i) of this Section 7 of Article XI. Trustee. The term "Trustee" shall mean the Person unaffiliated with this ------- corporation, or the Purported Beneficial Transferee, or the Purported Record Transferee, that is appointed by this corporation to serve as trustee of the Trust. (p) NOTICE OF RESTRICTED TRANSFER ----------------------------- Any Person who Acquires or attempts to Acquire Stock or other securities in violation of subparagraph (l) of this Section 7 of Article XI or any Person who is a transferee in a Transfer or is otherwise affected by an event other than a Transfer that results in a violation of subparagraph (l) of this Section 7 of Article XI, shall immediately give written notice to this corporation of such Acquisition, Transfer or other event and shall provide to this corporation such other information as this corporation may request in order to determine the effect, if any, of such Acquisition, Transfer or other event on this corporation's status as a REIT. 43 (q) OWNERS REQUIRED TO PROVIDE INFORMATION -------------------------------------- From and after the effective date of the merger of Public Storage Management, Inc. with and into this corporation, each Person who is a beneficial owner or Beneficial Owner of Stock and each Person (including the stockholder of record) who is holding Stock for a Beneficial Owner shall provide to this corporation such information as this corporation may request, in good faith, in order to determine this corporation's status as a REIT. (r) AMBIGUITY --------- In the case of an ambiguity in the application of any of the provisions of this Section 7 of Article XI, including any definition contained in subparagraph (o) of this Section 7 of Article XI, the Board of Directors shall have the power to determine the application of the provisions of this Section 7 of Article XI with respect to any situation based on the facts known to it. (s) LEGEND ------ Each certificate for shares of any class of Stock shall bear the following legend: "The shares of Stock represented by this certificate are subject to restrictions on ownership and transfer for the purpose of this corporation's maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended. Except as set forth in Section 7 of Article XI of this corporation's bylaws, no person may Beneficially Own more than 9.9% of the outstanding shares of any series of Preferred Stock of this corporation, with certain further restrictions and exceptions as are set forth in this corporation's Articles of Incorporation and bylaws. Any Person who attempts to own or Beneficially Own Stock in excess of the above limitations must immediately notify this corporation. All capitalized terms in this legend have the meanings defined in Section 7 of Article XI of this corporation's bylaws. If any of the restrictions on transfer or ownership set forth in Section 7 of Article XI of the bylaws or this corporation are violated, the Stock represented hereby will be automatically transferred to the Trustee of a Trust for the benefit of a Charitable Beneficiary pursuant to the terms of Section 7 of Article XI of the bylaws of this corporation. In addition, attempted transfers of Stock in violation of the limitations described above (as modified or expanded upon in Section 7 of Article XI of this corporation's bylaws), may be void ab initio. This corporation will furnish to the holder hereof, upon -- ------ request and without charge, a complete written statement of the terms and conditions of Section 7 of Article XI of the corporation's bylaws. Requests for such documents may be directed to the corporate secretary." (t) TRANSFER OF STOCK IN TRUST --------------------------- (i) Ownership in Trust; Status of Shares Held in Trust. Upon any purported -------------------------------------------------- Transfer (whether or not such Transfer is 44 the result of a transaction engaged in through the facilities of the NYSE), Acquisition or other event that results in the transfer of Stock to a Trust pursuant to subparagraph (m) of this Article IV, such shares of Stock shall be deemed to have been transferred to the Trustee in its capacity as Trustee for the exclusive benefit one or more Charitable Beneficiaries. The Trustee shall be appointed by this corporation and shall be a Person unaffiliated with this corporation, any Purported Beneficial Transferee or Purported Record Transferee. Each Charitable Beneficiary shall be designated by this corporation as provided in subparagraph (v) of this Section 7 of Article XI. Shares of Stock so held in Trust shall be issued and outstanding stock of this corporation. The Purported Beneficial Transferee or Purported Record Transferee shall not benefit economically from ownership of any shares of Stock held in Trust by the Trustee, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares held in Trust. The Purported Record Transferee and the Purported Beneficial Transferee of shares of Stock in violation of subparagraph (l) of this Section 7 of Article XI shall have no claim, cause of action, or any other recourse whatsoever against the purported transferor of such shares. (ii) Dividend Rights. The Trustee shall have all rights to dividends with --------------- respect to shares of Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or distribution paid prior to the discovery by this corporation that the shares of Stock have been transferred to the Trustee with respect to such shares shall be paid over to the Trustee by the recipient thereof upon demand, and any dividend declared but unpaid shall be paid when due to the Trustee. Any dividends or distributions so paid over to the Trustee shall be held in trust for the Charitable Beneficiary. (iii) Rights upon Liquidation. In the event of any voluntary or ----------------------- involuntary liquidation, dissolution or winding up of or any distribution of the assets of this corporation, the Trustee shall be entitled to receive, ratably with each other holder of Stock of the class of Stock that is held in the Trust, that portion of the assets of this corporation available for distribution to the holders of such class (determined based upon the ratio that the number of shares of such class of Stock held by the Trustee bears to the total number of shares of such class of Stock then outstanding). The Trustee shall distribute any such assets received in respect of the Stock held in the Trust in any liquidation, dissolution or winding up of, or distribution of the assets of the Corporation in accordance with subparagraph (t)(iv) of this Section 7 of Article XI. (iv) Sale of Shares by Trustee. Within twenty days of receiving notice ------------------------- from this corporation that shares of Stock 45 have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in Trust to a Person, designated by the Trustee, whose ownership of the shares of Stock held in the Trust would not violate the ownership limitations set forth in subparagraph (l) of this Section 7 of Article XI. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Purported Record Transferee and to the Charitable Beneficiary as provided in this subparagraph (t)(iv). The Purported Record Transferee shall receive the lesser of (1) (x) the price per share such Purported Record Transferee paid for the Stock in the purported Transfer that resulted in the transfer of shares of Stock to the Trust, or (y) if the Transfer or other event that resulted in the transfer of shares of Stock to the Trust was not a transaction in which the Purported Record Transferee gave full value for such shares of Stock, a price per share equal to the Market Price on the date of the purported Transfer or other event that resulted in the transfer of such shares of Stock to the Trust and (2) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sales proceeds in excess of the amount payable to the Purported Record Transferee shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by this corporation that shares of Stock have been transferred to the Trustee, such shares are sold by the Purported Record Transferee, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Purported Record Transferee received an amount for such shares that exceeds the amount such Purported Record Transferee was entitled to receive pursuant to this subparagraph (t)(iv), such excess shall be paid to the Trustee upon demand. The Trustee should have the right and power (but not the obligation) to offer any share of Stock held in the Trust for sale to this corporation on such terms and conditions as the Trustee shall determine appropriate. (v) Voting and Notice Rights. The Trustee shall have all voting rights and ------------------------ rights to receive any notice of any meetings, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. The Purported Record Transferee shall have no voting rights with respect to shares held in Trust. (u) SETTLEMENT ---------- Nothing in this Section 7 of Article XI shall preclude the settlement of any transaction entered into through the facilities of the NYSE (but the fact that settlement of a transaction is permitted shall not negate the effect of any other provision of this Section 7 of Article XI and all of the provisions of this Section 7 of Article XI shall apply to the purported transferee of the shares of Stock in such transaction). 46 (v) DESIGNATION OF CHARITABLE BENEFICIARY ------------------------------------- By written notice to the Trustee, this corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the shares of Stock held in the Trust would not violate the restrictions set forth in subparagraph (l) of this Section 7 of Article XI in the hands of such Charitable Beneficiary and (ii) each Charitable Beneficiary is an organization described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code." 47 EX-5.1 3 OPINION OF DAVID GOLDBERG Exhibit 5.1 David Goldberg Senior Vice President and General Counsel Public Storage, Inc. 600 North Brand Boulevard, Suite 300 Glendale, California 91203-1241 December 21, 1995 Public Storage, Inc. 600 North Brand Boulevard, Suite 300 Glendale, California 91203-1241 Gentlemen: As Senior Vice President and General Counsel of Public Storage, Inc. (the "Company"), I have examined (A) the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission (the "Commission") on or about July 16, 1992 (File No. 33-49696) and (B) the Registration Statement on Form S-4, filed by the Company with the Commission on or about December 13, 1995, as amended through the date hereof (File No. 33-64971) (collectively, the "Registration Statements"), which includes a Prospectus to be used in connection with securities registered under the Registration Statements (the "Prospectus"). The Prospectus relates to the offer and sale of up to $300,000,000 stated amount of (i) shares of preferred stock, par value $.01 per share (the "Preferred Shares"), (ii) depositary shares (the "Depositary Shares") representing a fractional interest in a Preferred Share, (iii) shares of common stock, par value $.10 per share (the "Common Shares") and (iv) warrants (the "Warrants"). I am familiar with the proceedings taken or to be taken by the Company relating to the authorization and issuance of the Preferred Shares, the Depositary Shares, the Common Shares and the Warrants in the manner set forth in the Registration Statements. I have also examined the Company's Restated Articles of Incorporation and Revised Bylaws and have made such other investigation as I have deemed necessary in order to express the opinions contained herein. It is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of California. 2. The Preferred Shares, the Depositary Shares, the Common Shares and the Warrants, when issued and delivered in the manner and on the terms described in the Registration Statements and payment of the agreed consideration therefor has been received by the Company, will be legally issued, fully paid and nonassessable. I hereby consent to the reference to me under the caption "Legal Opinions" in the Registration Statements and to the filing of this opinion as an exhibit to each of the Registration Statements or amendments thereto. Very truly yours, /s/ DAVID GOLDBERG DAVID GOLDBERG EX-8.1 4 OPINION OF HOGAN & HARTSON EXHIBIT 8.1 December 21, 1995 Public Storage, Inc. 600 N. Brand Boulevard Glendale, California 91203-1241 Ladies and Gentlemen: In connection with the registration by Public Storage, Inc., a California corporation (the "Company"), of shares of preferred stock, par value $.01 per share, depositary shares representing a fractional interest in a share of such preferred stock, shares of common stock, par value $.10 per share, and warrants to purchase shares of such preferred or common stock, as more fully described in the Company's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on December 13, 1995, as amended through the date hereof, of which the prospectus is a part (the "Prospectus"), we have been requested to provide you with our opinion as to whether the Company will continue to qualify as a REIT under sections 856 through 860 of the Internal Revenue Code (the "Code") following the Merger of Public Storage Management, Inc. ("PSMI") into the Company (the "Merger"). All capitalized terms used herein have the same meaning as set forth in the Prospectus unless otherwise defined herein. BASIS FOR OPINIONS AND ASSUMPTIONS MADE IN CONNECTION THEREWITH Our opinion is based on (i) existing law as contained in the Code, regulations issued thereunder by the U.S. Treasury Department ("Regulations"), administrative pronouncements of the Internal Revenue Service ("IRS"), and court decisions as of the date hereof, (ii) our understanding of the relevant facts related to the Company, its past, current, and contemplated operation, as reflected in the Prospectus and as represented to us in the certificate of the Company of even date herewith, and (iii) our assumption that the Company will continue to be operated in accordance with the representations contained in the certificate of the Company of even date herewith. Any of the statutes, regulations, administrative Public Storage, Inc. December 21, 1995 Page 2 pronouncements, or judicial decisions upon which this opinion is based could be changed at any time, perhaps with retroactive effect. Furthermore, some of the issues under existing law that could significantly affect our opinion have not yet been authoritatively addressed by the IRS or the courts. In rendering our opinion, we have examined such statutes, regulations, records, certificates and other documents as we have considered necessary or appropriate as a basis for such opinion, including the following: (1) the Agreement and Plan of Reorganization by and among Public Storage, Inc., PSMI and the Company dated June 30, 1995; (2) the Prospectus (including the exhibits thereto and all amendments thereto made through the date hereof); (3) the Amendment to the Company's Restated Articles of Incorporation, as adopted in connection with the Merger; (4) the Shareholders' Agreement dated November 16, 1995 ("Shareholders' Agreement") entered into by B. Wayne Hughes, Tamara L. Hughes, B. Wayne Hughes, Jr. and Parker Hughes Trust No. 2; (5) the articles of incorporation, by-laws and stock ownership information for PS Orange Co., Inc. ("Lock/Box Company"), Public Storage Commercial Properties Group, Inc. ("PSCP"), and PSCC, Inc. ("PSCC"); (6) the ruling request letters, dated March 19, 1995 and June 7, 1995, submitted to the Internal Revenue Service on behalf of the Company (the "Ruling Request Letters"), and the ruling letter dated October 4, 1995, issued by the Internal Revenue Service in response thereto; (7) the Amendment to the Amended Management Agreement dated August 8, 1995 (the "Management Agreement Amendment"); and (8) such other instruments and documents related to the organization and operation of the Company as we have deemed necessary or appropriate. In our review, we have assumed, with your consent, that all of the representations and statements set forth in the documents we reviewed are true and correct in all material respects, and that all of the obligations imposed by any such documents on the parties thereto have been and will be performed or satisfied substantially in accordance with their terms. Moreover, we have assumed that the Company has been, and each of the Company, the Lock/Box Company, PSCP and PSCC will be, operated substantially in the manner described in the Prospectus, the Ruling Requests, and the relevant articles of incorporation and other organizational documents. We also have assumed the genuineness of all signatures, the proper execution of all documents that are executed, the authenticity of all documents submitted to us as originals, the conformity to originals of documents submitted to us as copies, and the authenticity of the originals from which any copies were made. Public Storage, Inc. December 21, 1995 Page 3 For the purposes of our opinion, we have not made an independent investigation of the facts set forth in documents we reviewed or of representations made by the Company. We consequently have assumed that the information presented in such documents or otherwise furnished to us accurately and completely describes all material facts relevant to our opinion. We also have assumed for the purposes of this opinion that the Company is a validly organized and duly incorporated corporation under the laws of the State of California and that the provisions of the Shareholders' Agreement and Article IV of the Amendment to the Company's Restated Articles of Incorporation are fully enforceable in the manner set forth therein under the laws of the State of California. In the event any of the statements, representations, or assumptions upon which we have relied in rendering this opinion is incorrect or incomplete, our opinion could be adversely affected and may not be relied upon. OPINION Based upon the foregoing, and subject to the various assumptions, limitations, and qualifications set forth in this letter, we are of the opinion that: The Company will continue to qualify as a REIT under sections 856 through 860 of the Code following the Merger SO LONG AS (A) the Company has met at all times since the Merger and continues to meet the stock ownership and gross income requirements applicable to REITs and (B) either PSMI at the time of (and after giving effect to) the Merger was not considered to have any current or accumulated earnings and profits for tax purposes or the Company makes distributions prior to the end of 1995 in an amount sufficient to eliminate such earnings and profits. We are expressing our opinion only as to the specific matters set forth in the preceding numbered paragraphs. With regard to whether the Company will continue to qualify as a REIT following the Merger, we specifically are not rendering an opinion as to whether the Company has satisfied or will continue to satisfy the stock ownership and gross income requirements applicable to REITs following the Merger or whether PSMI had current or accumulated earnings and profits at the time of the Merger. For a discussion of certain of the considerations associated with these issues, we direct your attention specifically to the discussions of these matters contained in the Prospectus under the caption "Certain Federal Public Storage, Inc. December 21, 1995 Page 4 Income Tax Considerations--Consequences of the Merger on the Company's Qualification as a REIT." * * * * * * * * * * This opinion only represents and is based upon our best judgment regarding the application of relevant current provisions of the Code and interpretations of the foregoing as expressed in existing judicial decisions, administrative regulations and published rulings and procedures. Our opinion, however, 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 or that a court would not agree with that contrary position. Furthermore, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the opinion expressed herein. We undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. We undertake no obligation to update this opinion, or to ascertain after the date hereof whether circumstances occurring after such date may affect the conclusions set forth herein. We hereby consent to the filing of our opinion, together with the attachments thereto, as Exhibit 8.1 to the Prospectus and to the use of the name of our firm in the Prospectus. In giving this consent, however, we do not thereby admit that we are an "expert" within the meaning of the Securities Act of 1933, as amended. Very truly yours, /s/ HOGAN & HARTSON L.L.P. -------------------------- Hogan & Hartson L.L.P. EX-10.4 5 NOTE ASSUMPTION & EXCHANGE EXHIBIT 10.4 ================================================================================ STORAGE EQUITIES, INC. NOTE ASSUMPTION AND EXCHANGE AGREEMENT Dated as of November 13, 1995 Re: Assumption and Modification of $68,000,000 Remaining Principal Amount of 7.08% Senior Secured Notes of Public Storage Management, Inc. Due November 22, 2003 ================================================================================ Schedules to this Agreement will be furnished to the Securities and Exchange Commission upon request. ATTACHMENTS TO NOTE ASSUMPTION AND EXCHANGE AGREEMENT:
Schedule I -- Names and Addresses of Purchasers and Principal Amounts of Notes Schedule II -- Accountants, Investment Banks and Appraisers Schedule 5.1(a) -- Liens Schedule 5.1(d) -- Indebtedness Schedule 5.1(f) -- Litigation Schedule 5.1(g) -- Title to Properties Schedule 5.1(r) -- Environmental Schedule 7.2 -- Insurance Annex I -- Subsidiaries and Restricted Subsidiaries Exhibit A -- Form of Senior Note Exhibit B -- Description of Special Counsel's Closing Opinion Exhibit C -- Description of Closing Opinion of In- House Counsel to the Company, PSI and PSMI Exhibit D -- Consent Agreement
2 TABLE OF CONTENTS -----------------
PAGE ---- SECTION 1. EXCHANGE OF PSMI NOTES.............................. 3 SECTION 2. EXCHANGE PROCEDURE AND RELEASE OF SECURITY......................................... 3 SECTION 3. DESCRIPTION OF NOTES AND EXCHANGE................... 3 3.1 Description of Notes.................... 3 3.2 Exchange, Closing Date.................. 4 3.3 Other Agreements........................ 5 SECTION 4. PREPAYMENT OF NOTES................................. 5 4.1 Required Prepayments.................... 5 4.2 Optional Prepayment with Premium................................. 6 4.3 Notice of Prepayments................... 7 4.4 Application of Prepayments.............. 8 4.5 Direct Payment.......................... 8 SECTION 5. REPRESENTATIONS..................................... 8 5.1 Representations of the Company................................. 8 5.2 Representations of the Purchaser............................... 22 SECTION 6. CLOSING CONDITIONS.................................. 23 6.1 Conditions.............................. 23 6.2 Occurrence of PSMI Merger............... 26 6.3 Waiver of Conditions ................... 26 SECTION 7. COVENANTS........................................... 26 7.1 Corporate Existence, Etc................ 26 7.2 Insurance............................... 26 7.3 Taxes, Claims for Labor and Materials; Compliance with Laws......... 27 7.4 Maintenance, Etc........................ 28 7.5 Nature of Business...................... 28 7.6 REIT Status............................. 29 7.7 Continuation of Existing Arrangements with the Company........... 29 7.8 Financial Tests......................... 30 7.9 Unencumbered Assets..................... 31 7.10 Limitation on Incurrences of Additional Indebtedness................. 31
i 7.11 Management Fees......................... 32 7.12 Limitation on Liens..................... 33 7.13 Mergers, Consolidations and Sales of Assets..................... 33 7.14 Repurchase of Notes..................... 34 7.15 Transactions with Affiliates............ 35 7.16 Limitation on Restricted Investments............................. 36 7.17 ERISA................................... 37 7.18 Reports and Rights of Inspection.............................. 39 7.19 [Intentionally Omitted]................. 43 7.20 Facilities.............................. 43 7.21 Restrictive Agreements.................. 43 7.22 Rating for the Notes.................... 43 SECTION 8. EVENTS OF DEFAULT AND REMEDIES THEREFOR............. 44 8.1 Events of Default........................ 44 8.2 Notice to Holders........................ 48 8.3 Acceleration of Maturities............... 48 8.4 Rescission of Acceleration............... 49 8.5 Valuable Rights.......................... 50 8.6 Other Remedies........................... 50 SECTION 9. SECURITY............................................ 50 SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS.................... 51 10.1 Consent Required........................ 51 10.2 Solicitation of Holders................. 51 10.3 Effect of Amendment or Waiver.................................. 51 SECTION 11. INTERPRETATION OF AGREEMENT; DEFINITIONS............ 52 11.1 Definitions............................. 52 11.2 Accounting Principles................... 73 11.3 Directly or Indirectly.................. 73 SECTION 12. INDEMNIFICATION..................................... 73 12.1 Indemnified Parties..................... 73 12.2 Environmental Indemnification........... 75 12.3 Notification of Proceeding.............. 75 12.4 Rights of Subrogation................... 77 SECTION 13. CONTRIBUTION........................................ 77 13.1 Relative Fault........................... 77 13.2 Allocation of Fault...................... 78 13.3 Survival of Obligations.................. 78
ii SECTION 14. MISCELLANEOUS....................................... 78 14.1 Registered Notes......................... 78 14.2 Exchange of Notes........................ 79 14.3 Loss, Theft, Etc. of Notes............... 79 14.4 Expenses, Stamp Tax Indemnity................................ 80 14.5 Powers and Rights Not Waived; Remedies Cumulative...................... 81 14.6 Notices.................................. 81 14.7 Successors and Assigns................... 81 14.8 Survival of Covenants and Representations...................... 82 14.9 Jurisdiction and Process................. 82 14.10 Severability............................. 82 14.11 Entire Agreement......................... 83 14.12 Governing Law............................ 83 14.13 Captions................................. 83 14.14 Reproduction of Documents................ 83 SECTION 15. PURCHASE OF PSMI NOTES BY THE COMPANY............... 83
iii STORAGE EQUITIES, INC. PUBLIC STORAGE MANAGEMENT, INC. PUBLIC STORAGE, INC. 600 NORTH BRAND BOULEVARD, SUITE 300 GLENDALE, CALIFORNIA 91203 NOTE ASSUMPTION AND EXCHANGE AGREEMENT DATED AS OF NOVEMBER 13, 1995 TO EACH PURCHASER NAMED IN SCHEDULE I HERETO WHICH IS A SIGNATORY OF THIS AGREEMENT LADIES AND GENTLEMEN: THE UNDERSIGNED AGREE WITH YOU AS FOLLOWS: THIS NOTE ASSUMPTION AND EXCHANGE AGREEMENT (the "Exchange Agreement") is made and entered into as of November 13, 1995, by and between Public Storage Management, Inc., a California corporation ("PSMI"), Public Storage, Inc., a California corporation ("PSI"), Storage Equities, Inc., a California corporation (the "Company"), and the holder of a PSMI Note (as defined below) named on Schedule I hereto (all holders named on such schedule are collectively referred to as the "Purchasers"). RECITALS -------- PSMI and PSI entered into a Note Agreement dated as of November 22, 1993 (the "PSMI Note Agreement") pursuant to which $75,000,000 of PSMI's 7.08% Senior Secured Notes (the "PSMI Notes") were issued and sold to the Purchasers. $68,000,000 aggregate principal amount of PSMI Notes is outstanding. In conjunction therewith, PSI entered into a Note Agreement dated as of November 22, 1993 (the "PSI Note Agreement") with PSMI whereby PSMI delivered substantially all of the proceeds from the sale of the PSMI Notes to PSI in exchange for a note (the "PSI Note"). PSI and PSMI entered into a Pledge and Security Agreement with Bank of America National Trust and Savings Association as collateral agent, dated as of November 22, 1993 (the "Pledge and Security Agreement") for the purpose, among other things, of securing and providing for the repayment of the PSMI Notes. 1 The Company, PSMI and PSI have entered into an Agreement and Plan of Reorganization dated as of June 30, 1995, as amended to date (the "Reorganization Agreement"), providing for the Reorganization (as defined below) and the subsequent merger of PSMI into the Company pursuant to the PSMI Merger Agreement, with the Company surviving (the "PSMI Merger"). Pursuant to the Reorganization Agreement and the PSMI Merger Agreement, in connection with the PSMI Merger, the Company will assume and become liable for the debt and other obligations represented by the then outstanding PSMI Notes (the "Assumption") and consummate the Exchange (as defined below). In preparation for the PSMI Merger, PSI, PSMI and certain related persons are entering into a series of transactions more fully described in the Consent Agreement (as defined below). Such transactions are defined in the Consent Agreement as the "Reorganization." Each of the Purchasers has consented to the Reorganization and has among other things waived any and all rights or claims each of them had or may have against PSI or PSMI for any violations of the PSMI Note Agreement, the PSI Note Agreement or the Pledge and Security Agreement caused by the Reorganization by executing a consent agreement in substantially the same form as Exhibit D attached hereto (the "Consent Agreement"). In connection with the Assumption and pursuant to the Reorganization Agreement, the Purchasers and the Company have agreed to modify and restate the terms of the PSMI Notes, and to exchange the PSMI Notes for new notes to be issued by the Company pursuant to the terms and conditions of this Exchange Agreement (the "Exchange"). In consideration of the premises and of the mutual covenants and agreements set forth herein, the parties hereto agree as follows. AGREEMENT SECTION 1. EXCHANGE OF PSMI NOTES The Company and each of the Purchasers hereby agree that the Company will assume the PSMI Notes and all obligations represented thereby. In order to effect such Assumption, the Company shall, at the Closing (as defined 2 herein), exchange $1,000 principal amount, or appropriate portion thereof, of its 7.08% Senior Notes due November 22, 2003 (the "Notes" and individually a "Note") for each $1,000 outstanding principal amount, or portion thereof, of PSMI Notes tendered by each Purchaser. Whether or not a Purchaser tenders its PSMI Notes at the Closing, from and after the Closing, each PSMI Note will represent only the right to receive a Note in like principal amount, with the terms thereof and the covenants set forth in the PSMI Note Agreement being amended and restated as set forth herein. The aggregate principal amount of Notes to be issued to each Purchaser in the Exchange is listed on Schedule I hereto. SECTION 2. EXCHANGE PROCEDURE AND RELEASE OF SECURITY At the Closing, each Purchaser will deliver all of its PSMI Notes to the Company in proper form for transfer and the Company will deliver the Notes to each Purchaser. After the Exchange is completed and the Notes have been issued to each of the Purchasers in the amounts listed on Schedule I hereto, the PSMI Notes, the PSMI Note Agreement, the PSI Note, the PSI Note Agreement and the Pledge and Security Agreement shall be of no further force and effect except to the extent the Purchasers had or may have had any claim against any of the parties to such notes and agreements had they known of the existence of such claim prior to executing this Exchange Agreement and the Consent Agreement. In connection with the Closing, the Purchasers agree to take such further actions as shall be reasonably necessary to facilitate the release of the liens on the assets securing the PSMI Notes and the PSI Note. SECTION 3. DESCRIPTION OF NOTES AND EXCHANGE 3.1 Description of Notes. The Company has authorized the issuance of $68,000,000 aggregate principal amount of its Notes to be dated the date of issuance, to bear interest from the last date with respect to which interest was paid on the PSMI Notes at the rate of 7.08% per annum, payable semiannually in arrears on the 22nd day of each May and November in each year (commencing November 22, 1995) and at maturity and to bear interest on overdue principal (including any overdue required or optional prepayment of principal) and premium, if any, and (to the extent legally enforceable) on any overdue 3 installment of interest, at the rate equal to the greater of (i) 9.08% per annum and (ii) 2.0% plus the rate which Harris Trust and Savings Bank of Illinois announces from time to time as its prime lending rate, in each case from the date due, whether by acceleration or otherwise, until paid, to be expressed to mature November 22, 2003 and to be substantially in the form attached hereto as Exhibit A. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. The Notes are not subject to prepayment or redemption at the option of the Company prior to their expressed maturity date except on the terms and conditions and in the amounts and with the premium, if any, set forth in (S) 4 of this Exchange Agreement. The term "Notes" as used herein shall include each Note originally delivered pursuant to this Exchange Agreement and the separate agreements with the other purchasers named in Schedule I and all notes delivered in substitution or exchange for any of said Notes pursuant to this Exchange Agreement and said other agreements. You and the other purchasers named in Schedule I are hereinafter sometimes referred to as the "Purchasers" and individually as a "Purchaser." 3.2 Exchange, Closing Date. The Company shall issue to you and, subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, you agree to accept from the Company, Notes in exchange for your PSMI Notes, in the outstanding principal amount set forth opposite your name on Schedule I hereto at 100.00% of the principal amount thereof on the Closing Date hereafter mentioned pursuant to the terms of this Exchange Agreement. You understand that, whether or not you exchange your PSMI Notes for the Notes at the Closing pursuant to the terms and conditions of this Exchange Agreement, your PSMI Notes will be assumed by the Company at the Closing and will represent only the right to receive a Note in like principal amount as set forth in Section I. Delivery of the Notes will be made at a closing (the "Closing") at the offices of Skadden, Arps, Slate, Meagher & Flom, Los Angeles, at 9:00 A.M., Los Angeles time, on November 16, 1995 or such later date as shall mutually be agreed upon by the Company and the Purchasers (the "Closing Date"). The Notes delivered to you on the 4 Closing Date will be delivered to you in the form of a single registered Note in the form attached hereto as Exhibit A for the full outstanding principal amount of PSMI Notes tendered by you at the Closing (unless different denominations are specified by you at least two business days prior to the Closing Date), registered in your name or in the name of your nominee, all as you may specify at any time prior to the Closing Date. 3.3 Other Agreements. Simultaneously with the execution and delivery of this Exchange Agreement, the Company is entering into agreements identical (except for name and signature of the other Purchasers) to this Exchange Agreement with the other Purchasers under which such other Purchasers agreed to exchange the principal amount of the PSMI Notes for the Notes set opposite such Purchasers' names in Schedule I, and your and our obligations hereunder are subject to the execution and delivery of the Exchange Agreements by the other Purchasers. This Exchange Agreement and said agreements with the other Purchasers are herein collectively referred to as the "Exchange Agreements." The obligations of each Purchaser shall be several and not joint and no Purchaser shall be liable or responsible for the acts of any other Purchaser. SECTION 4. PREPAYMENT OF NOTES No prepayment of the Notes may be made except to the extent and in the manner expressly provided in this Exchange Agreement and in the Notes. 4.1 Required Prepayments. In addition to paying the entire outstanding principal amount and the interest due on the Notes on the maturity date thereof, the Company agrees that it shall prepay the principal amount of the Notes in installments, payable on each of the times set forth below in the respective aggregate amounts set forth opposite each such time:
Amount Date (000's) ---- --------- November 22, 1995 $2,500 May 22, 1996 2,875 November 22, 1996 2,875
5 May 22, 1997 3,250 November 22, 1997 3,250 May 22, 1998 3,625 November 22, 1998 3,625 May 22, 1999 4,000 November 22, 1999 4,000 May 22, 2000 4,375 November 22, 2000 4,375 May 22, 2001 4,750 November 22, 2001 4,750 May 22, 2002 4,875 November 22, 2002 4,875 May 22, 2003 5,000 November 22, 2003 5,000
If a scheduled date of payment is not a Business Day, payment shall be made on the immediately succeeding Business Day, and interest shall accrue and be payable to (but not including) the actual date of payment. No premium shall be payable in connection with any required prepayment made pursuant to this (S) 4.1. For purposes of this (S) 4.1, after prepayment of less than all the outstanding Notes pursuant to (S) 4.2, the amount of each prepayment required by this (S) 4.1 shall be reduced by an amount which is the same percentage of such required prepayment as the percentage that the principal amount of Notes prepaid pursuant to (S) 4.2 is of the aggregate principal amount of outstanding Notes immediately prior to such prepayment. 4.2 Optional Prepayment with Premium. In addition to the payments required by (S) 4.1, upon compliance with (S) 4.3, the Company shall have the privilege, at any time and from time to time, of prepaying the outstanding Notes, either in whole or in part (but if in part, then in a minimum principal amount of $500,000), by payment of a price equal to the sum of (a) the principal amount or portion thereof being prepaid, of and accrued and unpaid interest on, the Notes being so prepaid to the date of such prepayment and (b) the Make Whole Amount of the Notes being so prepaid. 4.3 Notice of Prepayments. The Company will give notice of any prepayment of the Notes pursuant to (S) 4.2 to each holder thereof not less than 30 days nor more than 60 days before the date fixed for such prepayment specifying (a) such date, (b) the principal amount 6 of the holder's Notes to be prepaid on such date, (c) that a premium may be payable, (d) the date when such premium will be calculated, (e) the estimated premium, and (f) the accrued interest applicable to the prepayment. Such notice of prepayment shall also certify all facts, if any, which are conditions precedent to any such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified in such notice, together with accrued interest thereon and the premium, if any, payable with respect thereto, shall become due and payable on the prepayment date specified in said notice. No later than 2:00 p.m., eastern time, two Business Days prior to the prepayment date specified in such notice, the Company shall provide (by telecopy transmission and overnight courier service) to each holder of a Note an Officers' Certificate of the Company stating the actual amount of the premium, if any, payable in connection with such prepayment and a reasonably detailed computation of the premium and attaching a copy of the source market data by reference to which the treasury yield was determined in connection with such computation. No later than five Business Days prior to such prepayment date, the Company shall provide (in the manner specified in the immediately preceding sentence) a draft of such certificate estimating the premium, if any, so payable. Prior to 2:00 p.m., eastern time, on the respective Business Days referred to in the two immediately preceding sentences, the Company shall call each Purchaser to confirm receipt of such estimate and certificate. In the case of any prepayment pursuant to (S) 4.2, the determination of the premium contained in such certificate shall be binding upon the Company and each holder of a Note unless the holders of at least a majority in aggregate principal amount of the Notes outstanding shall deliver (by telecopy transmission and overnight courier service) to the Company, not less than one Business Day prior to the prepayment date, a revised calculation of the premium in reasonable detail. In such event, the premium calculated by such holders shall be conclusive absent manifest error. 4.4 Application of Prepayments. All partial prepayments shall be applied on all outstanding Notes ratably in accordance with the unpaid principal amounts thereof. 7 4.5 Direct Payment. Notwithstanding anything to the contrary contained in this Exchange Agreement or the Notes, in the case of any Note owned by you or your nominee or owned by any subsequent Institutional Holder which has given written notice to the Company requesting that the provisions of this (S) 4.5 shall apply, the Company will punctually pay when due the principal thereof, interest thereon and premium, if any, due with respect to said principal, without any presentment thereof and without any notation of such payment being made thereon (provided that the holder shall make such notations prior to transferring any Notes), directly to you, to your nominee or to such subsequent Institutional Holder at your address or your nominee's address set forth in Schedule I hereto or such other address as you, your nominee or such subsequent Institutional Holder may from time to time designate in writing to the Company or, if a bank account with a United States bank is designated for you or your nominee on Schedule I hereto or in any written notice to the Company from you, from your nominee or from any such subsequent Institutional Holder, the Company will make such payments in immediately available funds to such bank account for receipt before 1:00 p.m., eastern time, marked for attention as indicated, or in such other manner or to such other account in any United States bank as you, your nominee or any such subsequent Institutional Holder may from time to time direct in writing. SECTION 5. REPRESENTATIONS 5.1 Representations of the Company. As an inducement to, and as part of the consideration for, your Exchange of the Notes pursuant to this Exchange Agreement, the Company represents and warrants that all of its representations and warranties set forth below are true and correct as of the date hereof and will be true and correct upon consummation of the Reorganization and the PSMI Merger. (a) Subsidiaries. Annex I attached hereto correctly states the name of each subsidiary of the Company after giving effect to the PSMI Merger (collectively, the "Subsidiaries"), its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company or its Subsidiaries. The Company and each Subsidiary has (or upon consummation of the PSMI 8 Merger will have) good and marketable title to all of the shares of stock or other ownership interests it purports to own of each Subsidiary, free and clear in each case of any Lien, except as set forth on Schedule 5.1(a) attached hereto. All such shares of stock or other ownership interests have been validly issued and are fully paid and nonassessable. (b) Corporate Organization and Authority. The Company and each Subsidiary and each Controlled Partnership -- (1) in the event that it is a corporation, it is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; (2) has all requisite power and authority and all necessary licenses and permits to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted, except where the failure to do so would not, individually or in the aggregate, materially and adversely affect its business, financial condition or property or the ability of the Company to perform its obligations set forth in the Documents; (3) is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction wherein the nature of the business transacted by it or the nature of the property owned or leased by it makes such licensing or qualification necessary and wherein the failure to be so qualified would, individually or in the aggregate, materially and adversely affect its business, financial condition or property or the ability of the Company to perform its obligations set forth in the Documents. (4) in the event it is a PS Partnership, it is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of California, and is duly licensed or qualified to conduct business and is in good standing in each jurisdiction wherein the character of the property owned or the nature of the business transacted by it makes such licensing or qualification necessary except where the failure to be so licensed would not, individually or in 9 the aggregate, materially and adversely affect its business, financial condition or property or the ability of the Company to perform its obligations set forth in the Documents. (5) in the event it is a Joint Venture, it is a general partnership, duly organized and validly existing under the laws of the State of California, and is duly licensed in each jurisdiction wherein the character of the property owned or the nature of the business transacted by it makes such licensing necessary, except where the failure to be so licensed would not, individually or in the aggregate, materially and adversely affect its business, financial condition or property or the ability of the Company to perform its obligations set forth in the Documents. (c) Financial Statements. The audited balance sheets of the Company as of December 31, 1994 and 1993 and the related statements of operations, stockholders' equity and cash flows for the fiscal years ended on said dates, each of which has been provided to you, are correct and complete in all material respects and present fairly the financial position of the Company as of such dates and the results of operations for such period (the "Audited Financials"). The unaudited historical operating results of the Company dated June 30, 1995 (the "Unaudited Financials"), a copy of which has been provided to you, are true and correct in all material respects and present fairly the operating results of the Company for the period contained therein. The Combined Historical Financial Information of Operating Companies and Real Estate Interests and the Combined Historical Financial Information of the Underlying Properties (collectively, the "Historical Other Company Information"), pertaining to the Reorganization and contained in the Proxy Statement of the Company dated October 11, 1995 (the "Proxy Statement"), a copy of which has been provided to you, are correct and complete in all material respects and present fairly the financial position of the companies and properties referred to therein (the "Subject Entities") as of such dates and the results of operations for the periods presented. The unaudited pro forma consolidated balance sheet and consolidated statement of income of the Company (the "Pro Forma Financials") pertaining to the Reorganization and contained in the Proxy Statement are correct and complete in 10 all material respects and have been prepared in a manner consistent with the historical financial statements of the Company and the assumptions underlying them are fair and reasonable. Except as disclosed in the Unaudited Financials or the Pro Forma Financials, there are no material liabilities, including, to the knowledge of the Company any contingent liabilities, of the Company not reflected in said consolidated balance sheets as of said date (other than amounts outstanding under the $45 million PSI credit facility which will be repaid in connection with the Reorganization). Except as disclosed in the Historical Other Company Information, there are no material liabilities, including, to the knowledge of the Company, any contingent liabilities of the Subject Entities not reflected in said Historical Other company information as of said date. Since June 30, 1995 there has been no change in the condition, financial or otherwise, of the Company as shown on the unaudited consolidated balance sheet as of such date except as contemplated by the Proxy Statement and except for changes which individually or in the aggregate have not been materially adverse. (d) Indebtedness. Schedule 5.1(d) attached hereto correctly describes all Current Debt, Funded Debt, Capitalized Leases and Long-Term Leases of the Company and its Subsidiaries outstanding on September 30, 1995 and as adjusted to reflect the PSMI Merger. All obligations and liabilities of the Company under this Exchange Agreement and the Notes rank pari passu in right of payment to the Bank Indebtedness of the Company. (e) Full Disclosure. Neither the financial statements referred to in paragraph (c) hereof nor the Documents, the Proxy Statement or any other written statement furnished by or on behalf of any of the Companies to you in connection with the negotiation or consummation of the Exchange of the Notes contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to any of the Companies which has not been disclosed to you which, individually or in the aggregate, materially affects adversely nor, so far as the Company can now reasonably foresee, will materially adversely affect the properties, business, prospects, profits or financial 11 condition of the Company. There is no fact peculiar to any of the Companies which has not been disclosed to you which materially adversely affects nor, so far as the Company can now reasonably foresee, will materially adversely affect the ability of the Company to perform its obligations and undertakings under any of the Documents. (f) Pending Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of the Company after due inquiry, threatened against or affecting the Company, or any Subsidiary in any court or before any governmental authority or arbitration board or tribunal which the Company believes to be reasonably likely to, individually or in the aggregate, materially and adversely affect the properties, business, prospects, profits or financial condition of the Company, or any Subsidiary or the ability of the Company to perform its obligations and undertakings under the Documents to which it is a party. Schedule 5.1(f) attached hereto correctly describes in all --------------- material respects each such action, suit or proceeding which involve the possibility of such a material and adverse effect. Neither the Company, nor any Subsidiary is now, nor will it be after or as a result of the transactions contemplated herein, in default or in violation with respect to any judgment, order, writ, injunction, or decree of any court, governmental authority or arbitration board or tribunal. (g) Title to Properties. Except as described in Schedule 5.1(g) --------------- attached hereto, the Company, and each Subsidiary has good and marketable title in fee simple (or its equivalent under applicable law) to all of the real property, and has good title to all the other material items of property, each of them purports to own, including that reflected in the most recent balance sheets included in the Audited Financials, the Unaudited Financials, the Pro Forma Financials and Historical Other Company Information, referred to in paragraph (c) hereof, except as sold or otherwise disposed of in the ordinary course of business and except for Liens permitted by the Exchange Agreements and the Notes. (h) Patents and Trademarks. The Company, and each Subsidiary owns or possesses all the patents, trademarks, trade names, service marks, copyright, li- 12 censes and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others. (i) The Assumption and Exchange is Legal and Authorized. The execution, delivery and compliance by each of the Companies with all of the provisions of the Documents to which they are parties and the execution, issuance, Exchange, delivery and performance of the respective obligations under the Documents to which they are parties (1) are within the corporate powers of each of the Companies; (2) will not violate any provisions of any law or any order of any court or governmental authority or agency and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under the articles of incorporation or bylaws of any of the Companies or any indenture or other agreement or instrument to which any of the Companies or any Subsidiary is a party or by which any of the Companies or any Subsidiary or any of their respective properties may be bound or affected or result in the imposition of any Liens or encumbrances on any property of any of the Companies or any Subsidiary; and (3) have been duly authorized by proper corporate action on the part of each of the Companies (no action by the stockholders of any Company being required by law, by its articles of incorporation or bylaws or otherwise, except such as has been taken or will be taken prior to the Closing) and have been duly executed and delivered by each of the Companies party thereto and the Documents constitute the legal, valid and binding obligations, contracts and agreements of the Companies party thereto, enforceable against such Persons in accordance with their respective terms. No consent of or waiver by any holder of any Indebtedness of the Company, or any Subsidiary is required in connection with the issuance of the Notes (other than the waiver of the lenders under the Bank Agreement, which has been obtained). 13 (j) No Defaults. No Default or Event of Default has occurred and is continuing. None of the Companies nor any Subsidiary-- (1) is in violation of any term of its charter instrument, bylaws or partnership agreement; (2) is in default in the payment of principal or interest on any Funded Debt or Current Debt under any instrument or agreement under and subject to which any Funded Debt or Current Debt has been issued; and (3) has obtained any waivers with respect to any payment defaults under any such instrument or agreement, except as have since been cured. No event has occurred and is continuing under the provisions of any such instrument or agreement which with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder, which event or events of default, if they were to be declared, could, taking into account any "cross- default" provisions contained in any other Funded Debt or Current Debt, materially and adversely affect the business, prospects, profits, properties or condition (financial or otherwise) of the Company, or materially impair the ability of the Company to perform its obligations contained in the Documents. There is no default or event of default under the PSMI Note Agreement. (k) Governmental Consent. Neither the nature of any of the Companies or any Subsidiary, or of any of their respective businesses or properties, nor any relationship between any of the Companies or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issuance, exchange or delivery of the Notes and the execution and delivery of the Documents is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority on the part of any of the Companies as condition to the execution and delivery of the Documents or the offer, issuance, exchange or delivery of the Notes. (l) Taxes. All tax returns required to be filed by any of the Companies or any Subsidiary and 14 any other Person with which any of the Companies files or has filed a consolidated return in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon any of the Companies or any Subsidiary and any such Person or upon any of their respective properties, income or franchises, which are due and payable have been paid except for taxes the amount, applicability or validity of which may be in dispute and which are currently being contested in good faith by appropriate proceedings and with respect to which the respective Company maintains on its books adequate reserves therefor. For all taxable years ending on or before December 31, 1994, the Federal income tax liability of each of the Companies and any Subsidiary heretofore asserted has been satisfied. Neither the Company nor any Subsidiary knows of any proposed additional tax assessment against it or any of the other Companies and no material controversy in respect of additional Federal or state income taxes due since said date is pending or to the best knowledge of the Company after due inquiry, threatened. The provisions for taxes (including, without limitation, any payment owing to any other Person pursuant to any tax sharing agreement among such Persons) on the books of each of the Companies are adequate for all open years and for its respective current fiscal period. (m) Margin Regulations. None of the transactions contemplated in the Documents will violate or result in a violation of Section 7 of the Securities Exchange Act, or any regulation issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter 11. "Margin stock" (within the meaning of said Regulation G or U) does not constitute more than 25% of the assets of the Company or of the Company and the Subsidiaries on a consolidated basis, both before and after giving effect to the transactions contemplated hereby. (n) Private Offering. None of the Companies, directly or indirectly, nor any agent on its behalf has offered or will offer the Notes or any similar Security or has solicited or will solicit an offer to acquire the Notes or any similar Security from or has otherwise approached or negotiated or will approach or negotiate in respect of the Notes or any similar Security with any Person other than the Purchasers, each of whom 15 was offered a portion of the Notes for investment. None of the Companies, directly or indirectly, nor any agent on its behalf has offered or will offer the Notes or any similar Security or has solicited or will solicit an offer to acquire the Notes or any similar Security from any Person so as to bring the issuance and exchange of the Notes within the provisions of Section 5 of the Securities Act. (o) ERISA. The consummation of the transactions provided for in the Exchange Agreements and compliance by the Company with the provisions thereof and the Notes issued thereunder will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended. Each Plan complies in all material respects with all applicable statutes and governmental rules and regulations, and (1) no Reportable Event has occurred and is continuing with respect to any Plan, (2) neither the Company, nor any ERISA Affiliate has withdrawn from any Plan or Multiemployer Plan or instituted steps to do so, and (3) no steps have been instituted to terminate any Plan. No condition exists or event or transaction has occurred in connection with any Plan which could result in the incurrence by the Company or any ERISA Affiliate of any material liability, fine or penalty. No Plan maintained by the Company or any ERISA Affiliate, nor any trust created thereunder, has incurred any "accumulated funding deficiency" as defined in Section 302 of ERISA, whether or not waived, nor does the present value of all benefit liabilities (whether or not vested) under all Plans exceed, as of the last annual valuation date, the current value of the assets of the Plans allocable to such benefit liabilities based upon reasonable actuarial assumptions. Neither the Company nor any ERISA Affiliate has any contingent liability with respect to any post-retirement "welfare benefit plan" (as such term is defined in ERISA) except as has been disclosed to the Purchasers. (p) Compliance with Law. None of the Companies nor any Subsidiary (i) is in violation of any law, ordinance, franchise, governmental rule or regulation to which it is subject; or (ii) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property 16 or to the conduct of its business, which violation or failure to obtain, individually or in the aggregate, could materially adversely affect the business, prospects, profits, properties or condition (financial or otherwise) of the Company or its Subsidiaries, or materially impair the ability of the Company to perform its obligations contained in any of the Documents. Neither the Company nor any Subsidiary is aware of any default with respect to any order of any court or governmental authority or arbitration board or tribunal. (1) None of the Companies nor any Subsidiary: (i) is a party to any contract or agreement, or subject to any charter or other corporate restriction that materially and adversely affects the business, profits, prospects, properties or condition (financial or otherwise) of the Company or any Subsidiary, or the ability of the Company to perform its obligations as set forth in this Exchange Agreement and in the other Documents; (ii) is a party to any contract or agreement that restricts its right or ability to incur Indebtedness, other than this Exchange Agreement and the agreements listed on Schedule 5.1(d) to this Agreement, none of which agreements, as of the Closing Date and giving effect to consents received in respect thereof, prohibits (a) the issuance of the Notes by the Company, (b) the execution and delivery of, or compliance with, the Documents by the Company; or (iii) has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by (S) 7.12. (2) (i) None of the Companies nor any Subsidiary, nor any Affiliate of any of the Companies is, by reason of being a "national" of a "designated foreign country" or a "specially designated national" 17 within the meaning of the Regulations of the Office of Foreign Assets Control, United States Treasury Department (31 C.F.R., Subtitle B, Chapter V), and (ii) none of the Companies nor any Subsidiary nor the transactions contemplated by the Documents is for any other reason, subject to any restriction or prohibition under, or is in violation of, any Federal statute or Presidential Executive Order, or any rules or regulations of any department, agency or administrative body promulgated under any such statute or order, concerning trade or other relations with any foreign country or any citizen or national thereof or the ownership or operation of any property. None of the Companies nor any Subsidiary, nor any Affiliate of any of the Companies is an "enemy" or an "ally of the enemy" within the meaning of Section 2 of the Trading with the Enemy Act (50 U.S.C. App (S)(S) 1 et seq.), as amended. None of the Companies, nor any Subsidiary, nor any Affiliate of the Company is in violation of, and neither the issuance and Exchange of the Notes as contemplated by this Exchange Agreement will violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Assets Control of the Department of the Treasury (31 C.F.R., Chapter V). (3) None of the Companies nor any Subsidiary is, and none of them is directly or indirectly controlled by, or acting on behalf of any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (4) None of the Companies nor any Subsidiary is a "holding company" or a subsidiary or affiliate of a "holding company," or a subsidiary company of a "holding company," or a "public utility," within the meaning of the Public Utility Holding Company Act of 1935, as amended. (q) Solvency. The fair value of the business and assets of the Company will be in excess of the amount that will be required to pay its liabilities (including, without limitation, contingent, subordinated, unmatured and unliquidated liabilities on existing debts, as such liabilities may become absolute and matured), in each case after giving effect to the transactions contem- 18 plated by the Documents (including, without limitation, the Reorganization and the PSMI Merger). The Company, after giving effect to the transactions contemplated by the Documents (including, without limitation, the Reorganization and the PSMI Merger), will not be engaged in any business or transaction, nor is it about to engage in any business or transaction, for which it has an unreasonably small capital (within the meaning of the Uniform Fraudulent Transfer Act, as adopted in the State of California and Section 548 of the Federal Bankruptcy Code), and the Company has no intent to: (1) hinder, delay or defraud any entity to which it is, or will become, on or after the Closing Date, indebted, or (2) to incur debts that would be beyond its respective ability to pay as they mature. (r) Compliance with Environmental Laws. Except as is set forth on Schedule 5.1(r) attached hereto: - --------------- (1) To the best knowledge of the Companies after due inquiry, all facilities and property (including underlying groundwater) owned or leased by any of the Companies have been, and continue to be, owned or leased by such Companies, as the case may be, in compliance with all Environmental Laws. (2) There have been no past, and there are no pending or, to the best knowledge of the Companies after due inquiry, threatened (i) claims, complaints, notices or requests for information received by any of the Companies with respect to any alleged violation of any Environmental Law, or (ii) complaints, notices or inquiries to any of the Companies regarding potential liability under any Environmental Law. (3) To the best knowledge of the Companies after due inquiry, there have been no Releases of Hazardous Materials at, on or under any property now and previously owned or leased by any of the Companies that, singly or in the aggregate, have, or may reasonably be expected to have, a material and adverse effect on the 19 financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries. (4) To the best knowledge of the Companies after due inquiry, each of the Companies have been issued and are in compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses. (5) No property now or, to the best knowledge of the management of the Company, previously owned or leased by any of the Companies is listed or proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA (as defined therein), on the CERCLIS or on any similar state list of sites requiring investigation or clean-up. (6) To the best knowledge of the Companies after due inquiry, there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by any of the Companies that, singly or in the aggregate, have, or may reasonably be expected to have, a material and adverse effect on the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries. (7) To the best knowledge of the Companies after due inquiry, none of the Companies has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to material claims against any of the Companies for any remedial work, damage to natural resources or personal injury, including claims under CERCLA. (8) To the best knowledge of the Companies after due inquiry, there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased by any of the Companies that, singly or in the aggregate, have, or may reasonably be expected to have, a material and adverse effect on the 20 financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries. (9) To the best knowledge of the Companies after due inquiry, no conditions exist at, on or under any property now or previously owned or leased by any of the Companies which, with the passage of time, or the giving of notice or both, would have a material and adverse effect on the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries arising out of liability asserted under any Environmental Law. (10) To the best knowledge of the Companies after due inquiry, there are no past or present events, conditions or circumstances, including without limitation pending changes in any Environmental Law or permit, that are likely to interfere with or otherwise affect the operations of any of the Companies as now conducted and as presently proposed to be conducted or that would interfere with compliance or continued compliance with any Environmental Law or permit. (11) To the best knowledge of the Companies after due inquiry, no pipeline or any equipment or property associated with the operations of any of the Companies (whether or not owned or leased by any of the Companies) is contaminated by polychlorinated biphenyls. (s) Brokers. None of the Companies has dealt with any broker, finder, commission agent or other Person other than BT Securities Corporation in connection with the Exchange of the Notes and the transactions contemplated by this Exchange Agreement and the other Documents, and the Company is under no obligation to pay any broker's fee or commission in connection with such transactions, other than a fee payable to BT Securities Corporation for investment banking services rendered in connection with advisory services rendered in structuring a financing transaction, which fee is the sole obligation of the Company. (t) Defense of Usury. To the fullest extent permitted by applicable law, the Company shall not consent, plead (as a defense or otherwise) or in any manner whatsoever claim (and shall actively resist any attempt to compel it to assert, plead or claim) in any 21 action, suit or proceeding that the interest rate on the Notes violates usury or other laws relating to the interest payable on any indebtedness and shall not otherwise avail itself (and shall actively resist any attempt to compel it to avail itself) of the benefits or advantages of such laws. (u) The Company is qualified, has been qualified at all times since January 1, 1981, and intends to operate so as to continue to be qualified, (i) as a REIT under Sections 856 et seq. of the Code, and (ii) to be subject to tax -- --- on its "real estate investment trust income" pursuant to Section 857 of the Code. (v) Survival of Representations and Warranties. All statements contained in any certificate, document, financial statement or other instrument delivered by or on behalf of the Company pursuant to or in connection with this Exchange Agreement shall be deemed to constitute representations and warranties thereunder. All of the Company's representations and warranties and indemnities shall survive the execution and delivery of the same, any investigation by you and the issuance of the Notes. 5.2 Representations of the Purchaser. You represent, and in entering into this Exchange Agreement the Company understands, that you are an "accredited investor" within the meaning of Rule 501 under the Securities Act and that you are acquiring the Notes for the purpose of investment and not with the present intention of distributing the Notes; it being understood, however, that the disposition of your property shall at all times be and remain within your control. You further represent that you are acquiring the Notes for your own account and with your general corporate assets and not with the assets of any separate account in which any employee benefit plan has any interest. As used in this Section, the terms "separate account" and "employee benefit plan" shall have the respective meanings assigned to them in ERISA. You further represent that, at the Closing Date, you will be the owner (free and clear of all liens, claims and encumbrances) of the aggregate principal amount of PSMI Notes shown next to your name on Schedule I under the heading "Principal Amount of PSMI Notes to be Exchanged," and have obtained any and all requisite third party consents, if any, necessary, to exchange such PSMI 22 Notes for a like aggregate outstanding principal amount of Notes in accordance with this Exchange Agreement. You further represent that you have not dealt with any broker, finder, commission agent or other Person other than BT Securities Corporation in connection with the exchange of the Notes and the transactions contemplated by this Agreement and are under no obligation to pay any broker's fee or commission in connection with such transactions. SECTION 6. CLOSING CONDITIONS 6.1 Conditions. Your acceptance of the Assumption and Exchange on the Closing Date shall be subject to the performance by the Company of its agreements hereunder which by the terms hereof are to be performed at or prior to the time of the Assumption and Exchange and to the following further conditions precedent: (a) Closing Certificate. You shall have received a certificate dated the Closing Date, signed by the President or a Vice President of the Company, the truth and accuracy of which shall be a condition to your acceptance of the Assumption and Exchange, and to the effect that (a) the representations and warranties of the Company set forth in Section 5.1 hereof are true and correct on and with respect to the Closing Date, (b) the Company has performed all of its obligations hereunder and under the Documents which are to be performed on or prior to the Closing Date or such obligations have been waived in writing by you, (c) the conditions set forth in clauses (e) through (m), inclusive, below have been satisfied (or waived by you) and (d) no Default or Event of Default has occurred and is continuing and there is no default or event of default under the PSMI Note Agreement. (b) Legal Opinions. You shall have received from Skadden, Arps, Slate, Meagher & Flom, who are acting as your special counsel in this transaction, and from David Goldberg, Esq., in-house counsel for the Company and PSMI, their respective opinions dated the Closing Date, in form and substance satisfactory to you, and covering the matters set forth in Exhibits B and C, respectively, hereto and such other matters incident to the transaction contemplated hereby as you may reasonably request. 23 (c) Existence and Authority. On or prior to the Closing Date, you shall have received, in form and substance reasonably satisfactory to you and your special counsel, such documents and evidence with respect to the Company as you may reasonably request in order to establish the existence and good standing of the Company and PSMI and the authorization of the transactions contemplated by this Exchange Agreement. (d) Satisfactory Proceedings. All proceedings taken in connection with the transactions contemplated by this Agreement, and all documents necessary to the consummation thereof, shall be satisfactory in form and substance to you and your special counsel, and you and your special counsel shall have received a copy (executed or certified as may be appropriate) of all legal documents or proceedings taken in connection with the consummation of said transactions. (e) Management and Advisory Agreements. PSI and PSMI shall have used all reasonable efforts to cause the owners of all properties managed and of all partnerships and corporations advised by any of the PSI Entities (as defined in the Reorganization Agreement) to consent to the management of such properties and assumption of such advisory functions by the Company to the extent required by the existing management and advisory agreements relating thereto. (f) Intellectual Property Rights. PSI and PSMI shall have used all reasonable efforts to obtain all assignments or other consents necessary to vest in the Company exclusive ownership and full use and benefit with respect to the PSI Intellectual Property Rights (as defined in the Reorganization Agreement). (g) The Reorganization. Each of the transactions comprising the Reorganization (including without limitation, the PSMI Merger) shall have been consummated in accordance with California and all other applicable laws. (h) Reorganization Agreement Conditions. The conditions contained in Sections 8.1 and 8.3 of the Reorganization Agreement shall have satisfied or, in the case of immaterial conditions, waived. 24 (i) Private Placement Number. A Private Placement Number, if the one assigned to the PSMI Notes is not sufficient, relating to the Notes shall have been duly assigned by Standard & Poor's Corporation. (j) Payment of Counsel Fees. The Company shall have duly paid all reasonable fees, expenses, costs and charges, including the fees and expenses of Skadden, Arps, Slate, Meagher & Flom, special counsel to the Purchasers, (to the extent that such fees and expenses are known 48 hours prior to the Closing Date and are reflected in an invoice (which shall be in reasonable detail) delivered by such counsel prior thereto), incurred by you through the Closing Date and incident to the proceedings in connection with, and the transactions contemplated by this Exchange Agreement and the Notes. (k) Consents and Approvals. All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained by or from any Federal, state or other governmental authority or agency, or by or from any trustee or holder of any Indebtedness, obligation or security of any of the Companies that are necessary in connection with the transactions contemplated by this Exchange Agreement and the Notes (including, without limitation, the Reorganization and the PSMI Merger) shall have been delivered to you. (l) Legality. The Notes shall qualify as a legal investment for you under the laws and regulations of each jurisdiction to which you are subject (without reference to any so-called "basket" provision which permits the making of an investment without restrictions as to the character of the particular investment being made) and you shall have received such certificate or other information as you shall reasonably request from the Company to establish such fact. (m) Other Purchasers. The Company shall have entered into Exchange Agreements identical to this Exchange Agreement in all material respects with each of the other Purchasers. 6.2 Occurrence of PSMI Merger. The obligations of the Company, PSMI and PSI hereunder (other than those set forth in Section 15 hereof, which shall be 25 effective from and after the date hereof to the extent set forth therein) are subject to the condition precedent that, on or before the Closing Date, the PSMI Merger shall have been consummated in accordance with California and all other applicable laws. 6.3 Waiver of Conditions. If on the Closing Date, the Company fails to tender to you the Notes to be issued to you on such date or if the conditions specified in (S) 6.1 have not been fulfilled, you may thereupon elect to be relieved of all further obligations under this Agreement. Without limiting the foregoing, if the conditions specified in (S) 6.1 have not been fulfilled, you may waive compliance by the Company with any such condition to such extent as you may in your sole discretion determine. Nothing in this (S) 6.3 shall operate to relieve the Company of any of its obligations hereunder or to waive any of your rights against the Company. SECTION 7. COVENANTS From and after the Closing Date and continuing so long as any amount remains unpaid on any Note: 7.1 Corporate Existence, Etc. The Company will, and will cause its Restricted Subsidiaries to, preserve and keep in full force and effect its respective corporate or partnership existence and all licenses and permits necessary to the proper conduct of its respective business, provided that the foregoing shall not prevent any transaction permitted by (S) 7.13. 7.2 Insurance. The Company will, and will cause its Restricted Subsidiaries to, insure and keep insured at all times all of its respective properties and use their best efforts to cause to be insured all Self-Storage Facilities which are of an insurable nature and of the character usually insured by companies operating similar properties, against loss or damage by fire and from other causes customarily insured against by companies engaged in similar businesses in such amounts as are usually insured against by such companies, and in any case as are adequate to provide reasonable protection against such loss or damage to the Self-Storage Facility. Each such Person also will maintain at all times with financially sound and reputable insurers adequate insurance against loss or damage from such hazards and risks 26 to the person and property of others as are usually insured against by companies operating businesses similar to the businesses of the Company and its Restricted Subsidiaries. All such insurance shall be carried with financially sound and reputable insurers accorded a rating of "A-VI" or better by A.M. Best Company, Inc. (or a comparable rating by any comparable rating agency), provided that at -------- least 75 percent of all coverage and the insurer with the risk of first loss in each category shall have a rating of "A-IX" or better. If the Company cannot obtain sufficient insurance which meets the above criteria, the Company will provide the Purchasers with notice and will demonstrate that insurance cannot be obtained in accordance with the above criteria, in which case the requirement shall be reduced to "A-V" and "A-VIII," respectively. The sum of the deductible limit of all insurance coverage plus any amounts of self-insurance will not exceed $1,000,000 per occurrence. A summary of insurance presently in force is contained in the attached Schedule 7.2. ------------ 7.3 Taxes, Claims for Labor and Materials; Compliance with Laws. (a) The Company will, and will cause its Restricted Subsidiaries to, promptly pay and discharge, when due, all taxes, assessments and governmental charges or levies imposed upon such Person or upon or in respect of all or any part of the property or business of such Person including, but not limited to, any property leased by such Person (but only to the extent required to do so by the applicable lease), all trade accounts payable in accordance with usual and customary business terms, and all claims for work, labor or materials, which if unpaid might become a Lien upon any property of such Person; provided such Person shall not be required to pay any such tax, assessment, charge, levy, account payable or claim if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings which will prevent the forfeiture or sale of any property of such Person or any material interference with the use thereof by such Person and title to such property is not materially and adversely affected thereby, and (ii) such Person shall set aside on its books, reserves deemed by it to be adequate with respect thereto. In the case of any item of the foregoing description involving in excess of $1,000,000, the 27 adequacy of such reserves will be supported by a resolution of the Board of Directors of the Company (which resolution will be delivered to the holders of the Notes). (b) The Company will, and will cause its Restricted Subsidiaries to, promptly comply with all laws, ordinances or governmental rules and regulations to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, as amended, ERISA and all Environmental Laws in all applicable jurisdictions, the violation of which could materially and adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of the Company or the ability of the Company to perform its obligations set forth in the Documents, or would result in any Lien not permitted under (S) 7.11. 7.4 Maintenance, Etc. The Company will, and will cause its Restricted Subsidiaries to, maintain, preserve and keep its properties which are used or useful in the conduct of its business (whether owned in fee or a leasehold interest) in good repair and working order (ordinary wear and tear excepted) and from time to time make all necessary repairs, replacements, renewals and additions so that at all times the efficiency thereof shall be maintained. 7.5 Nature of Business. The Company will not, and will not permit any of its Restricted Subsidiaries to, engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by such Person would be substantially changed from the general nature of the business engaged in by such Person on the Closing Date (provided that the Company's ownership of an Investment shall not in itself constitute a change in the nature of the Company's business). 7.6 REIT Status. The Company shall conduct its affairs in a manner so as to qualify as a real estate investment trust pursuant to Sections 856 et seq. -- --- of the Code. 7.7 Continuation of Existing Arrangements with the Company. 28 (a) (i) The Company shall not permit any of its Affiliates or Subsidiaries to itself, directly or indirectly, engage in or perform (x) the business of leasing storage space to the public in, or managing, facilities located in the United States and used in the business of leasing storage space to the public or (y) any other business conducted or service performed by the Company, except as permitted by the proviso in (S) 7.11 hereof. (ii) The foregoing provisions: (x) shall not apply to an Affiliate or Subsidiary of the Company to the extent that the Company or B. Wayne Hughes, members of his immediate family, or trusts for the benefit of the foregoing, individually or collectively, directly or indirectly, through the Company or any other Person, do not control or do not have the right to exercise decision making authority on behalf of any such Affiliate. In such circumstances the Company shall use its best efforts to cause such Affiliate to comply with such provisions, and (y) are subject to the fulfillment of any applicable fiduciary obligation imposed by law, as determined by the board of directors of the Company or any corporate general partner of an applicable Ownership Entity. (b) With respect to all Self-Storage Facilities now or hereafter owned, leased, or in any manner operated or controlled by any Ownership Entity, 29 the Company shall and shall cause its Affiliates and Subsidiaries (except to the extent that the Company or any such Affiliate or Subsidiary does not control or does not have the right to exercise decision-making authority on behalf of such Ownership Entity (in which case the Company or its Affiliates or Subsidiaries shall use their best efforts to cause such Ownership Entity) and subject to the fulfillment of any applicable fiduciary obligation imposed by law, as determined by the board of directors of the Company or any corporate general partner of such Ownership Entity) to select the Company to serve as property manager, pay the Company management fees consistent with fees received by the Company from unrelated third parties for similar services and not terminate the Company as property manager as discussed above with respect to each Self-Storage Facility for which it is offered the opportunity to do so. 7.8 Financial Tests. The Company shall: (a) Maintain at all times a Funded Debt Ratio of less than 0.40 to 1.00; (b) Maintain net income of not less than $1.00 for each fiscal quarter; (c) Maintain an Interest Coverage Ratio of not less than 4.0 to 1.0 for each period of four (4) fiscal quarters ending on the last day of each fiscal quarter, commencing with the quarter ending December 31, 1995; (d) Maintain at all times Total Shareholders' Equity of not less than ninety percent (90%) of the Total Shareholders' Equity of the Company as of the effective date of the PSMI Merger and giving effect thereto (the "Post-Merger Equity"); provided that, prior to the delivery by the Chief Financial Officer of the Company of a certificate certifying the amount of the Post-Merger Equity (which certificate shall be accompanied by an opinion of the Company's independent public accountants reasonably satisfactory to the Purchasers, in support thereof), the Company shall maintain at all times total Shareholders Equity of not less than $650 million. 7.9 Unencumbered Assets. The Company shall at all times maintain Unencumbered Assets with an Aggre- 30 gate Net Asset Value equal to or greater than two times the aggregate amount of Indebtedness (other than Non-recourse Indebtedness) then outstanding. 7.10 Limitation on Incurrences of Additional Indebtedness. (a) From and after the Closing Date, the Company will not, and will not permit any Restricted Subsidiary of the Company to, create, assume or incur or in any manner be or become liable in respect of (including by Guarantee) any Indebtedness, except: (1) Indebtedness where payment is secured by a Permitted Encumbrance; (2) taxes, assessments and governmental charges or levies which are not delinquent or which are being contested in good faith and for which, in accordance with GAAP, adequate reserves have been set aside on the books of the Company or the affected Restricted Subsidiary of the Company; (3) current liabilities incurred in connection with the obtaining of goods or services in the ordinary course of business of the Company and its Restricted Subsidiaries and consistent with past practice; (4) Non-recourse Indebtedness; (5) Indebtedness owing from a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary; (6) Indebtedness shown on Schedule 5.1(d); --------------- (7) Other Indebtedness, such that the Company is in compliance with the Funded Debt Ratio contained in (S) 7.8(a) hereof; and (8) Indebtedness owing from a Management Fee Subsidiary to the Company or a Wholly Owned Restricted Subsidiary. The exceptions set forth in the preceding sentence shall not be construed to permit the Company or 31 any of its Restricted Subsidiaries to incur, create, assume, become liable in respect of or permit to exist any Indebtedness which would result in the existence of a Default or an Event of Default under this Exchange Agreement. (b) Any Person which becomes a Restricted Subsidiary of the Company after the date hereof shall for all purposes of this (S) 7.10 be deemed to have created, assumed or incurred at the time it becomes such a Restricted Subsidiary all Indebtedness of such Person existing immediately after it becomes such a Restricted Subsidiary. 7.11 Management Fees. The Company will not, and will not permit its Restricted Subsidiaries to, sell, transfer or otherwise dispose of its right to management fees under any Management Contract in respect of any Property or subordinate its right to management fees under any Management Contract in respect of any Property to any obligation of any Ownership Entity or to any Lien on a Property; provided however, that the Company may sell or transfer its right to management fees under any Management Contract in respect of any Property to a Management Fee Subsidiary provided that the Board of Directors of the Company, in good faith and pursuant to a board resolution, determines that the sale or transfer of such management fees is reasonably necessary to the maintenance of the Company's status as a "real estate investment trust" under the Code, and that (a) any sale, transfer or other disposal by such Management Fee Subsidiary of more than 10% of the economic interest in such management fees to a Person other than the Company, and (b) the incurrence of any Indebtedness by such Management Fee Subsidiary, other than to the Company, shall constitute a breach of this (S) 7.11. The Company shall at all times retain an interest in each Management Fee Subsidiary representing at least 90% of the economic interests therein. 7.12 Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary of the Company to, create, assume, incur, or suffer to be incurred or to exist, any Lien on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of 32 obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire, or permit any Restricted Subsidiary of the Company to acquire, any property or assets upon conditional sales agreements or other title retention devices, except for Permitted Encumbrances. 7.13 Mergers, Consolidations and Sales of Assets. (a) The Company will not, and will not permit any Restricted Subsidiary of the Company to, consolidate with or be a party to a merger or amalgamate with any other Person or sell, lease, convey, or otherwise dispose of all or substantially all of the assets of the Company (on a consolidated basis) to any Person, unless (1)(i) the Company (or, in the case of a transaction not involving the Company, the applicable Restricted Subsidiary) is the surviving entity, or (ii) the surviving entity shall be a corporation organized under the laws of the United States or Canada or a state or province thereof and shall expressly assume all obligations of the Company under this Exchange Agreement and the other Documents; (2) no Default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and (3) immediately after giving effect to such transaction on a pro forma basis, the consolidated surviving or transferee entity would immediately thereafter be permitted to incur at least $1.00 of additional Indebtedness pursuant to (S) 7.10. Notwithstanding the foregoing, any Restricted Subsidiary may merge, consolidate or amalgamate with any other Restricted Subsidiary or with the Company (provided that in the case of a transaction involving the Company, the foregoing provisions of this (S) 7.13 (other than clause (3)) have been satisfied). For purposes of the first sentence of this (S) 7.13, the sale, lease, conveyance or transfer of all or substantially all of the properties and assets of one or more Restricted Subsidiaries of the Company, which properties and assets, if held by the Company instead of such Restricted Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. 33 (b) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold and (ii) immediately after such sale and after giving effect thereto, no Default or Event of Default shall exist. (c) If the Net Cash Proceeds of an Asset Sale, when added to (x) the Net Cash Proceeds of other Asset Sales occurring in the same fiscal year of the Company, (y) the book value (at the time of transfer) of all assets transferred to Unrestricted Subsidiaries by the Company or any of its Restricted Subsidiaries in such fiscal year and (z) the book value (at the time of designation) of the net assets of all Restricted Subsidiaries that are designated Unrestricted Subsidiaries in such fiscal year, exceeds 10% of Consolidated Assets measured as of the last day of the immediately preceding fiscal year, then the Company shall, within 12 months of such Asset Sale, either (i) invest Net Cash Proceeds, if any, in an amount equal to such excess (the "Excess Proceeds") in properties and assets that will be used in the businesses of the Company or its Wholly-Owned Restricted Subsidiaries existing on the date of this Exchange Agreement or in Voting Stock or other equity interests of a Person which becomes a Wholly-Owned Restricted Subsidiary or (ii) make an optional repayment of the Notes in accordance with (S) 4.2, in the amount of the Excess Proceeds not applied in accordance with clause (i). 7.14 Repurchase of Notes. The Company will not, and will not permit its Restricted Subsidiaries or Affiliates to, directly or indirectly, repurchase or make any offer to repurchase any Notes unless an offer has been made to repurchase Notes, pro rata, from all holders of the Notes at the same time and upon the same terms. In case the Company repurchases or otherwise acquires any Notes, such Notes shall immediately thereafter be cancelled and no Notes shall be issued in substitution therefor. Without limiting the foregoing, upon the purchase or other acquisition of any Notes by the Company, any subsidiary of the Company, any Controlled Partnership or any Affiliate of the Company, such Notes shall no longer be outstanding for purposes of any section of this Agreement relating to the taking by the holders of the Notes 34 of any actions with respect hereto, including, without limitation, (S) 8.3, (S) 8.4 and (S) 10.1. 7.15 Transactions with Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or be a party to or suffer to exist any transaction or arrangement (an "Affiliate Transaction") with any Affiliate of the Company (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate of the Company or the issuance of securities and the acquisition of assets from Affiliates through purchase for cash, property or securities, by merger, or otherwise), other than transactions among the Company and its Wholly Owned Restricted Subsidiaries; provided, however, that the foregoing shall not prohibit Affiliate Transactions in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and consistent with past practice that are upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtained in a comparable arm's-length transaction with a Person other than an Affiliate of the Company and, with respect to an Affiliate Transaction or series of Affiliate Transactions involving aggregate payments equal to or greater than (i) $5 million, if a majority of the members of the Board of Directors of the Company who are disinterested in such transaction(s) approve such transaction(s), and (ii) $50.0 million, if, in addition to satisfying clause (i), the Company receives a favorable written opinion from an investment banking or accounting firm included on Schedule II hereto and which is not an Affiliate of the Company that such transaction(s) is/are fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view; provided, further, that the following transactions shall not constitute Affiliate Transactions: (i) transactions in accordance with the proviso to (S) 7.11; (ii) transactions described in clause (z) of the definition of Asset Sale; and (iii) the sale or transfer of assets comprising the Company's existing lock business or box business or truck rental business, or the sale or transfer of any assets acquired after the Closing Date, in each case to a Management Fee Subsidiary, provided that the Board of Directors of the Company, in good faith and pursuant to a board resolution, determines that the sale or transfer of 35 such assets is reasonably necessary to the maintenance of the Company's status as a "real estate investment trust" under the Code. 7.16 Limitation on Restricted Investments. The Company will not, and will not permit any Restricted Subsidiary of the Company to, make any Investments unless: (a) At least 75% of the assets of the Company and its Restricted Subsidiaries, in the aggregate, shall consist of Investments in Persons or assets whose principal source of income is from the ownership or management of facilities used in the business of leasing storage space to the public; (b) At least 85% of the assets of the Company and its Restricted Subsidiaries, in the aggregate, shall consist of Investments in cash and cash equivalents or in Persons or assets whose principal source of income is derived from "real estate assets" as defined in Code section 856; (c) For purposes of (b) above, cash and cash equivalents may be invested in: (i) Investments in commercial paper maturing in twelve months or less from the date of issuance which, at the time of acquisition by the Company or any Restricted Subsidiary of the Company, is accorded a rating of at least A3 by Standard & Poor's Corporation or a rating of P3 by Moody's Investors Service Inc.; (ii) Investments in direct obligations of the United States of America or any agency or instrumentality of the United States of America, the payment or guarantee of which constitutes a full faith and credit obligation of the United States of America, in either case, maturing twelve months or less from the date of acquisition thereof; and (iii) Investments in certificates of deposit maturing in twelve months or less from the date of issuance thereof, issued 36 by a bank or trust company organized under the laws of the United States of America or any state thereof, having capital, surplus and undivided profits aggregating at least $100,000,000 and whose long-term certificates of deposits are, at the time of such investment in certificate of deposit by the Company or a Restricted Subsidiary, rated A or better by Standard & Poor's Corporation or A2 or better by Moody's Investors Services, Inc. For purposes of this section, the measurement of the value of Investments and assets shall be in accordance with GAAP. In addition, for purposes of this section, at any time a Person becomes a Restricted Subsidiary of the Company or an Unrestricted Subsidiary becomes a Restricted Subsidiary of the Company, the Investments of such Restricted Subsidiary shall be deemed to have been made by such Restricted Subsidiary at such time. 7.17 ERISA (a) The Company will, and will cause each Restricted Subsidiary and ERISA Affiliate of the Company to, at all times with respect to each Plan established, maintained or contributed to by any of them, (1) except to the extent waived pursuant to Section 303 of ERISA or Section 412 of the Code, as the case may be, make timely payment of contributions required (i) to meet the minimum funding standards set forth in ERISA or the Code with respect thereto, or (ii) to be paid as provided for by Section 515 of ERISA, and (2) comply in all material respects with all other applicable provisions of ERISA. (b) The Company agrees that all assumptions and methods used to determine the actuarial valuation of employee benefits, both vested and unvested, under any Plan of the Company or any subsidiary or ERISA Affiliate of the Company, and each such Plan, whether now 37 existing or adopted after the date hereof, will comply in all material respects with ERISA and other applicable law. (c) The Company will not at any time permit any Plan established, maintained or contributed to by it or any subsidiary or ERISA Affiliate of the Company to: (1) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Code or in Section 406 of ERISA; (2) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, whether or not waived; or (3) be terminated under circumstances which are likely to result in the imposition of a Lien on the property of the Company or any subsidiary of the Company pursuant to Section 4068 of ERISA, if and to the extent such termination is within the control of the Company; if the event or condition described in clauses (1), (2) or (3) above is likely to subject the Company or any subsidiary or ERISA Affiliate of the Company to a liability which, in the aggregate, is material in relation to the business, property, operations, or condition, financial or otherwise, of the Company and its subsidiaries taken as a whole. (d) Upon the request of you or any other holder, the Company will furnish a copy of the annual report of each Plan (Form 5500) required to be filed with the Internal Revenue Service. Copies of annual reports shall be delivered no later than 30 days after the later of the date such report has been filed with the Internal Revenue Service or the date the copy is requested. (e) Promptly upon the occurrence thereof, the Company will give you and each other holder written notice of (1) a Reportable Event with respect to any Plan; (2) the institution of any steps by the Company, any subsidiary of the Company, any ERISA Affiliate of the Company, the PBGC or any other person to terminate any Plan that is subject to the funding requirements of (S) 412 38 of the Code or is a "multiemployer plan"; (3) the institution of any steps by the Company, any subsidiary of the Company, or any ERISA Affiliate to withdraw from any Plan; (4) a prohibited transaction in connection with any Plan; (5) any material increase in the contingent liability of the Company or any subsidiary of the Company with respect to any post-retirement welfare liability; or (6) the taking of any action by the Internal Revenue Service, the Department of Labor, or the PBGC with respect to any of the foregoing which, in any of the events specified above, would result in any material liability of the Company or any of its subsidiaries. 7.18 Reports and Rights of Inspection. The Company will keep, and will cause each Restricted Subsidiary of the Company to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of such Person, in accordance with GAAP consistently applied (except for changes disclosed in the financial statements furnished to you pursuant to this (S) 7.18 and concurred to by the independent public accountants referred to in (S) 7.18(b) hereof), and will provide, and will cause each such Restricted Subsidiary to provide, reasonable protection against loss or damage to such books of record and account. The Company will furnish to you so long as you are the holder of any Note and to each other holder of the then outstanding Notes (in duplicate if so specified below or otherwise requested): (a) Quarterly Statements. Within 50 days after the end of each quarterly fiscal period (except the last) of each fiscal year of the Company, copies of: (1) a consolidated balance sheet of the Company and its Restricted Subsidiaries as of the close of such quarterly fiscal period, which need not be audited, setting forth in comparative form the consolidated figures for the fiscal year then most recently ended, (2) a consolidated statement of income of the Company and its Restricted Subsidiaries for such quarterly fiscal period and for the portion of the fiscal year ending with such quarterly fiscal period, which need not be audited, in each case setting forth in 39 comparative form the consolidated figures for the corresponding periods of the preceding fiscal year, and (3) a consolidated statement of cash flows of the Company and its Restricted Subsidiaries for the portion of the fiscal year ending with such quarterly fiscal period, which need not be audited, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, reasonable detail and certified as complete and correct by the principal financial officer of the Company; (b) Annual Statements. Within 90 days after the close of each fiscal year of the Company, copies of: (1) a consolidated balance sheet of the Company and its Restricted Subsidiaries as of the close of such fiscal year, and (2) a consolidated statement of income and retained earnings and cash flows of the Company and its Restricted Subsidiaries for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail, certified as complete and correct by the principal financial officer of the Company and accompanied by a report thereon (which shall not be qualified by reason of any limitation as to the status of the Company as a going concern or by any other limitation imposed by the Company) of a firm of independent public accountants of recognized national standing selected by such person to the effect that the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its Restricted Subsidiaries as of the end of the fiscal year being reported on and the consolidated results of the operations and cash flows for said year in conformity with GAAP and that the examination of such accountants in connection with such financial statements has been conducted in accordance with generally accepted auditing standards and included such tests of the accounting records and such other auditing procedures as said accountants deemed necessary in the circumstances. The Company shall, on the date it provides its audited financial statements to you pursuant to (S) 7.18(b), simul- 40 taneously provide such statements to the National Association of Insurance Commissioners, Securities Valuation Office, 195 Broadway, New York, New York 10007 (the "NAIC"); (c) Audit Reports. Promptly upon receipt thereof, one copy of each interim or special audit made by independent accountants of the books of the Company, or any Restricted Subsidiary and any management letter received from such accountants; (d) SEC and Other Reports. Within 15 days of their becoming available, one copy of any financial statement, report, notice or proxy statement sent by the Company to stockholders generally and of each regular or periodic report and any registration statement or prospectus required to be filed by the Company or any Restricted Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency (including, without limitation, Forms 10-K, 10-Q and 8-K); (e) Officers' Certificates. Within the periods provided in paragraphs (a) and (b) above, Officers' Certificates of the Company respectively, stating that such officers have reviewed the provisions of this Exchange Agreement and setting forth: (1) the information and computations (in sufficient detail) required in order to establish whether the Company was in compliance with the requirements of (S) 7.8 through (S) 7.17 of this Agreement applicable to it at the end of the period covered by the financial statements then being furnished, and (2) whether there existed as of the date of such financial statements and whether, to the best of such officers' knowledge, there exists on the date of the certificate or existed at any time during the period covered by such financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Company is taking and proposes to take with respect thereto; (f) Accountants' Certificates. Within the period provided in paragraph (b) above, a certificate of the accountants who render an opinion with respect to such financial statements, stating that they have reviewed this Exchange Agreement and stating further wheth- 41 er, in making their audit, such accountants have become aware of any Default or Event of Default under any of the terms or provisions of (S) 7.8 through (S) 7.17 of this Exchange Agreement or (S) 7.3(a) (but not with respect to unaudited quarterly periods), insofar as any such terms or provisions pertain to or involve accounting matters or determinations, and if any such condition or event then exists, specifying the nature and period of existence thereof; (g) Litigation Notices. Promptly upon learning of any lawsuit or similar action brought against the Company or any of its subsidiaries, the claimed damages of which may exceed $500,000, a notice describing such action in reasonable detail; (h) Environmental Notices. Promptly upon learning of (i) any claims, complaints, notices, requests or inquiries as set forth in (S) 5.1(r)(2) of this Exchange Agreement, or (ii) any listing or proposed listing as set forth in (S) 5.1(r)(5), or (3) any notices of noncompliance for the matters identified in (S) 5.1(r)(4), a notice describing such action in reasonable detail and including the underlying document; and (i) Requested Information. With reasonable promptness, such other data and information as you or any such holder may reasonably request, including, without limitation, (1) such financial or other information as any holder of Notes or any Person designated by such holder may reasonably determine is required to permit such holder to comply with the requirements of Rule 144A promulgated under the Securities Act, in connection with the resale by any holder of the Notes, and (2) copies of any report, notice or proxy statement or other filing required to be filed by the Company or any Affiliate of the Company qualifying as a "real estate investment trust" under the Code with any securities exchange or the Securities and Exchange Commission or any successor agency. Without limiting the foregoing, the Company will permit you, so long as you are the holder of any Note, and each holder of the then outstanding Notes (or such Persons as either you or such holder may designate), to visit and inspect, under the Company's guidance but at your expense (except as set forth in the last sentence of 42 this paragraph), any of its or its respective subsidiaries' properties, to examine all of their books of account, records, reports and other papers, to make copies and extracts therefrom and to discuss their respective affairs, finances and accounts with their respective officers, employees, and independent public accountants (and by this provision the Company authorizes said accountants to discuss with you the finances and affairs of the Company and its subsidiaries) all at such reasonable times, with reasonable notice and as often as may be requested. Subsequent to and during the continuance of a Default or Event of Default such visitation and inspection shall be at the sole expense of the Company as applicable, and without its required guidance. 7.19 [Intentionally omitted] 7.20 Facilities. The Company and its Restricted Subsidiaries and the Controlled Partnerships shall keep the Controlled Properties in good repair, working order and condition, and from time to time shall make necessary repairs or replacements thereto so that their property shall be maintained adequately for its intended use. 7.21 Restrictive Agreements. The Company shall not and shall not permit any of its Restricted Subsidiaries to enter into any agreement which restricts the ability or right of any such Restricted Subsidiary to make payments to the Company or another Restricted Subsidiary of the Company by way of dividends, distributions, returns of capital, advances, reimbursement or otherwise. 7.22 Rating for the Notes. You shall have received evidence satisfactory to you by January 31, 1996 that Duff & Phelps Credit Rating Co. has issued a private letter rating of at least "BBB+" for the Notes. SECTION 8. EVENTS OF DEFAULT AND REMEDIES THEREFOR 8.1 Events of Default. Any one or more of the following shall constitute an "Event of Default" as such term is used herein: 43 (a) Default in the payment of interest on any Note when the same shall have become due and such default shall continue for more than two days; or (b) Default in the making of any required prepayment on any of the Notes as provided in (S) 4.1; or (c) Default in the making of any other payment of the principal of any Note or premium, if any, thereon at the expressed or any accelerated maturity date or at any date fixed for prepayment; or (d) Default in the observance or performance of any covenant or agreement contained in (S) 7.8, 7.9 or 7.13(b), unless satisfactory evidence of a remedy of such default is delivered to all holders within 10 days after the day on which any executive officer of the Company first obtains knowledge of such default; or (e) Default in the performance or breach of any other provision of this Exchange Agreement unless satisfactory evidence of a remedy of such default is delivered to all holders within 10 days after the earlier of (1) the day on which any executive officer of the Company first obtains knowledge of such default and (2) the day on which written notice thereof is given to any executive officer of the Company by any holder of a Note; or (f) Default in the observance or performance by the Company of any of the financial covenants contained in Section 6.20 or 6.21 of the Bank Agreement unless such Default is permanently waived or such Default is cured by a permanent amendment to the Bank Agreement; or (g) Any representation or warranty or other statement made by or on behalf of the Company herein or in the other Documents, or made by the Company in any statement or certificate furnished by or on behalf of the Company in connection with the consummation of the issuance and delivery of the Notes or furnished by the Company pursuant hereto, is untrue or misleading in any material respect as of the date of the issuance or making thereof; or 44 (h) Any judgments or awards for the payment of money aggregating in excess of $2,500,000 is or are outstanding against the Company or any Restricted Subsidiary of the Company or against any property or assets of either and any one of such judgments has remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 30 days from the date of its entry; or (i) (i) The Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships shall default (unless waived) in the payment when due, whether by acceleration or otherwise, of any amount of principal or interest due in respect of Indebtedness (other than Nonrecourse Indebtedness) in an aggregate principal amount greater than $5 million or in respect of any guaranty of such Indebtedness, or shall default (unless waived in writing) in the performance or observance (subject to any applicable grace period) of any agreement, covenant or condition with respect to any such Indebtedness or guaranty if the effect of such default is to accelerate the maturity of any such Indebtedness or to permit the holder or holders of any such Indebtedness or guaranty, or any trustee or agent of such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity or to call upon such guaranty in advance of nonpayment of the guaranteed Indebtedness; or (ii) the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships shall default (unless waived in writing) in the payment when due, whether by acceleration or otherwise, of any amount of principal or interest due in respect of Nonrecourse Indebtedness in an aggregate principal amount greater than $10 million, or in respect of any guaranty of such Indebtedness, or shall default (unless waived in the performance or observance (subject to any applicable grace period) of any agreement, covenant or condition with respect to any such Indebtedness or guaranty if the effect of such default is to accelerate the maturity of any such Indebtedness or to permit the holder or holders of any such Indebtedness or Guaranty, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity or to call upon such guaranty in advance of non-payment of the guaranteed Indebtedness; 45 (j) Any final non-monetary judgment, order or decree shall be rendered against the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships which may have a material and adverse effect on the business, financial condition or property of the Company or on the ability of the Company to perform its obligations set forth in the Documents, and either (i) enforcement proceedings shall have been commenced by any Person upon such judgment or order, or (ii) there shall be any period of thirty (30) days during which a stay or enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect, unless such judgment, order or decree shall, within such thirty-day period, be vacated or discharged (other than by satisfaction thereof); (k) (i) An Employee Benefit Plan that is intended to be qualified under section 401(a) of the Code shall lose its qualification, and the resulting loss or cost to the Company or any Controlled Group member can reasonably be expected to exceed $500,000; (ii) the commencement or increase of contributions to, the adoption of, or the amendment of a Plan by, the Company or any Controlled Group member shall result in a net increase in unfunded liabilities to the Company or any Controlled Group member in the aggregate in excess of $500,000; or (iii) the Internal Revenue Service asserts a claim against the Company or any Controlled Group member in connection with the unfunded liabilities arising under section 412 of the Code under the employee pension benefit (as defined in section 3(2) of ERISA) maintained by any member of the ERISA Affiliated Group, if such claim can reasonably be expected to impose on the Company or any Controlled Group member liability in the aggregate amount of $500,000 or more; (l) The Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships shall institute a voluntary case seeking liquidation or reorganization under Chapter 7 or Chapter 11, respectively, of the United States Bankruptcy Code, or shall consent to the institution of an involuntary case thereunder against it; or the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships shall file a petition initiating or shall otherwise institute any similar Insolvency Proceeding under any other applicable federal or state law, or shall consent thereto; or the Company or 46 any of its Restricted Subsidiaries or any of the Controlled Partnerships shall apply for, or by consent or acquiescence there shall be an appointment of, a receiver, liquidator, sequestrator, trustee or other officer with similar powers, or the Company of any of its Restricted Subsidiaries or any of the Controlled Partnerships shall make an assignment of the benefit of creditors; or the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships shall admit in writing its inability to pay its debts generally as they become due; or, if an involuntary case shall be commenced seeking the liquidation or reorganization of the Company of any of its Restricted Subsidiaries or any of the Controlled Partnerships under Chapter 7 or Chapter 11, respectively, of the United States Bankruptcy Code, or any similar proceeding shall be commenced against the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships under any other applicable federal or state law, and (i) the Company, any of its Restricted Subsidiaries or any of the controlled Partnerships is a party to the petition commencing the involuntary case; or (ii) the petition commencing the involuntary case is not timely controverted; or (iii) the petition commencing the involuntary case is not dismissed with forty-five (45) days of its filing; or (iv) an interim trustee is appointed to take possession of all or a portion of the property and/or to operate all or any part of the business of the Company or such Restricted Subsidiary or Controlled Partnership; or (v) an order for relief shall have been issued or entered therein; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee or other officer having similar powers over the Company or such Restricted Subsidiary or Controlled Partnerships, or of all or a part of the property of any of the foregoing, shall have been entered; or any other similar relief shall be granted against the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships under any applicable federal or state law; (m) Any statutory Lien shall have been placed upon the assets of the Company or any member of the Controlled Group under the Code or ERISA; (n) A Change of Control (other than the PSMI Merger) shall occur; or 47 (o) The Company fails at any time to be qualified as a real estate investment trust under the Code. Notwithstanding the provisions of paragraphs (a) and (c) above in this Section 8.1, it shall not constitute an Event of Default if a payment due under any one of such paragraphs is not made when due but is made within two days thereafter (a "Late Payment"), provided that there can be no more than two Late Payments during the collective term of this Exchange Agreement and the PSMI Note Agreement, and any other payment not made when due shall constitute an immediate Event of Default, and provided further that any payments due on the same day under any such paragraphs (a) or (c) shall be deemed to be one payment for purposes of counting Late Payments. 8.2 Notice to Holders. When any Default or Event of Default described in the foregoing (S) 8.1 has occurred, or if the holder of any Note or of any other evidence of Funded Debt or Current Debt of the Company gives any notice or takes any other action with respect to a claimed default, the Company agrees to give notice within three business days of such event to all holders of the Notes then outstanding specifying the nature of such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. 8.3 Acceleration of Maturities. When any Event of Default described in paragraph (a), (b), (c), or (f) of (S) 8.1 has happened and is continuing, any holder of any Note may declare such Note to be due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in paragraphs (a) through (k), (m), (n) or (o), inclusive, of said (S) 8.1 has happened and is continuing, the holder or holders of 25% or more of the principal amount of Notes at the time outstanding may, by notice to the Company, declare the entire principal and all interest accrued on all Notes to be, and all Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in paragraph (l) of (S) 8.1 has occurred, then all outstanding Notes shall automatically become immediately due and payable without presentment, demand or notice of any kind 48 all of which are hereby expressly waived. Upon the Notes becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to the holders of the Notes the entire principal and interest accrued on the Notes and, to the extent not prohibited by applicable law, an amount as liquidated damages for the loss of the bargain evidenced hereby (and not as a penalty) equal to the Make-Whole Amount, determined as of the date on which the Notes shall so become due and payable. No course of dealing on the part of the holder or holders of any Notes nor any delay or failure on the part of any holder of Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company further agrees, to the extent permitted by law, to pay to the holder or holders of the Notes all costs and expenses incurred by them in the collection of any Notes upon any default hereunder or thereon, including reasonable compensation to such holder's or holders' attorneys for all services rendered in connection therewith. 8.4 Rescission of Acceleration. The provisions of (S) 8.3 are subject to the condition that if the principal of and accrued interest on all or any outstanding Notes have been declared immediately due and payable by reason of the occurrence of any Event of Default described in paragraphs (a) through (k), (m), (n) or (o), inclusive, of (S) 8.1, the holders of 66-2/3% in aggregate principal amount of the Notes then outstanding may, by written instrument filed with the Company, rescind and annul such declaration and the consequences thereof on behalf of all holders, provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; (b) all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except any principal, interest or premium on the Notes which has become due and payable solely by reason of such declaration under (S) 8.3) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been made good, cured or 49 waived pursuant to (S) 10.1; and provided further, that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereto. 8.5 Valuable Rights. The Company acknowledges, and the parties to this Agreement agree, that the right of each holder to maintain its investment in the Notes free from repayment by the Company (except as in this Agreement specifically provided for) is a valuable right and that the provision for payment of the Make-Whole Amount by the Company in the event that the Notes are accelerated as a result of an Event of Default is intended to provide compensation for the deprivation of such right under such circumstances and not as a penalty against the Company. 8.6 Other Remedies. During the existence of an Event of Default and regardless of whether the Notes then outstanding shall have been declared to be due and payable pursuant to (S) 8.3 of this Exchange Agreement and regardless of whether any holder of Notes then outstanding shall otherwise have pursued or be pursuing any other rights or remedies, any holder of Notes may proceed to protect and enforce its rights under this Exchange Agreement and such Notes by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any agreement contained in this Exchange Agreement or in aid of the exercise of any power granted in this Exchange Agreement. SECTION 9. SECURITY The Notes are unsecured. SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS 10.1 Consent Required. Any term, covenant, agreement or condition of this Exchange Agreement may, with the consent of the Company, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), if the Company shall have obtained the consent in writing of the holders of at least 66 2/3% in aggregate principal amount of outstanding Notes (or 50% in the case of the 50 selection of investment banks, accountants or appraisers not included in Schedule II hereto); provided that without the written consent of the holders of all of the Notes then outstanding, no such amendment or waiver shall be effective (1) which will change the time of payment (including any prepayment required by (S) 4) of the principal of or the interest on any Note or change the principal amount thereof or change the rate of interest thereon, (2) which will change any of the provisions with respect to optional prepayments or any of the provisions contained in (S) 7.14 or (S) 10.2, or (3) which will change the percentage of holders of the Notes required to consent to any amendment or waiver under this Exchange Agreement or the Notes or any of the other provisions of this (S) 10. For purposes of determining whether the holders of outstanding Notes of the requisite unpaid principal amount at any time have taken any action authorized by this (S) 10.1 or otherwise by this Agreement, any Notes owned by the Company or any Restricted Subsidiary or Affiliate of the Company shall not be deemed outstanding. 10.2 Solicitation of Holders. So long as there are any Notes outstanding, the Company will not, and will not permit any if its Restricted Subsidiaries or Affiliates or any of the Controlled Partnerships to, solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Exchange Agreement or the Notes, unless each holder of Notes (irrespective of the amount of Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any amendment or waiver effected pursuant to the provisions of (S) 10.1 will be delivered by the Company to each holder of Notes within 15 days following the date on which the same shall have become effective. The Company will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of Notes as consideration for or as an inducement to entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions of this Exchange Agreement or the Notes, unless such remuneration is concurrently paid, on the same terms, ratably to the holders of all Notes then outstanding. 51 10.3 Effect of Amendment or Waiver. Any such amendment or waiver shall apply equally to all of the holders of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company, whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon. SECTION 11. INTERPRETATION OF AGREEMENT; DEFINITIONS 11.1 Definitions. Unless the context otherwise requires, the terms hereinafter set forth when used herein shall have the following meanings and the following definitions shall be equally applicable to both the singular and plural forms of any of the terms herein defined: "Affiliate" shall be defined as a Person that (a) directly or indirectly through one or more intermediaries controls, or is controlled by or is under common control with, the Company; (b) beneficially owns or holds five percent (5%) or more of the Voting Stock of the Company; or (c) 5 percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, (5%) or more of the equity interest) of which is beneficially owned or held by the Company or a Subsidiary. "Affiliate Transaction" shall have the meaning set forth in (S) 7.15. "Aggregate Net Asset Value" means the Company's Combined Percentage Interest in the pre-depreciation net book value (determined in accordance with GAAP) of Unencumbered Assets of the Company and the Consolidated Affiliates. "Annual Report" means the Company's Annual Report on Form 10-K filed with the Securities and Ex- 52 change Commission for the fiscal year ended December 31, 1994. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary of the Company; and (ii) any other properties or assets of the Company or any Restricted Subsidiary of the Company. For the purpose of this definition, the term "Asset Sale" shall not include (w) any transfer of (A) inventory or obsolete or worn out equipment, in each case in the ordinary course of business, or (B) properties and assets of the Company to any Wholly Owned Restricted Subsidiary of the Company or of any Restricted Subsidiary of the Company to the Company or any Wholly Owned Restricted Subsidiary, (x) exchanges of property by the Company or any Restricted Subsidiary for equivalent property of equivalent value that will be used in the businesses of the Company or its Wholly Owned Restricted Subsidiaries existing on the date of this Exchange Agreement (as determined by the Board of Directors of the Company in good faith), (y) leases of assets in the ordinary course of business consistent with past practice or (z) sales of Business Park Properties or management contracts for Business Park Properties, regardless of whether or not such properties are owned by the Company or a Controlled Partnership. "Bank Agreement" shall mean the Amended and Restated Credit Agreement by and among the Company and Wells Fargo Bank, National Association, as Agent, and certain Financial Institutions party thereto dated as of May 22, 1995, as it may be amended from time to time. "Bank Indebtedness" means Indebtedness under the Bank Agreement. "Business Day" shall mean a day of the year on which banks located in the cities of New York, New York and Glendale, California are open for business. "Business Park Property" shall be defined as a property generally of the type (a) described in the 53 Annual Report as "business parks" and (b) owned by the Company, a Restricted Subsidiary of the Company or a Controlled Partnership. "Capitalized Lease" means any lease under which the obligation of the lessee is required by GAAP to be shown as a liability on the financial statements of the lessee. "Capitalized Lease Obligation" means any lease obligation that, in accordance with GAAP, is required to be shown as a liability on the financial statements of the lessee. The amount of a Capitalized Lease Obligation shall be the amount required by GAAP so to be shown. "Capitalized Rentals" of any Person shall mean as of the date of any determination thereof the amount at which the aggregate Rentals due and to become due under all Capitalized Leases under which such Person is a lessee would be reflected as a liability on a consolidated balance sheet of such Person. "Capital Stock" means, with respect to any Person, any capital stock of such Person and shares, interests, participations or other ownership interests (however designated) of any Person and any rights (other than debt securities convertible into corporate stock), warrants and options to purchase any of the foregoing, including (without limitation) each class of common stock and preferred stock of such Person if such Person is a corporation and each general and limited partnership interest of such Person if such Person is a partnership. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" shall mean the Comprehensive Environmental Response Compensation Liability Information System List. "Change of Control" means the occurrence of any of the following events: (a) all or substantially all of the assets of the Company are sold, leased, exchanged or otherwise transferred to any Person or group of persons or entities acting in concert as a partnership or other group; (b) the Company is merged or consolidated with or 54 into another corporation (other than a Restricted Subsidiary that is not a Controlled Partnership) with the effect that the common stockholders immediately prior to such merger or consolidation hold less than seventy-five percent (75%) of the ordinary voting power of the outstanding securities of the surviving corporation of such merger or the corporation resulting from such consolidation; (c) a change in the composition of the board of directors of the Company as a result of which fewer than a majority of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change, or (ii) were elected, or nominated for election, to the board of directors with the affirmative votes of a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (d) a Person or group (as such term is used in Rule 13d-5 under the Securities Exchange Act) of Persons (other than B. Wayne Hughes; members of the immediate family of B. Wayne Hughes; any foundation, trust, or other Person controlled by B. Wayne Hughes and/or his immediate family, and any Person eligible to file a statement on Schedule 13G pursuant to Rule 13d-1(b)(1) of the Securities Exchange Act) shall, as a result of a tender or exchange offer, open market purchases, merger, privately negotiated purchases or otherwise, have become, directly or indirectly, the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act) of securities having twenty-five percent (25%) or more of the ordinary voting power of then outstanding voting securities of the Company. "Closing Date" shall have the meaning set forth in (S) 3.2. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Combined Percentage Interest" means as to any asset, liability or item of income, gain, loss, deduction or expense on the consolidated financial statements of the Company and the Consolidated Affiliates, the Company's allocable share of such asset, liability or item, for the relevant period or as of the date of determination, taking into account (a) the relative proportion of each such item constituting or derived from assets directly owned by the Company and constituting or derived 55 from assets owned by the respective Controlled Partnerships, and (b) the Company's Percentage Interests in the respective Controlled Partnerships. As an example, assume that there are two Controlled Partnerships: Partnership A, in which the Company's Percentage Interest is 55%; and Partnership B, in which the Company's Percentage Interest is 40%. Further, assume that, for fiscal 1995, depreciation derived from assets directly owned by the Company is $40,000; depreciation derived from the assets owned by Partnership A is $20,000; and depreciation derived from assets owned by Partnership B is $30,000. For fiscal year 1995, the Company's Combined Percentage Interest of all depreciation derived from the consolidated assets of the Company and the Consolidated Affiliates would be 70%, calculated as follows: (55% of $20,000)+(40% of $30,000)+(100% of $40,000) / $90,000 = 63/90 "Companies" means the Company, PSMI, PSI and each of their subsidiaries. "Company" shall mean Storage Equities, Inc., a California corporation, and any Person who succeeds to the business or to all, or substantially all, of the assets of Storage Equities, Inc. "Consolidated Affiliates" means, collectively, the Restricted Subsidiaries of the Company and the Controlled Partnerships. "Consolidated Assets" means, for the Company and its Restricted Subsidiaries, total assets plus accumulated depreciation and accumulated amortization, determined in accordance with GAAP. "Consolidated Funded Debt" means, for the Company and the Consolidated Affiliates on a consolidated basis in accordance with GAAP, all Indebtedness including any Indebtedness or Contingent Obligation with respect to outstanding letters of credit and any Contingent Obligation (excluding the Contingent Obligations described in Schedule 5.1(d) with respect to any interest-bearing indebtedness of any other Person. 56 "Consolidated Interest Expense" means, for any period, gross consolidated interest expense for the period (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments, such portion of payments under Capitalized Leases as may be characterized as interest expense in accordance with GAAP; but excluding commitment fees under the Bank Agreement, amortization of loan origination costs and other one-time or non-cash charges related to the incurrence of Indebtedness) for the Company and the Consolidated Affiliates, on a consolidated basis in accordance with GAAP, plus the portion of the up-front costs and expenses for Rate Contracts (to the extent not included in gross interest expense) fairly allocated to such Rate Contracts as expenses for such period, as determined in accordance with GAAP. "Consolidated Net Income" means for any period, the net income (or loss) of the Company and the Consolidated Affiliates for such period, determined on a consolidated basis for such Persons in accordance with GAAP; provided, however, that in determining Consolidated Net Income, (a) there shall not be included in gross revenues any revenues of a Non-consolidated Affiliate, but there shall be included any dividends or distributions from any Non-consolidated Affiliate received by the Company or any Consolidated Affiliate; and (b) there shall not be included in gross revenues any of the following items: (i) if the Company or one of the Consolidated Affiliates shall have acquired the assets and business of any Person or any substantial part of the assets and business of any Person, any earnings properly attributable to such assets and business or part thereof prior to the date of such acquisition; and (ii) any earnings of, and dividends payable to, the Company or one of the Consolidated Affiliates in a currency which at the time may not be converted into Dollars under the laws of the nation issuing such currency. "Consolidated Tangible Net Worth" shall mean as of the date of any determination thereof the total amount of all Tangible Assets of the Company and its Restricted Subsidiaries after deducting therefrom, to the extent otherwise included (i) Consolidated Funded Debt and (ii) all items which in accordance with GAAP would be included on the liability and equity side of a consolidated 57 balance sheet, except shareholders' equity calculated in accordance with GAAP. "Contingent Obligation" means, as applied to any Person, without duplication, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including, without limitation, any such obligation for which that Person is in effect liable through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet item, level of income or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation, services or lease regardless of the nondelivery or nonfurnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof. The amount of any Contingent Obligation shall be equal to the actual amount of the obligation so guaranteed or otherwise supported. Without limitation, Contingent Obligation shall include any environmental indemnity or other agreement with respect to the environmental condition of any property (whether or not entered into in connection with the issuance of Non-recourse Indebtedness). "Controlled Group" means the Company and all Persons (whether or not incorporated) under common control or treated as single employer with the Company pursuant to section 414(b) or (c) of the Code. "Controlled Partnership" means any of the following (a) any Joint Venture (b) any PS Partnership or 58 (c) as of any date, any other general or limited partnership whose financial statements are required as of such date to be consolidated with those of the Company in accordance with GAAP except any such partnership which constitutes an Unrestricted Subsidiary. "Controlled Property" means any real property owned, leased, managed, operated or occupied by the Company, any Subsidiary of the Company or any Controlled Partnership. "Current Debt" of any Person shall mean as of the date of any determination thereof (a) all Indebtedness of such Person for borrowed money other than Funded Debt of such Person and (b) Guarantees by such Person of Current Debt of others. "Default" shall mean any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default. "Depreciation and Amortization" shall mean the depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period (so long as deducted in the computation of Consolidated Net Income), determined on a consolidated basis in accordance with GAAP consistently applied. "Documents" shall mean, collectively, the Exchange Agreements, the Notes, and all other documents necessary to consummate the transactions contemplated by the Exchange Agreements (including any instruments contemplated by or executed in connection with any of the foregoing). "EBITDA" means, in respect of any fiscal period, Consolidated Net Income, increased by extraordinary losses, decreased by extraordinary gains, and increased by Depreciation and Amortization, interest (including the portion of payments under any Capitalized Lease that may be characterized as interest), and federal and state income taxes, all for such period for the Company and the Consolidated Affiliates on a consolidated basis in accordance with GAAP. 59 "Environmental Laws" shall mean all federal, state, or local laws, statutes, rules, regulations or ordinances relating to public health, safety or the environment, including, without limitation, relating to releases, discharges, emissions or disposals to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, crude oil or any fraction thereof, or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited or regulated substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed to also refer to any successor sections. "ERISA Affiliate" shall mean any corporation, trade or business that is, along with the Company, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in section 414(b) and 414(c), respectively, of the Code or Section 4001 of ERISA. "Event of Default" shall have the meaning set forth in (S) 8.1. "Exchange Agreements" shall have the meaning set forth in (S) 3.3. "Fair Market Value" means, with respect to any property, the sale value of such property, as determined by the Board of Directors of the Company in good faith, that would be realized in an arm's-length sale at such time between an informed and willing buyer and an informed and willing seller, under no compulsion to buy or sell, respectively. "Funded Debt" of any Person as of the date of any determination thereof shall mean (a) all Indebtedness of such Person for borrowed money or which has been incurred in connection with the acquisition of assets in 60 each case having a final maturity of one or more than one year from the date of origin thereof (or which is renewable or extendible at the option of the obligor for a period or periods more than one year from the date of origin), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not the obligation to make such payments shall constitute a current liability of the obligor under GAAP, (b) all Capitalized Rentals of such Person, and (c) all Guarantees by such Person of Funded Debt of others. "Funded Debt Ratio" means, as of any day, the ratio of Net Funded Debt as of such day to the sum of (a) Net Funded Debt as of such day plus (b) Total Shareholders' Equity as of such day. "GAAP" means accounting principles as promulgated from time to time in statements, opinions and pronouncements by the Financial Accounting Standards Board or in such statements, opinions and pronouncements of such other successor entities as shall be accepted by a substantial majority of the accounting profession in the United States of America. "Governmental Authority" shall mean any federal, state, Canadian provincial, county, city, town, village, municipal or other governmental department, commission, board, bureau, agency, authority or instrumentality, domestic or foreign. "Guarantees" by any Person as of the date of any determination thereof shall mean all obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing, or in effect guaranteeing, any Indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, all obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Indebtedness or obligation or any property or assets constituting security therefor, (b) to advance or supply funds (i) for the purchase or payment of such Indebtedness or obligation, (ii) to maintain working capital or other balance sheet condition or otherwise to advance or make available funds for the purchase or payment of such 61 Indebtedness or obligation, (c) to lease property or to purchase Securities or other property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the primary obli-gor to make payment of the Indebtedness or obligation, or (d) otherwise to assure the owner of the Indebtedness or obligation of the primary obligor against loss in respect thereof. For the purposes of all computations made under this Agreement, a Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to the principal amount of such Indebtedness for borrowed money which has been guaranteed, and a Guaranty in respect of any other obligation or liability or any dividend shall be deemed to be Indebtedness equal to the maximum aggregate amount of such obligation, liability or dividend. "Hazardous Material" shall mean (a) any "hazardous substance," as defined by CERCLA; (b) any "hazardous waste," as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other Environmental Law. "Holder" or "holder" shall mean any holder of a Note. "Indebtedness" of any Person as of the date of any determination thereof shall, without duplication, mean and include (a) any obligation for borrowed money; (b) any obligation evidenced by bonds, debentures, notes or other similar instruments; (c) any obligation to pay the deferred purchase price of property or for services (other than in the ordinary course of business); (d) any Capitalized Lease Obligation; (e) any obligation under any Rate Contract; (f) any obligation or liability of others secured by a Lien, whether or not such obligation or liability is assumed; (g) any Contingent Obligation (other than Contingent Obligations incurred in the ordinary course of business); and (h) Non-recourse Indebtedness. "Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, 62 winding-up or relief of debtors; or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors or other, similar arrangement. "Institutional Holder" shall mean any holder of a Note that is an "accredited investor" as defined in Section 2(15) of the Securities Act and any "qualified institutional buyer" as defined in Rule 144A promulgated under the Securities Act. "Interest Coverage Ratio" means for any period the ratio of (a) the Company's Combined Percentage Interest in EBITDA for such period plus the Company's Combined Percentage Interest in all Sale-Leaseback Rental Expenses for such period to (b) the Company's Combined Percentage Interest in Consolidated Interest Expense for such period plus the Company's Combined Percentage Interest in all Sale-Leaseback Rental Expenses for such period. "Investments" means as applied to any Person, means any direct or indirect ownership or purchase or other acquisition by that Person of any capital stock, equity interest, obligations or other securities, or of a beneficial interest in any capital stock, equity interest, obligations or other securities, or all or substantially all of the assets of any other Person (including any Restricted Subsidiary) or of the assets which comprise a separate or separable line of business, or any direct or indirect loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by that Person to any other Person, including all indebtedness and accounts receivable from that other Person which are not current assets or did not arise from sales to that other Person in the ordinary course of business. "Joint Venture" means any one of SEI/PSP I Joint Ventures, a California general partnership; SEI/PSP II Joint Ventures, a California general partnership; SEI/PSP III Joint Ventures, a California general partnership; SEI/PSP IV Joint Ventures, a California general partnership; SEI/PSP V Joint Ventures, a California general partnership; SEI/PSP VI Joint Ventures, a California general partnership; SEI/PSP VII Joint Ventures, a 63 California general partnership; and "Joint Ventures" means all such partnerships collectively. "Lien" shall mean any interest in real or personal property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buyback agreements and all similar arrangements) affecting property. For the purposes of this Agreement, the Company or a Restricted Subsidiary of the Company shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement. Capitalized Lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes and such retention or vesting shall constitute a Lien. "Long-Term Lease" shall mean any lease of real or personal property (other than a Capitalized Lease) having an original term, including any period for which the lease may be renewed or extended at the option of the lessor, of more than three years. "Make-Whole Amount" shall mean in connection with any prepayment or acceleration of the Notes the excess, if any, of (a) the aggregate present value as of the date of such prepayment of each dollar of principal being prepaid (taking into account the application of such prepayment required by (S) 4.1) and the amount of interest (exclusive of interest accrued to the date of prepayment) that would have been payable in respect of such principal being prepaid if such prepayment had not been made, determined by discounting such amounts at the Reinvestment Rate from the respective dates on which they would have been payable, over (b) 100% of the principal amount of the outstanding Notes being prepaid. 64 "Management Contract" shall mean a contract for management services pursuant to which the Company agrees to manage one or more Self-Storage Facilities. "Management Fee Subsidiary" shall mean any corporation (a) having one class of common stock and one class of preferred stock, (b) 100% of the preferred stock of which is owned by the Company and (c) the preferred stock of which represents at least 90% of the economic interest in such corporation. "Multiemployer Plan" shall have the same meaning as set forth in ERISA. "Net Cash Proceeds" shall mean the aggregate amount of cash and cash equivalents received, less the sum of all fees, commissions and other expenses incurred, including the amount (estimated reasonably and in good faith) of income, franchise, sales and other applicable taxes required to be paid. "Net Funded Debt" means the Company's Combined Percentage Interest in Consolidated Funded Debt. "Non-recourse Indebtedness" means, as to any Person, Indebtedness of such Person, secured by specified collateral, the obligation to pay which Indebtedness is nonrecourse to such Person and in respect of which obligation no Affiliate of such Person is contingently or otherwise liable; provided that Indebtedness shall not be deemed to be other than Non-recourse Indebtedness solely by reason of the obligor's personal liability (a) for fraud, misappropriation of rents, waste or similar intentional conduct, or (b) environmental matters. "Notes" shall have the meaning set forth in (S) 1.1. "Obligations" shall mean each and every obligation, covenant and agreement of the Company contained in the Notes and the Exchange Agreements. "Officers' Certificate" shall mean a certificate, signed by any two of the chairman of the board, president, executive vice presidents, chief operating officer, principal financial officer or secretary of any Person, and including: (a) a statement that the person 65 making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to ex-press an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with. "Ownership Entity" shall mean any Person which invests in Self-Storage Facilities and (a) is owned, operated or controlled by the Company or any Affiliate of the Company or (b) for which the Company or any Affiliate of the Company has the right to select a Self-Storage Facility manager. "Percentage Interest" means, as to each Subsidiary and each Controlled Partnership, the cumulative percentage ownership interest (direct and indirect) of the Company in such Subsidiary's or Controlled Partnership's income. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means (a) carriers', warehousemen's, mechanics', landlords', materialmen's, suppliers', tax, assessment, governmental and other like liens and charges arising in the ordinary course of business securing obligations that are not incurred in connection with the obtaining of any advance or credit and which are not overdue, or are being contested in good faith by appropriate proceedings, provided that, in accordance with GAAP, adequate reserves have been established; (b) liens arising in connection with worker's compensation, unemployment insurance, appeal and release bonds and progress payments under government contracts; (c) judgment or attachment liens in existence less than forty-five (45) days after the entry of the judgment, or with respect to which execution has been stayed, or the payment of which is covered in full by insurance; (d) zoning restrictions, easements, licenses or other re- 66 strictions on the use of real property, so long as the same do not materially impair the use of such real property by the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships or the value thereof to the owner of such real property; (e) any lien existing or arising by operation of law in the ordinary course of business, such as a "banker's lien" or similar right of offset; (f) liens on the property of the Company or any of its Restricted Subsidiaries or any of the Controlled Partnerships securing (i) the performance of bids, trade contracts (other than for borrowed money), leases or statutory obligations, (ii) obligations on surety and appeal bonds, and (iii) other obligations of a like nature incurred in the ordinary course of business, provided all such liens in the aggregate have no reasonable likelihood of causing a material and adverse effect on the business, financial condition or property of the Company or on the ability of the Company to perform its obligations set forth in the Documents; (g) liens covering equipment, which liens secure purchase money financing for such equipment, provided that (A) any such lien covers only the equipment so acquired, and (B) the indebtedness secured thereby is permitted pursuant to (S) 7.12 hereof; (h) liens identified on Schedule 5.1(a) and any renewals, extensions or replacements thereof, provided that by any such renewal, extension or replacement no lien is extended to additional property and that no monetary amount secured by any such lien is increased; (i) liens securing Non-recourse Indebtedness permitted under clause (4) of (S) 7.10 hereof; and (j) other liens securing obligations in an aggregate amount not exceeding $10,000,000 at any time. "Person" means an individual, partnership, corporation, trust, unincorporated organization or a government or agency or political subdivision thereof. "Plan" means a "pension plan," as such term is defined in ERISA, established or maintained by the Company or any ERISA Affiliate or as to which the Company or any ERISA Affiliate contributed or is a member or otherwise may have any liability. "Proceeding" means an action, claim, suit or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), wheth- 67 er commenced or, to the knowledge of the Company, threatened. "Property" shall mean any Self-Storage Facility in the United States which at any time is owned or controlled by an Ownership Entity or for which the Company or any of its Subsidiaries has a Management Contract. "Proxy Statement" shall have the meaning set forth in (S) 5.1(c). "PSI" shall mean Public Storage, Inc., a California corporation, and any Person who succeeds to the business or to all, or substantially all, of the assets of Public Storage, Inc. "PSMI Merger Agreement" means the Agreement and Plan of Merger dated June 30, 1995 between the Company, PSMI and PSI, as it may have been amended since that time. "PS Partnerships" means, collectively, PS Partners, Ltd., a California limited partnership; PS Partners II, Ltd., a California limited partnership; PS Partners III, Ltd., a California limited partnership; PS Partners IV, Ltd., a California limited partnership; PS Partners V, Ltd., a California limited partnership; PS Partners VI, Ltd., a California limited partnership; and PS Partners VII, Ltd., a California limited partnership. "Purchasers" shall have the meaning set forth in (S) 3.1. "Rate Contracts" means interest rate and currency swap agreements, cap, floor and collar agreements, interest rate insurance, currency spot and forward contracts and other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. "Reinvestment Rate" shall mean 0.5% when used with reference to (S) 4.2, plus the yield (based on offered, and not bid, prices) on actively-traded U.S. government securities with a maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal then being prepaid or paid as set forth on page "USD" of the Bloomberg Financial Markets Screen (or, if not available, any other nation- 68 ally recognized trading screen reporting on-line intraday trading in United States government securities) at 10:00 A.M. (New York City time) on the second Business Day prior to the date fixed for prepayment, or in the event no such nationally recognized trading screen reporting on-line intraday trading in the United States government securities is available, the arithmetic mean of the yields under the respective headings "This Week" and "Last Week" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal being prepaid (taking into account the application of such prepayment required by (S) 4). If no maturity exactly corresponds to such Weighted Average Life to Maturity, yields for the two published maturities most closely corresponding to such Weighted Average Life to Maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. "Release" shall have the meaning assigned thereto in CERCLA. "Remaining Dollar Years" shall mean with respect to the principal amount of Notes being prepaid the amount obtained by (1) multiplying (x) the remainder of (i) the amount of principal that would have become due on each scheduled payment date if such prepayment had not been made, less (ii) the amount of principal on the Notes scheduled to become due on such date after giving effect to such prepayment and the application thereof in accordance with the provisions of (S) 4.1, by (y) the number of years (calculated to the nearest one-twelfth) which will elapse between the date of determination and such scheduled payment date, and (2) totalling the products obtained in (1). "Rentals" shall mean and include as of the date of any determination thereof all fixed payments (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Company or a subsidiary of the Company, as lessee or sublessee under a lease of real or personal property, but shall be exclu- 69 sive of any amounts reimbursed to the Company or such subsidiary (not to exceed the rent owed by such Person) and shall be net of sublease income received by the Company or such subsidiary in the ordinary course of business in respect of property rented by such Person. "Reportable Event" shall have the same meaning as in ERISA. "Restricted Subsidiary" shall mean any Subsidiary that is not an Unrestricted Subsidiary and any Controlled Partnership and shall include, without limitation, those Subsidiaries listed on Annex I. "Sale-Leaseback Rental Expense" shall mean all of the lease or rental expenses associated with a Sale-Leaseback Transaction. "Sale-Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company, one of its Restricted Subsidiaries or one of the Controlled Partnerships transfers such property to a Person and the Company, one of its Restricted Subsidiaries or one of the Controlled Partnerships leases it from such Person. "Securities Act" shall mean the Securities Act of 1933, as amended, and as it may be further amended from time to time. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and as it may be further amended from time to time. "Security" shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. "Self-Storage Facility" shall mean any facility managed by the Company, or in which the Company owns an interest, and used in the business of leasing storage space to the public. "Statistical Release" shall mean the then most recently published statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded U.S. Government 70 Securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination hereunder, then such other reasonably comparable index which shall be designated by the holders of 66-2/3% in aggregate principal amount of the outstanding Notes. The term "subsidiary" with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such person, by such person and one or more subsidiaries of such person or by one or more subsidiaries of such person (ii) any other person (other than a corporation) in which such person, one or more subsidiaries of such person, or such person and one or more subsidiaries of such person, directly or indirectly, at the date of determination thereof has at least majority ownership interest. "Subsidiary" means a subsidiary of the Company or a Management Fee Subsidiary. "Tangible Assets" shall mean as of the date of any determination thereof the total amount of all assets of the Company and its subsidiaries (less depreciation, depletion and other properly deductible valuation reserves) after deducting good will, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with GAAP. "Total Shareholders' Equity" means the total shareholders' equity of the Company determined in accordance with GAAP. "Unaudited Financials" shall have the meaning set forth in (S) 5.1(c). "Unencumbered Assets" means Controlled Properties which are free and clear of Liens, provided that a Controlled Property owned by a Consolidated Affiliate shall not be considered an Unencumbered Asset unless the 71 Company's ownership interests (direct and indirect) in such Consolidated Affiliate are free and clear of Liens. "Unrestricted Subsidiary" shall mean any Subsidiary which is hereafter designated as an Unrestricted Subsidiary by the Board of Directors of the Company (such designation to be effective upon receipt by all holders of Notes of a notice of such designation), provided that no person may be designated as an Unrestricted Subsidiary if after giving effect thereto a Default or Event of Default would exist or if the Company could not incur at least $1.00 of additional Indebtedness in compliance with (S) 7.10; and provided further that the Board of Directors of the Company may designate any Unrestricted Subsidiary a Restricted Subsidiary (the subject entity to cease being an Unrestricted Subsidiary upon receipt by all holders of Notes of a notice to that effect signed by the Company), if the following conditions are met: (a) after giving effect thereto, the Company is able to incur at least $1.00 of additional Indebtedness in compliance with (S) 7.10 and, immediately after such designation, (b) the book value (at the time of transfer) of all assets (other than Business Park Properties or the related management contracts) transferred to Unrestricted Subsidiaries by the Company or any of its Restricted Subsidiaries in any fiscal year of the Company plus the book value (at the time of designation) of the net assets (other than Business Park Properties or the management contracts for Business Park Properties, regardless of whether or not such properties are owned by the Company or a Controlled Partnership) of all Restricted Subsidiaries that are designated an Unrestricted Subsidiary in such fiscal year plus the Net Cash Proceeds of all shares or assets that are the subject of one or more Asset Sales occurring during such fiscal year (except to the extent that the Net Cash Proceeds of such Asset Sales have been applied in accordance with (S) 7.13(c)) does not exceed 10% of Consolidated Assets measured as of the last day of the immediately preceding fiscal year, and (c) no Default or Event of Default has occurred and is continuing or would exist immediately after such designation. A Restricted Subsidiary may be designated an Unrestricted Subsidiary, but may not be designated again; provided that a Subsid- 72 iary that, upon its formation, is designated an Unrestricted Subsidiary may be designated a Restricted Subsidiary and designated once more as an Unrestricted Subsidiary, but may not be designated again, provided further that all designations must satisfy the foregoing provisions of this definition. "Voting Stock" shall mean Securities of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions), managers, trustees or any other governing body. "Weighted Average Life to Maturity" of the principal amount of the Notes being prepaid shall mean, as of the time of any determination thereof, the number of years obtained by dividing the then Remaining Dollar-Years of such principal by the aggregate amount of such principal. "Wholly-Owned Restricted Subsidiary" means any direct or indirect Restricted Subsidiary of the Company where the Company's ownership of such Restricted Subsidiary is through ownership of 100% of all issued and outstanding capital stock and warrants, options or rights to purchase capital stock at all levels. 11.2 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with GAAP, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. 11.3 Directly or Indirectly. Where any provision in this Exchange Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. SECTION 12. INDEMNIFICATION 73 12.1 Indemnified Parties. In addition to all other sums due hereunder or provided for in this Exchange Agreement or any of the other Documents and any and all obligations of the Company to indemnify the Purchasers hereunder or under any of the other Documents the Company shall, without limitation as to time, indemnify and hold harmless each Purchaser, each of their Affiliates, and the employees, officers, directors and representatives of each Purchaser, including attorneys and consultants (individually, an "Indemnified Party" and ----------------- collectively, the "Indemnified Parties"), to the fullest extent lawful, from and ------------------- against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys' fees) and expenses, including expenses of investigation (collectively, "Losses"), as ------ incurred, arising out of or in connection with this Agreement, the PSMI Merger Agreement, the Reorganization Agreement or the Documents or the transactions contemplated hereby or thereby (or any other document or instrument executed herewith or pursuant hereto or thereto), regardless of whether the transactions contemplated by this Exchange Agreement are consummated and regardless of whether any Indemnified Party is a formal party to any Proceeding; provided, however, that the Company shall not be liable to any Indemnified Party for any Losses to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or review) that such Losses arose from the gross negligence or willful misconduct of such Indemnified Party, which (i) is independent of any wrongful act by the Company, its Affiliates or any of their respective representatives and (ii) was not taken by such Indemnified Party in reliance upon any of the representations, warranties, covenants or promises of the Company herein or in the other Documents, including (without limitation) the certificates delivered by the Company pursuant hereto or thereto. The Company agrees to advance to any Indemnified Party promptly for all such Losses as they are incurred by such Indemnified Party (regardless of whether the entitlement of such an Indemnified Party to indemnification hereunder is being disputed); provided that the assertion of a claim against an Indemnified Party shall not, in and of itself, constitute a Loss by such Indemnified Party in the amount of such claim. Prior to reimbursing any Indemnified Party for any Losses pursuant to this Section 12, the Company may require such Indemnified 74 Party to provide a written undertaking to reimburse the Company if it is finally judicially determined by a court of competent jurisdiction (which determination is not subject to appeal) that such Indemnified Party was not entitled to indemnification pursuant to this Section 12 or otherwise. The obligations of the Company to each Indemnified Party hereunder shall be separate obligations, and the liability of the Company to any Indemnified Party hereunder shall not be extinguished solely because any other Indemnified Party is not entitled to indemnity hereunder. 12.2 Environmental Indemnification. The Company shall, without limitation as to time, indemnify, reimburse, defend, and hold harmless the Indemnified Parties for, from, and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs and expenses, including, without limitation, interest, penalties, reasonable attorney's fees, disbursements and expenses, asserted against, resulting to, imposed on, or incurred by any of the Indemnified Parties in connection with any of the following: (i) the events, circumstances, and conditions relating to environmental matters described in the Exchange Agreement on Schedule 5.1(r); (ii) any pollution or threat to human health or the environment that is related in any way to the Companies', or any Person for whom any of the Companies is or may be responsible by law or contract, management, use, control, ownership or operation of the business or property in connection with the business of such Companies, including, without limitation, all on-site and off-site activities involving materials of environmental concern, regardless of whether the pollution or threat to human health or the environment is described in this Exchange Agreement; (iii) any environmental claim against any Person whose liability for such environmental claim any of the Companies has assumed or retained either contractually or by operation of law; or (iv) the breach of any environmental representation or warranty set forth in this Exchange Agreement in (S) 5.1(r) (provided that the determination as to whether there has been any such breach shall be made without regard to any limitations in such representations and warranties pertaining to the knowledge of the Companies). 75 12.3 Notification of Proceeding. If any proceeding shall be brought or asserted against any Indemnified Party in respect of which indemnity may be sought from the Company hereunder, such Indemnified Party promptly shall notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all reasonable fees and expenses incurred in connection with the defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Company of its obligations pursuant to this Agreement, except to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to review or appeal) that such failure shall have materially and adversely prejudiced the Company. Any such Indemnified Party shall have the right to employ separate counsel in any such action, claim or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Company has agreed to pay such fees and expenses; or (2) the Company shall have failed promptly to assume the defense of such Proceeding or to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Company or an Affiliate of the Company, and such Indemnified Party shall have been advised by counsel that either (x) a conflict of interest may exist if such counsel represents such Indemnified Party and the Company or its Affiliate or (y) there may be one or more legal defenses available to such Indemnified Party that are different from or in addition to those available to the Company or such Affiliate (and in the case of any of (1), (2) or (3), if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Company), it being understood, however, that the Company shall not, in connection with any one such Proceeding or separate but substantially similar or related Proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of 76 attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, which firm shall be designated in writing by such Indemnified Parties. The Company shall have the right to employ separate counsel in, and to participate in the defense of, any Proceeding with respect to which it has no right to assume the defense, but the fees and expenses of such counsel shall be at the expense of the Company. No Indemnified Party will be subject to any liability for any settlement made without its written consent. The Company shall not be liable for any settlement made without its written consent, which shall not be unreasonably withheld. The Company shall not consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release, in form and substance reasonably satisfactory to the Indemnified Party, from all liability in respect of such Proceeding for which such Indemnified Party would be entitled to indemnification hereunder (regardless of whether any Indemnified Party is a party thereto). All reasonable fees and expenses of the Indemnified Party (including fees and expenses to the extent incurred in connection with investigating or preparing to defend such action or proceeding in a manner not inconsistent with this (S) 12) shall be paid to the Indemnified Party, as incurred, upon written notice thereof to the Company (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder). Prior to reimbursing any Indemnified Party for any Losses pursuant to this (S) 12, the Company may require such Indemnified Party to provide a written undertaking to reimburse the Company if it is finally judicially determined by a court of competent jurisdiction (which determination is not subject to appeal) that such Indemnified Party was not entitled to indemnification pursuant to this (S) 12 or otherwise. 12.4 Rights of Subrogation. The Indemnified Parties shall have and be entitled to all rights of subrogation, in respect of any Losses or other amounts as to which the foregoing indemnity provisions apply, with respect to the claims of the Company against any of the other parties to the PSMI Merger Agreement or the Reorganization. SECTION 13. CONTRIBUTION 77 13.1 Relative Fault. If a claim by an Indemnified Party for indemnification under (S) 12 is found unenforceable in a final judgment by a court of competent jurisdiction (not subject to further appeal or review) even though the express provisions hereof provide for indemnification in such case, then the Company, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and such Indemnified Party, on the other hand, in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and any Indemnified Party, on the other hand, shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been taken by, or relates to information supplied by, the Company or such Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent any such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or Proceeding. 13.2 Allocation of Fault. The parties hereto agree that it would not be just and equitable if contribution pursuant to this (S) 13 were determined by pro rata allocation or by any other method of allocation that does not account - --- ---- for the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who is not guilty of such fraudulent misrepresentation. 13.3 Survival of Obligations. The obligations of the Company under (S) 12 and this (S) 13 shall survive the issuance of the Notes and any termination of this Agreement or the other Documents. 78 SECTION 14. MISCELLANEOUS 14.1 Registered Notes. The Company shall cause to be kept at its principal office a register for the registration and transfer of the Notes (hereinafter called the "Note Register"), and the Company will register or transfer or cause to be registered or transferred, as hereinafter provided and under such reasonable regulations as it may prescribe, any Note issued pursuant to this Exchange Agreement. At any time and from time to time the registered holder of any Note which has been duly registered as hereinabove provided may transfer such Note upon surrender thereof at the principal office of the Company duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing. The Person in whose name any registered Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes of this Exchange Agreement. Payment of or on account of the principal, premium, if any, and interest on any registered Note shall be made to or upon the written order of such registered holder. 14.2 Exchange of Notes. At any time and from time to time, upon not less than ten days' notice to that effect given by the holder of any Note initially delivered or of any Note substituted therefor pursuant to (S) 14.1, this (S) 14.2 or (S) 14.3, and, upon surrender of such Note at its office, the Company will deliver in exchange therefor and insured to the reasonable satisfaction of such holder, without expense to such holder, except as set forth below, a Note for the same aggregate principal amount as the then unpaid principal amount of the Note so surrendered, or Notes in the denomination of $100,000 or any amount in excess thereof as such holder shall specify, dated as of the date to which interest has been paid on the Note so surrendered or, if such surrender is prior to the payment of any interest thereon, then dated as of the date of issue, registered in the name of such Person or Persons as may be designated by such holder, and otherwise of the same form and tenor as the Notes so surrendered for exchange. The Company may require the payment of a sum sufficient to cover any 79 stamp tax or governmental charge imposed upon such exchange or transfer. 14.3 Loss, Theft, Etc. of Notes. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of any Note, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of the Note, the Company will make and deliver without expense to the holder thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Note. If the Purchaser or any subsequent Institutional Holder is the owner of any such lost, stolen or destroyed Note, then the affidavit of an authorized officer of such owner, setting forth the fact of loss, theft or destruction and of its ownership of such Note at the time of such loss, theft or destruction and stating that such Note had not been indorsed (in blank or otherwise) by the owner or prior Holder, shall be accepted as satisfactory evidence thereof and no further indemnity shall be required as a condition to the execution and delivery of a new Note other than the written agreement of such owner to indemnify the Company. 14.4 Expenses, Stamp Tax Indemnity. Whether or not the transactions herein contemplated shall be consummated, the Company agrees to pay promptly (and in any event within 30 days of receiving any statement or invoice therefor) all of your expenses in connection with the preparation, execution and delivery of this Exchange Agreement and the transactions contemplated hereby, including but not limited to the reasonable charges and disbursements of your special counsel (which shall be in reasonable detail), duplicating and printing costs and charges for shipping the Notes, adequately insured to you at your home office or at such other place as you may designate. The Company agrees to pay all such expenses relating to any amendments, waivers or consents pursuant to the provisions hereof (whether or not the same are actually executed and delivered), including, without limitation, any amendments, waivers, or consents resulting from any work-out, renegotiation or restructuring relating to the performance by the Company of its obligations under this Exchange Agreement and the Notes. The Company also agrees that it will pay and save you harm- 80 less against any and all liability with respect to stamp and other taxes, if any, which may be payable or which may be determined to be payable in connection with the execution and delivery of this Exchange Agreement or the Notes, whether or not any Notes are then outstanding. The Company agrees to protect and indemnify you against any liability for any and all brokerage fees and commissions payable or claimed to be payable to any Person in connection with the transactions contemplated by this Exchange Agreement except to the extent such fees and commissions are a result of your gross negligence or willful misconduct. The obligations of the Company under this (S) 14.4 shall survive the payment or prepayment of the Notes and the termination of this Exchange Agreement. 14.5 Powers and Rights Not Waived; Remedies Cumulative. No delay or failure on the part of the holder of any Note in the exercise of any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of the same preclude any other or further exercise thereof, or the exercise of any other power or right, and the rights and remedies of the holder of any Note are cumulative to, and are not exclusive of, any rights or remedies any such holder would otherwise have. 14.6 Notices. All communications provided for hereunder shall be in writing and, if to you, delivered or mailed prepaid by registered or certified mail or overnight air courier, or by facsimile communication confirmed by overnight air courier, in each case addressed to you at your address appearing on Schedule I to this Exchange Agreement or at such other address as you or the subsequent holder of any Note initially issued to you may designate to the Company in writing, and if to the Company, delivered or mailed by registered or certified mail or overnight air courier, or by facsimile communication, to the Company at 600 North Brand Boulevard, Suite 300, Glendale, California 91203- 1241, Attention: Chief Financial Officer, or to such other address as the Company may in writing designate to you or to a subsequent holder of the Note initially issued to you; provided, however, that a notice to you by overnight air courier shall only be effective if delivered to you at a street address designated for such purpose in Schedule I, and a notice to you by facsimile communication shall only be effective if made by confirmed transmission to you at 81 a telephone number designated for such purpose in Schedule I, or, in either case, as you or a subsequent holder of any Note initially issued to you may designate to the Company in writing. 14.7 Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to your benefit and to the benefit of your successors and assigns, including each successive holder or holders of any Notes. 14.8 Survival of Covenants and Representations. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant hereto, whether or not in connection with the Closing Date, shall be deemed to be material and to have been relied upon by you, notwithstanding any investigation made by you or on your behalf, and shall survive the closing and the delivery of this Exchange Agreement and the Notes. 14.9 Jurisdiction and Process. TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, EACH OF THE COMPANY AND PSI HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS EXCHANGE AGREEMENT, AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH OF THE COMPANY, PSMI AND PSI IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 14.10 Severability. Should any part of this Exchange Agreement for any reason be declared invalid or unenforceable, such decision shall not affect the validity or enforceability of any remaining portion, which remaining portion shall remain in force and effect as if this Exchange Agreement had been executed with the invalid or unenforceable portion thereof eliminated and it is 82 hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Exchange Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared invalid or unenforceable. 14.11 Entire Agreement. This Exchange Agreement constitutes the final entire agreement by the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings and discussions, whether oral or written. 14.12 Governing Law. THIS EXCHANGE AGREEMENT AND THE NOTES ISSUED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH NEW YORK LAW WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 14.13 Captions. The descriptive headings of the various sections or parts of this Exchange Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 14.14 Reproduction of Documents. This Exchange Agreement and all documents relating hereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by you at the Closing (except the Notes themselves), and (iii) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process, and you may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction which is legible shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence; provided that nothing herein contained shall preclude the Company from objecting to the admission of any reproduction on the basis that such reproduction is not accurate, has been altered or is otherwise incomplete. SECTION 15. PURCHASE OF PSMI NOTES BY THE COMPANY 83 15.1 From and after the date hereof and continuing until the earlier of (a) consummation of the PSMI Merger and each of the transactions comprising the Reorganization (the first date which is on or after the date on which all such transactions have been consummated (the "Reorganization Date") or (b) the date on which no amounts remain outstanding on any PSMI Note, (x) the Company shall be bound by the covenants set forth in (S)(S) 7.1 through 7.7, inclusive, 7.9 through 7.13, inclusive, and 7.15 through 7.21, inclusive (except that any references therein to the "Closing Date" shall be deemed to refer to the date of this Exchange Agreement), and (y) the Company agrees that it will not take any action, or fail to take any action, the result of either of which is that the Company's ability to satisfy its obligations set forth in (S) 15.2 hereof is adversely impaired. 15.2 If the Reorganization Date does not occur on or prior to November 17, 1995, then, from and after November 18, 1995 and continuing until the earlier to occur of (i) the Reorganization Date or (ii) February 18, 1996, each holder of a PSMI Note shall have the right, exercisable at its option by the delivery to the Company of a written statement (a "Put Notice") demanding that the Company purchase any or all PSMI Notes held by such Person in accordance with this (S) 15.2, to demand that the Company purchase any of all of its PSMI Notes (the "Put Option"). Within 5 business days following receipt by the Company of a Put Notice relating to any PSMI Notes, PSMI shall purchase such PSMI Notes by making a wire transfer of same day funds to the account of the holder who delivered such Put Notice (the "Demanding Holder") specified therein in an amount equal to the amount that PSMI would be required to pay if such PSMI Notes were being prepaid by PSMI pursuant to (S) 2.2 of the PSMI Note Agreement. Prior to or concurrently with such purchase, the Demanding Holder shall deliver to the Company the PSMI Notes that are the subject of the Put Notice. Upon the satisfaction by the Company of its obligation to purchase any and all PSMI Notes requested to be purchased by holders of PSMI Notes pursuant to (S) 15.2, the Company's obligations under (S) 15.1, and the obligations of the Hughes Family under (S) 15.3, shall terminate. 15.3 B. Wayne Hughes, Tamara Gustavson and B. Wayne Hughes, Jr. (collectively, the "Hughes Family") each agree that, if the Reorganization Date has not occurred on or prior to November 17, 1995, then, within 5 Business Days following the earlier of (x) February 18, 84 1996, and (y) the first date which is on or after the date on which a written waiver of the Put Option set forth in (S) 15.2 has been received by B. Wayne Hughes from all holders of the PSMI Notes, if any PSMI Notes are then outstanding, he or she will contribute (the "Contribution") to the capital of PSMI any and all assets that are received by him or her or by any Person directly or indirectly controlling, controlled by or under common control with him or her or with him or her and one or more other members of the Hughes Family, directly or indirectly in connection with any of the transactions comprising the Reorganization, provided, however, if the Company defaults in its obligation to purchase any PSMI Notes in accordance with (S) 15.2, then each member of the Hughes family shall make its respective portion of the Contribution within 5 business days following the date of such default. 85 The execution hereof by you shall constitute a contract between us for the uses and purposes hereinabove set forth, and this Exchange Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. STORAGE EQUITIES, INC. By /s/ Ronald L. Havner, Jr. -------------------------------------------- Name: Ronald L. Havner, Jr. Title: Vice President - Chief Financial Officer PUBLIC STORAGE, INC. By /s/ Ronald L. Havner, Jr. -------------------------------------------- Name: Ronald L. Havner, Jr. Title: Vice President - Chief Financial Officer PUBLIC STORAGE MANAGEMENT, INC. By /s/ Ronald L. Havner, Jr. -------------------------------------------- Name: Ronald L. Havner, Jr. Title: Vice President - Chief Financial Officer Solely for purposes of (S) 15.3 hereof: /s/ B. Wayne Hughes ---------------------------------------------- B. Wayne Hughes /s/ Tamara Gustavson ---------------------------------------------- Tamara Gustavson /s/ B. Wayne Hughes, Jr. ---------------------------------------------- B. Wayne Hughes, Jr. Accepted as of November 13, 1995 Allstate Life Insurance Company - ------------------------------- Purchaser By /s/ David A. Chulupuck ----------------------------- By /s/ Dorothy E. Even ----------------------------- Authorized Signatory 86 Massachusetts Mutual Life Insurance Company - -------------------------------------------- Purchaser By /s/ Bruce E. Gaudette ----------------------------------------- Bruce E. Gaudette, Vice President AMERICAN MUTUAL LIFE INSURANCE COMPANY - -------------------------------------------- Purchaser By /s/ Roger D. Fors ------------------------------------------ Roger D. Fors, Vice President, Fixed Income Investments PFL Life Insurance Company - --------------------------------------------- Purchaser By /s/ Gregory W. Theobald ------------------------------------------- Gregory W. Theobald, VP & Asst. Secretary THE UNION CENTRAL LIFE INSURANCE COMPANY - --------------------------------------------- Purchaser By /s/ Joseph A. Tucker, III ------------------------------------------- Joseph A. Tucker, III Assistant Treasurer Life Investors Insurance Company of America - ---------------------------------------------- Purchaser By /s/ Gregory W. Theobald - ----------------------------------------------- Gregory W. Theobald, VP & Asst. Secretary International Life Investors Insurance Company of America - ----------------------------------------------- Purchaser By /s/ Gregory W. Theobald --------------------------------------------- Gregory W. Theobald, VP & Asst. Secretary Bankers United Life Assurance Company - ----------------------------------------------- Purchaser By /s/ Gregory W. Theobald --------------------------------------------- Gregory W. Theobald, VP & Asst. Secretary THE MANHATTAN LIFE INSURANCE COMPANY - ------------------------------------------------- Purchaser By /s/ J. N. Kotsonis ---------------------------------------------- J. N. Kotsonis By /s/ N. V. Gordon ---------------------------------------------- N. V. Gordon 87 EX-23.1 6 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Prospectus of Public Storage, Inc., formerly Storage Equities, Inc. (included in Amendment No. 1 to the Registration Statement on Form S-4 (No. 33-64971) and which will also be used in connection with the Registration Statement on Form S-4 (No. 33-49696) for the registration of shares of its preferred stock, its depositary shares, shares of its common stock and warrants for the purchase of its preferred stock and common stock and to the incorporation by reference therein of our report dated February 7, 1995, except for Note 13, for which the date is March 13, 1995 with respect to the consolidated financial statements and schedules of Storage Equities, Inc. in its Annual Report on Form 10-K as amended by a Form 10-K/A (Amendment No. 2) dated April 21, 1995 for the year ended December 31, 1994 filed with the Securities and Exchange Commission. We also consent to the incorporation by reference of the following: (i) our report dated February 24, 1995 with respect to the financial statements of Public Storage Properties VII, Inc. which is included in the Registration Statement on Form S-4 (No. 33-58893) of Storage Equities, Inc., (ii) our report dated July 10, 1995 on the combined statements of assets, liabilities and deficit of the property management and advisory businesses of Public Storage, Inc. as of December 31, 1994 and 1993 and the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1994, and our report dated July 10, 1995 on the combined summaries of historical information relating to real estate interests to be acquired for each of the three years in the period ended December 31, 1994 which are included in the Current Report on Form 8-K, as amended by a Form 8-K/A, each dated June 30, 1995, of Storage Equities, Inc., (iii) our report dated October 6, 1995 on the combined statements of assets, liabilities and equity of the property management and advisory businesses and real estate assets of Public Storage, Inc. as of December 31, 1994 and 1993 and the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1994 which are included in the Current Report on Form 8-K dated November 16, 1995, of Public Storage, Inc., each of which is incorporated by reference in the Registration Statements on Form S-4 (Nos. 33-64971 and 33-49696) and related Prospectus. ERNST & YOUNG LLP Los Angeles, California December 21, 1995 -----END PRIVACY-ENHANCED MESSAGE-----